Fifty years ago, after a few scuffles,
the Free Speech Movement established its foothold at the University of
California, Berkeley. On December 2, 1964, Mario Savio gave a well-known speech
before a thousand or more students. In part: "There's a time when the
operation of the machine becomes so odious - makes you so sick at heart - that
you can't take part."
In February 2014, Neil Fligstein, a sociologist at U Cal Berkeley, along with
professors Jonah Stuart Brundage and Michael Schultz, released a paper:
"Why the Federal Reserve Failed to See the Financial Crisis of 2008: The
Role of Macroeconomics." In conclusion: The suppressed and carcinogenic operation
of the country by the Federal Reserve has become so odious - it should make
Americans sick at heart - that it took a sociology department to exercise free
speech, when no economics department dared take part.
From the professors'
abstract: "One of the puzzles about the financial crisis of 2008 is why
the regulators were so slow to recognize the impending collapse of the
financial system. In this paper, we propose a novel account of what happened.
We analyze the meeting transcripts of the Federal Reserve's main
decision-making body, the Federal Open Market Committee (FOMC), to show that
they had surprisingly little recognition that there was a serious financial
crisis brewing as late as December 2007."
This certainly is novel. No economist exposed to the Federal Reserve's
tentacles (99%), would dare write this paper.
The sociologists explain their methodology: "We use topic modeling to
analyze transcripts of FOMC meetings held between 2000 and 2007, demonstrating
that the framework provided by macroeconomics dominated FOMC conversations
throughout this period."
From
"topic modeling" (whatever that may be), the sociologists explain why
the Fed will do nothing as the current asset bubbles pop: "The topic
models... show that each of the issues involved in the crisis remained a
separate discussion and were never connected together."
For current asset
allocation, that is all you need to know.
Just as former Federal
Reserve Chairman Ben S. Bernanke said - and he really did believe - that
subprime mortgage defaults were "contained" (abandoned houses in
Maricopa, Arizona and the Inland Empire would not inhibit the nation's
economy), whoever rules the suffocating Eccles Building when stocks, bonds,
houses, and paper currencies gasp for air, will do no differently.
There is talk now
that Fed Chair Janet Yellen is monitoring bubbles. She is doing no such thing.
It is impossible for Yellen to see outside her oh-so-tiny world, having lived
her life in the minutiae of the late-20th-century economic sandbox
(regression analysis). If reports are true (this seems hard to believe, but,
life and art...) Yellen set her sights in high-school to be a researcher for
the Federal Reserve. She loves this stuff! So does everyone else in the room.
There are the occasional interlopers, such as Richard Fisher today. The problem
though, is academic economists cannot understand anything outside their own
abstractions, since the only reference to their own abstractions are their own
abstractions.
The Berkeley
professors write: "Our results suggest that regulators use economic theory
to make sense of a macro economy that, in key respects, does exist
independently of their models. This understanding limits their ability to
understand the 'real' connections between markets." Since models
have been constructed for the mutual pleasure and (more-so-then-ever) need to
retain academia's credibility, discussion at FOMC meetings is of the construction
of models, not of anything real.
The sociologists
write: "Not surprisingly, the majority of people appointed to the FOMC are
formally trained as economists." They add a footnote: "Incidentally,
we also found that, despite their status as central bankers, only 6 of 31 FOMC
members had spent any time working in the financial industry." This is not
"incidentally."
There is so much in
the University of California paper that has been said for years - but never by
the academic economist mafia. Such as, the Federal Reserve's own zero-interest
rate policy (ZIRP) of the early 'oughts was directly responsible for the
housing-CDO-private equity-TBTF bank failures. To say this again: If not for
the Federal Reserve's ZIRP policy, there would have been no financial crisis in
2007 and 2008. Fannie and Freddie would never have grown beyond their
Lilliputian mandates; Angelo Mozilo would be managing a tanning salon; and
Bernie Madoff could not have levitated predictably increasing returns without
the Federal Reserve's constantly rising cushion of credit absorption.
Let's review footnote
number 11 of the paper: The first paragraph may frustrate those not interested
in the sociologists' theory, but please bear with it: "It is possible that
the FOMC's macroeconomic models were performative in the specific sense of 'counter-performativity,'" defined as a situation in which economic
models shape economic processes in such a way 'that they conform less well to
their depiction by economics' (MacKenzie, 2007, p. 76; emphasis added)."
Okay. Theory in
place, let's go to the evidence: "[T]he Fed's extended interest rate
accommodation of the early 2000s, designed-at least overtly-to promote growth
through the standard policy channels of consumer and corporate investment, also
appears to have directly fueled asset prices, contributing to the housing-price
bubble at the same time that the FOMC's models consistently rooted housing
prices in economic 'fundamentals' (see below). Further research would need to
demonstrate the extent to which the FOMC could be considered counter-performative
in this and other respect."
The evidence is manifest.
Posts
