Do you know how many people with PhDs are employed by the US Federal Reserve?
20? 100? 200?
Not even close. Try 750.
750 academics. And how many saw the subprime mortgage crisis coming? A few, at best.
But seriously, who is going to argue with your boss (Ben Bernanke at the time), especially when he says with a straight face at a news conference (March 2007): ‘[The] problems in the subprime market seems likely to be contained.’
Imagine tapping Ben on the shoulder after that interview and saying ‘Sir, I think the proverbial is going to hit the fan. We should take corrective action now!’
By the way, this is the same Ben Bernanke who has since authored a book titled The Courage to Act: A Memoir of a Crisis and Its Aftermath. The man has no shame.
It’s now 2016; how many of these 750 PhD academics are now telling Janet ‘enough is enough?’
Again, there would be a few dissenting voices. But they are not audible enough to be heard.
It’s my guess the institution grinds them down. Go along to get along is the creed they live by…provided they recognise what’s good for them.
My forlorn thinking used to be that, with all these smart people in the Fed’s employ, you’d hope somewhere along the line a common sense approach would eventually prevail.
This was mere wishful thinking.
The system has a self-reinforcing feedback loop.
According to Wikipedia:
‘Bernanke taught at the Stanford Graduate School of Business from 1979 until 1985, was a visiting professor at New York University and went on to become a tenured professor at Princeton University in the Department of Economics. He chaired that department from 1996 until September 2002…
‘Yellen was an assistant professor at Harvard in 1971–76 and a lecturer at The London School of Economics and Political Science in 1978–80. She was an economist with the Federal Reserve Board of Governors in 1977–78. Beginning in 1980, Yellen has been conducting research at the Haas School and teaching macroeconomics to full-time and part-time MBA and undergraduate students. She is now a Professor Emerita at the University of California, Berkeley‘s Haas School of Business, where she was named Eugene E. and Catherine M. Trefethen Professor of Business and Professor of Economics.’
University students are indoctrinated into Keynesian groupthink by the very people who end up in charge of this financial Frankenstein.
They study and work in an incubator where the principle philosophy is an ardent adherence to the belief that credit creation is the sole means to achieve economic growth.
Those who question this ‘orthodoxy’ can pretty much kiss goodbye their careers in government and aligned institutions.
Can you imagine any US president appointing a Fed chairperson who preached a doctrine of austerity and prudence…that tells the government to get its house in order? Me neither.
Going along to get along is why we’ll continue on this path of financial, economic and, in some cases, personal self-destruction.
Occasionally, influential outsiders do look in and ask the obvious question.
In November 2008, the Queen visited the London School of Economics and asked a professor, Luis Garicano, ‘Why did nobody notice it [GFC]?’
His reply: ‘At every stage, someone was relying on somebody else and everyone thought they were doing the right thing.’
If that somebody else is another Keynesian disciple, then you have a situation where ‘if everyone is thinking the same, then no one is thinking at all’.
Dissension should be welcomed. But in the hallowed halls of the Federal Reserve, bucking the trend is certain career death.
So (almost) all the PhD-qualified academics play the game.
And for good reason. Because if they actually practice what they preach, they’ll have mortgages, credit cards, car loans, student debts, interest free in-store credit and a personal loan for good measure to pay off. Therefore, they need their employment, health coverage and pension plan.
Don’t rock the boat. Just go along with the groupthink…there’s safety in numbers.
For 40 years, Keynesian groupthink has created a period in history without peer. Sustained above average economic growth. Record levels of debt. Rising property and share values. The lowest recorded interest rates ever. The greatest level of money creation.
Most people are completely oblivious to all this. It has happened so gradually that each additional billion dollars of debt, each notch down in interest rates, and each tick up in property values is now all part of a pattern they’ve become accustomed to. What I call conditioning.
The point is that the experiment is not going to stop of its own accord. The economic scientists are not going to shut the doors of the lab and declare their life’s work in academia a miserable failure. That verdict will be delivered by the market.
This experiment is going to end with a BANG, not with a whimper.
Editorial note: The above article is an edited extract from Vern’s premium advisory service, The Gowdie Letter.