My San Francisco Fed Talk
By David Henderson
Last Wednesday I gave a talk at the San Francisco Federal Reserve Bank. The event was the “2014 Conference of Twelfth District Directors.”
I was one of three presenters. See here for the other two. The session was on “Bubbles” and my talk was titled “Bubbles, Information, and the Fatal Conceit.” In my talk, I reviewed the evidence of Peter Garber and the later evidence of the late Earl Thompson, which showed that the apparent tulip bubble in Holland in the 1630s was actually not a bubble: the prices reflected market fundamentals. I also pointed out how badly one would have done if one had followed the implicit advice of Robert Shiller in March 2010, which was not to buy stocks. Based on the S&P 500 index, one would have foregone compounded annual returns of 13.1 percent, and that’s not including dividends.
I segued from that to the information problem as laid out by Hayek in “The Use of Knowledge in Society” and then to my 5th Pillar of Economic Wisdom: Information is valuable and costly, and most information that’s valuable is inherently decentralized. I then gave three good things that happened on September 11, 2001–the emptying of the World Trade Center of people despite the official advice to stay put, so that the death toll was under 3,000 rather than the originally feared 20,000, the passengers’ actions on United #93, and the landing of almost 3,000 planes safely within an hour of the order to land–as applications of that pillar. I briefly got into lessons not learned from 9/11. Some of that is here.
Then to Adam Smith on central planning, talking about the man of system in The Theory of Moral Sentiments.
Then I asked, “Is Monetary Policy an Exception?” I asked the audience, “Is planning the money supply easier than planning the steel industry or the auto industry?” I reminded the audience of Ben Bernanke’s famous confession to Milton Friedman and Anna J. Schwartz at Milton’s 90th birthday party: “I would like to stay to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” That was an expensive way to learn the lesson, I pointed out, and moreover, under the Fed, the dollar has lost over 95 percent of its value.
My last two slides contained excerpts from “The New Central Planning,” Wall Street Journal, March 28, 2013, Jeff Hummel’s excellent review of Ben Bernanke’s book. The first quote was:
Yet he [Bernanke] hardly discusses the quantity of money in circulation or the Fed’s effect on it. The omission reflects the fact that Mr. Bernanke has dramatically altered the nature of central banking. Under his management, the Fed now tries to determine to which sectors the economy’s savings flow, and monetary policy has become solely about setting interest rates.
The second quote was:
Milton Friedman correctly insisted that the role of central banks was to merely control the total money supply and permit markets to allocate credit. Mr. Bernanke clearly rejects this view, and this finally is the underlying story of his lectures, reflected in his focus on interest rates as the sole indicator of monetary policy, his targeted but sterilized bailouts, his paying interest on reserves, his expanding Fed assets to include mortgage-backed securities, and his efforts to manipulate the yield curve on Treasurys. In short, under Ben Bernanke central banking is becoming the new central planning.
I never said that we should “end the Fed,” but I think it was clear to over 80 percent of the audience that that’s where my argument would lead.
Given the audience–SF Fed economists and other employees and directors and former directors of the Federal Reserve 12th District, I thought the reception to my talk was quite good. I doubt that I changed many minds. But I also think that I gave a number of people there some things to think about. My guess is that the vast majority of them had never seen the issue of a central bank as an issue of central economic planning. My guess also is that over 50 percent of them had never seen Ben Bernanke’s admission.
Afterwards, John Williams, the President and CEO of the Fed, came up and told me that this was the 6th year they’ve had an afternoon panel at their annual conference and that my talk was the first one that was so critical of the Fed.
I have other impressions of the Fed, of John Williams’s talk that morning, and of Glenn Rudebusch’s talk that morning, but I’ll share those in a later post.