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Why Economists Rarely Say Bad Things About the Fed

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Silly me. Here I thought the main reason that the economics profession had not only missed the crisis, but for the most part, gave the Fed a free pass on its colossal policy errors, was that everyone drank the same Kool-Aid, theory-wise.

It turns out that the Fed is not someone to cross, at least if you are a young academic. From Huffington Post:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found…

“The Fed has a lock on the economics world,” says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. “There is no room for other views, which I guess is why economists got it so wrong.”

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

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33 comments

  1. Swedish Lex

    Groupthink on an imperial scale at the FED as a contributing factor to the crisis? We are schocked, truly shocked.

    Time to dust off Montesquieu again, perhaps.

  2. Doc Merlin

    This reminds me a lot of how academic science worked in the soviet union, which itself is a scary thought.

  3. psychohistorian

    Maybe this is why none of the economic models include greed and avarice.

    Maybe this is why there is never any public discussion of the US Imperialism factor in international trade and why US taxpayers may be providing a subsidy to some industries that someone has decided is strategic or profitable for a certain group of folks (i.e $100/barrel for military protection of oil shipping, etc.).

    Maybe this is why we will be moving away from the American dollar as the world reserve currency in short order now that the value has been “compromised” by all that printing in the last year.

  4. Richard Kline

    Angering anybody _at all_ is career threatening for a young academic. Which is one reason why young academics have so few really good ideas reach the surface, and pick most of their fights with folks who are safely dead.

    The real sad fact is that in the US we have no independent intellectual community which could take a critical role. Once, there were non-profit or minimally for profit research institutes which generated some genuinely good work, and into which academics could rotate for some of their more pungent years. Find them on the map now, I can’t. Everyone wants tenure, so they check their brain at the door.

  5. PetrieDish

    Weren’t Abraham Lincoln and John F. Kennedy contemplating messing up the Fed’s good thing?

    I’m just sayin’………….

  6. Gentlemutt

    This is exactly why all those economists signed their self-serving petition a few months ago to protect the Fed from prying eyes in Congress. Their careers depend on conformity.

  7. Eagle

    Interesting consipiracy theory. I’d love to see it expanded to explain why most of the rest of the world’s economists missed the bubble as well. Or is it that they are all beholder to publish in this one American journal?

    What is with this blog and ascribing bad faith first, and asking questions later?

    1. prufrock

      Don’t you think that economists from the row are as much interested in joining high ranking US universities and publishing on JME? There is no cospiracy: it is just everybody thinking the same way, it is very normal herd behaviour. Leavin’ as an hero is not a matter to ambitous people.

  8. DownSouth

    The collusion between state and academe is the post-Enlightenment version of the old alliance that existed between church and state in the Ancien Régime.

    Academe currently fulfills the same function that the church did before, and that is to give the state the imprimatur of moral and intellectual legitimacy.

    1. Gentlemutt

      Well put, DS. This institutionalized mutual support process goes back to the beginning of recorded history. Today’s economics profession is the high priest in the temple. The power of their harmonic repetitive chants maintains orthodoxy.

      In times of stress the first response is to chant louder and faster, for we know not what else to do.

  9. OrganicGeorge

    The Fed, USDA, Academics, etc. it all the same; get along to go along, it works until it doesn’t work.

    Money and prestige is the corrupting factor for most. The “experts” in the Land Grant Colleges told us organic types that production organic Ag was “impossible”; however we ignored them since their knowledge was tide directly to their corporate source of funding.

    Like economics, these Ag experts still hold sway, but year after year their ideas are diminish by reality.

    Conspiracy, yes the status quo will always do what it can to reinforce its ideals.

    Creative destruction my friends.

  10. Ishmael

    In Secrets of the Temple this is clearly laid out. The Fed has $800 billion which it earns interest on. The proceeds of the interest is used in the following way: (1) Pay for operations of the Fed, (2) Payoff, opps I mean fund, economic research at universities and (3) what ever is left over is returned to the treasury.

    It is very clear that the Fed is the first, second and third source of funding for academic economists at the graduate and doctorial level. No one will go against the Fed at the academic level if they want tenure.

    This whole rats nest needs to be eliminated.

  11. nowhereman

    It never ceases to amaze me the cognitive dissonance caused by anyone challenging the current paradigm. Sometimes the facts point out the infrastructure that has grown up to protect the current paradigm from challenges from newer, perhaps more robust ways of viewing the data that provide much more valid predicting tools. Careers, reputations and tenure depend on the status quo. I remember back in grad school a psychology professor assigned a task that was essentially a validation of his current thesis. I did the research and felt that I had proved that his thesis was in fact incorrect, with the appropriate citations backing my view. Needless to say I received a failing grad and learned a valuable lesson.

  12. Ed

    Well, now we know the answer to the Queen’s question.

    One one level, this story is a contender for the “well, duh” award for 2009. But its helpful to have this documented.

    “I remember back in grad school a psychology professor assigned a task that was essentially a validation of his current thesis.”

    I’ve always been puzzled by this sort of behaviour. So he doesn’t want his precious thesis questioned. OK, then why not assign a task that had nothing to do with the thesis at all? Then you might get some interesting work. What is the point of getting your thesis validated by a bunch of inexperienced grad students, who will validate it even if they disagree with it to get a good grade?

    1. Richard Kline

      So Ed, it’s easy to see you’ve spent little time around tenured hacks (to your good fortune, I might add). What the prof is looking for, semi-legitimately, is to turn out an acolyte who will beat the prof’s drum loudly to the academic community. Graduate students are, in fact, apprentices: that is specifically how the higher degree process developed historically and functions at present. So a prof _only_ votes in a candidate’s acceptance if he thinks that person will be a loyal spearcarrier in the prof’s career parade. Shabby and sick, I know, but true.

      But moreover, what the prof was looking for, illegitimately, was for another publishable paper supporting the prof’s contentions, which would float around in the academic ‘literature’ collecting its own citation history, linking back and boosting the prof’s citation frequency. It’s all a game, and a rotten trick to make your students ‘learn’ by reiterating the prof’s work. —But then what grad students mostly do is do the prof’s grunt work research for them, historically with little or no published credit for their labor, another part of the apprenticship.

      The illusion put out to the public is that academic research is intended to substantiate ‘facts’ about an issue; maybe even establish a bit of ‘truth.’ If either are found, it’s incidental to the enterprise. The goal is to build a subset of factoids, references, and assessments which the builder has more expertise over than anyone; that ‘expertise’ is then their salable commodity. Anyone who threatens that accumulated heap directly threatens the accumulators status as ‘an expert.’ Going into a grad program with proof that your doctoral supervisor’s pet or career-making model/discovery is flawed is career-ending—for the student! . . . It’s a rigged game. Knowledge and discovery are incidental to the careerism with which it is rife.

  13. aaron

    This seems a little too much like a conspiracy theory. Of course young economists don’t want to criticize the Fed, express a traditional Keynesian position, etc. Swimming against the current of economic theory is rarely a good career move, although there have been plenty of young economists in recent years that have made slight deviations from mainstream theory in there articles. In addition, most of the major articles in journals don’t deal with the present situation–at best, they go back 5 years or so. So no conspiracy theories are required. Actually, given that the Fed is generally considered a haven for Keynesians in this monetarist world, one might think that including more Fed reviewers and fewer pure academics might have encouraged better and more practical articles.

  14. moslof

    Hong Kong before the communist takeover had the greatest economic growth cycle in modern history with no central bank. Our Fed has survived because of the overall conspiracy with bankers, politicians and now has corrupted the entire economic braintrust. It will not last much longer.

  15. Charles

    For those who forgot it, I remind that the Nobel Prize for Economics is sponsored by … a Central Bank !

    For students that are brilliant and patient enough, revenge can ultimately be sweet. Check how Pigou has been humiliated by Keynes after being his mentor.

  16. Skippy

    Well said, Richard Kline & Charles.

    Whilst a classical education can open doors to acclaim, the real road to independent thought can only be traveled alone.

    Skippy…”A solider will fight long and hard for a bit of colored ribbon” Napoleon Bonaparte.

  17. Hugh

    What this is about is the maintenance of orthodoxies. The financial meltdown caught both academic and professional economists in a Larry Craig moment tapping their feet in the restroom stall. Their institutional reaction has been, as with Craig, to deny the obvious. Of course there have been exceptions and we all have our favorite list of them, but I can not remember an occasion in my lifetime when a discipline has been so deeply discredited across the board and remained in such denial about it. It is a good argument though why most economists can not be trusted to be part of the solution to our economic and financial problems and why too they should have no future role in systemic risk regulation.

  18. Lim

    Establishments resist change. Interestingly, the science establishments gradually took over the role of the Catholic Church in the 17th Century. Those who holds different opinion from the orthodox doctrine are denounced, similar to what’s done to Galileo.

  19. ahab

    “There is no cospiracy: it is just everybody thinking the same way, it is very normal herd behaviour.”

    much truth to that- however- it would seem to me- with all the economic schools of thought- that better analysis would have been brought to light concerning he economic reality that was and is before us-

    the Fed can’t control individual thought- and i think much of the dissenting opinion out there never sees the light of day because it does not get reported on by the MSM

  20. mansoor h khan

    Here is a radical alternative to the FED:

    A Radical Solution for America’s Insolvent Financial System

    The core problem of the United States banking system (and maybe the world’s banking system) is not liquidity but insolvency. The liabilities of the United States’ banking system exceed the value of its assets. The issue is not only the toxic assets (toxic mortgage backed securities, toxic commercial real estate loans, sub-prime mortgages, alt-A loans, adjustable loans likely to go bust, increase in prime mortgage default rates, etc) but also off-balance sheet liabilities (such as expected huge unaccounted for future derivatives losses).
    This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
    One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
    Which will probably lead to even more defaults as unemployment increases and debtor’s are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
    Is there a better way?
    Here is my idea:
    1) We essentially need an orderly bankruptcy and liquidation of the United States’ financial system.
    2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This “transfer” is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
    3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
    4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
    5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have “free banking” from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
    6) The new government bank will act as an electronic “piggy bank” only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a “safe” money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
    7) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
    8) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).

    Mansoor H. Khan
    http://aquinums-razor.blogspot.com/

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