The PhD Scourge
Danielle DiMartino Booth has written a timely book about the Fed, Fed Up, An Insider’s Take on Why the Federal Reserve is Bad for America. Fed Up deconstructs the Fed from the lofty pedestal upon which conventional wisdom has hoisted it and its absurd reputation for economic omnipotence. It pulls the curtain back on the Fed’s carefully constructed mystique as an independent body comprised of all-knowing, economic experts. Since Greenspan’s Maestro days and Bernanke’s Time Man of the Year cover—for which history will reserve special economic derision matched only by Rudolph Havenstein—contemporary America has accorded prestige to the Fed in Kafkaesque fashion far beyond its intrinsic worth. This is the result of what Booth describes as the takeover of the Fed by PhD economists with degrees from the world’s top universities.
Booth entered the Fed mausoleum at the elbow of Richard Fisher, the president of the Federal Reserve Bank of Dallas. Fisher was an anomaly in the Fed inner sanctum. Fisher did not have a PhD. He had actual banking and business experience. He was not molded in the ivory tower of academia. Fisher consistently dissented from post 2008 Fed centrally managed policy. Yet, the Dallas Fed remained under the careful control of its PhD economists and their econometric models.
Booth gives a devastating account of how the Fed PhDs control all that emanates as eventual Fed policy. The PhDs exist within their own incestuous hierarchy. The status of the university that awarded their PhD determines their prestige: MIT, Harvard, Yale, Princeton, and the University of Chicago at the top. If you’re not a PhD you’re not in the club. Not only are you not in the club, you are not deserving of serious attention. The number of times that PhDs cite the obscure writings of a fellow PhD in their equally obscure writings establishes the reputation of a Fed PhD. That’s how the PhD system works. Absent any real life experience, the PhD evolves from the laboratory of academia and thesis review to the cloistered halls of the Fed to inflict their theory upon the real world. Booth notes that the Fed is the primary employer by far of PhD economists.
What do the PhDs actually know? They know theory. And equations. The PhD economists derive their econometric models from hindsight data that they pore over and examine like sacrificial animal’s entrails of old. They then shoehorn the data into useless equations based on errant models that spit out with laser-like precision exact, scientific predictions of future economic progress down to the hundredth decimal point. The financial media megaphone broadcasts the Fed’s projected data analysis and the world accepts it as if it was writ from on high. Then it all blows up and the process starts over again. Nothing ever happens as their models predict because they base their models on errant theory. Every major economic indicator the Fed has predicted since it began micro-managing the economy after 2008 has been devastatingly wrong. Of course, this doesn’t stop the Fed. They simply double down on their errant theory and models because ivory tower dissertations don’t lie. The PhD models negate the behavioral laws of economics and substitute them with mathematical equations, as if all humans are identical programmable atoms. The result is economic chaos. Booth’s description of the Fed PhD mafia explains how the world arrives at “secular stagnation” on the road to negative interest rates. When PhD theory fails, as it always does, the solution is to invent new theory to explain away their failed theory.
Booth provides great detail of all the flashing warning signs that forewarned the 2008 financial crisis. Signs that should have been been abundantly clear to the Fed’s foremost financial experts had their heads not been buried so deeply in the bowel of hindsight data. Booth gives an accurate account of the Fed’s response to the financial crisis. Led by Bernanke and Yellen, the Fed entered uncharted financial waters with multiple iterations of QE and interest rate manipulation. The Fed’s plan was to stimulate aggregate demand and growth with its magic wand of monetary manipulation. The Fed would then unwind its monetary manipulation under the stable foundation of sustained Keynesian growth and we would all live happily ever after.
Booth accurately sums up the actual results of post 2008 Fed policy. She writes in the last chapter: “The unintended consequences of unconventional monetary policy run amok: pension systems at risk, unaffordable housing, malinvestment, rampant financial engineering by America’s top companies, stagnant wages, millions who have dropped out of the labor force, the stealth growth of the safety net financed by record low interest rates. And of course, more asset price bubbles than ever before.”
Booth laments Fed stewardship under the reign of Greenspan, Bernanke, and Yellen. She chronicles missed opportunities. Going back to Greenspan, the Fed was constantly too late or early in lowering interest rates, or raising them. Regulation of derivatives was too lax. Regulators awarded too much leeway to the financial industry. The result was the creation of the alphabet of securities instruments that led to the subprime housing debacle and 2008 financial meltdown.
While Booth saw all the warning signs, what she misses is the solution. The solution is not diversity of Fed economists, a revamping of the Fed system, more Fed regulation, or greater funds rate manipulation wisdom. The solution is money based on the historical stability of gold. Interest rate derivatives are instruments created solely to manage the instability of fiat currency. They did not exist under the Bretton Woods international monetary system based on gold, nor would they exist if the U.S. led the reestablishment of an international gold standard. Speculative traders churn $5.3 trillion in currency daily for no productive reason other than to maintain the complex system of floating exchange rates, interest rates, and derivatives necessary to hold the global financial system together. This will once again disappear with a return to a gold standard. Traders will instead put capital to productive use. Congress created the Fed in 1913 to centrally mange the dollar, backed by gold, and act as lender of last resort. It is time for the Fed to shrink massively from its metastasized role as omnipotent economic masters and return to its original legislated duty.
Fed Up is highly readable and enjoyable. It is by no means an academic tome but instead reads as a fascinating account that easily holds the reader’s attention. Booth has done the world a service by pulling back the curtain on the Fed with her insider’s view. As the deleterious economic effects of Fed mismanagement continue to pile up, another financial crisis is on the horizon. Fed Up is a prescient marker for imperative change to our monetary system.