Austrians at the Fed?

Coverage of central banks and monetary policy in popular financial media outlets like Bloomberg, Financial Times, Forbes, Wall Street Journal, and The Economist is almost uniformly bad. The reporting and analysis are superficial, and the writers tend to assume facts, not in evidence. The same myths repeat themselves ad nauseam: the Fed’s vaunted “independence” must be kept sacrosanct; the obvious and proper purpose of monetary policy is monetary stimulus; Ph.D. central bankers hold special technical knowledge which us average folks should not question; and central bank decisions are wholly unpolitical.

These myths are used to prop up trite and superficial conclusions, always with the implication that “everyone knows” X, Y, and Z are true about central banking. But many times those conclusions are not true, or at least not widely agreed upon. And when they are reported as gospel truth, the financial press effectively become cheerleaders for the Fed. While they may call for tinkering with interest rates or replacing one Governor with another, the presumption that central banks are ever and always benevolent goes unchallenged.

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For example, consider this recent article from Bloomberg fretting about “Austrians” taking over the Fed under a Trump administration:

Trump’s characterization of the current economy as “false” suggests a sympathy for the Austrian school of economics, in which short-term monetary benefits are believed to come with longer-run costs. The “false” economy fosters asset price bubbles that pop and end in an even deeper recession than would otherwise be the case.

A Fed packed with Austrian economists would likely react slowly to a recession and resist extraordinary policies such as quantitative easing. They would also likely attempt to tighten policy soon after the recession ended. They would, in other words, tend toward a liquidationist approach that risks turning the Great Recession into another Great Depression.

I hate to break it to Bloomberg, but thanks to central bankers liquidation and contraction are in fact the solutions to our economic issues, not problems to be avoided. And the economy is indeed a house of cards, starting at ground zero with the Fed’s balance sheet and the Fed Funds Rate. But is the Fed really about to be packed with Austrians? Who knew that Trump’s election means the Ivy League economists at the Eccles Building have been busy cramming Mises and Rothbard or at least looking up Paul Volcker’s Wikipedia page?

First of all, there is no indication whatsoever that Donald Trump employs or intends to employ economists who are sympathetic to the Austrian school. Even the appointment of Dr. Judy Shelton to his economic advisory team, which raised eyebrows simply because she advocates some level of gold backing for the US dollar, hardly portends a hard-money Fed. Dr. Shelton may be a breath of fresh air relative to the Greg Mankiws and Glenn Hubbards, but she is also a “King Dollar” Larry Kudlow type who thinks an international monetary system should stabilize currency exchange rates. She is hardly an Austrian. But in the strangely unquestioning world of monetary policy journalism, any suggested deviation from the Fed’s current role as a Keynesian stimulus machine is alarming. Any measure towards tighter monetary policy is portrayed as Austrian– even when nominal Fed hawks promoting it plainly are not.

Second, it’s hard to imagine what a “real” Austrian could do as Fed Chair or Governor. First and foremost, economics is descriptive rather than prescriptive. But even if a Joe Salerno or a Jeffrey Herbener magically were appointed as Fed board members, the mechanics of the Open Market Committee require manipulation of the monetary base and interest rates. At most, an Austrian at the Fed could serve as an uber-hawk and urge the Committee to mimic a gold standard (as Allen Greenspan once claimed it did) to the extent possible. If there is such thing as an Austrian policy on money, it is this: money is a market commodity, it derives its initial value from some use independent of any exchange value, and the price of borrowing it– interest rates– should be determined by the relative time preferences of borrowers and lenders. That’s it. But all of these views are conceptually at odds with central banking altogether, much less as it is practiced today.

If monetary policy is misunderstood in the West, it is in some part because financial journalist have let us down. The world needs a new kind of financial reporting, one that dispenses with political agendas (Krugman, Sorkin) and resists hosting glorified infomercials for financial markets (Kudlow, Cramer). One that requires journalists to wear out shoe leather and actually talk to people in the financial world. One that hires journalists with actual knowledge of the areas they cover (especially when it comes to money and banking), not just a journalism degree.In fact, the greatest economics journalist of the 20th century– Henry Hazlitt– had no college degree at all.

This is not to say there are not good financial journalists out there. John Tamny (Forbes, RealClearMarkets) is one example of someone who understands various schools of thought and writes in a layman-friendly style. But most are not good, and in fact are wedded to a pro-Fed, pro-state ideology that subconsciously permeates everything they write. They are hopelessly unobjective, the naive products of their education and training The world needs a real diversity of thought and opinion, not the fake kind being discussed at the Fed. Such diversity necessarily includes the view that money is something better left to markets altogether, rather than governments and their bankers.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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