Central bankers have impeccable usually PhD level credentials from all the right places. Because of that, it is simply assumed that they are the preeminent experts of how any economy works. In reality, however, the term stamped on each of their doctoral degrees is highly misleading. Though it may say economics, it was really and truly nothing more than a rigorous training in statistics and regressions.
The word “economics” itself is derived from the Greek; Latin oeconomia from Greek oikonomia, meaning “household management.” It wasn’t until the 17th century that more cumulative study was made turning the aggregate decisions of households into the national product of centralized understanding; political economy. Thus, there has always been a natural tension between what happens of and for the individual and what might be the consequences of individual choice for the whole. That prospective divide turned into active national policy in the Great Depression when economists blamed individuals taking individual action for social economic breakdown (a form of socialism).
To “cure” the “disease” of individual choice, it was first proposed remedies to rescale the balance of power in money. Gold was outlawed, thus treating money financially instead of in its proper custodial arrangement. The reasoning for doing so was straightforward; individuals who were rightfully concerned and even fearful of the Great Collapse after 1929 were “hoarding” money that could have been used to stop the collapse, or at least attenuate its damage. If the socialized economy were to be realized, then individual emotion must be reduced in its reach such that the enlightened few could prevent the worst consequences (if not, as they claim from time to time, such as the late 1990’s, create positively utopian trends to begin with).
For that activated Platonic ideal to become real, it places a great deal of power and responsibility in the hands of a very few. That is true not just in Lord Acton’s phrase of human frailty, but also inasmuch as said humans must possess enough understanding of the subject matter from the start.
Faced with disappointing growth after years of ultra-low interest rates, Federal Reserve Chair Janet Yellen and her peers who met this weekend in Jackson Hole, Wyoming, re-affirmed their belief in power of monetary policy to stop economies from slipping into deflation.
That is the proper description of the typical central banker mindset, all framed around “deflation” as derived from study of the Great Depression. It is a simple mantra; prevent deflation, create economy. Almost everything every central bank does flows from that singular purpose. And yet, here we are.
Since economics is almost entirely a discipline of math, it leaves behind some of the common sense views that would check unquestioned deference to correlations alone. Perhaps the most obvious of such differences was the housing bubble of the mid-2000’s. Again, by nothing other than common sense, following so close to the dot-com collapse, there was no need for any Ivy League training to sense that something was very wrong at that time. Most people didn’t explicitly act despite the nagging warning because it was assumed Alan Greenspan knew what he was doing; and further that when Alan Greenspan knew what he was doing such knowledge translated into the proper, utopian economic format.
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