Why Do We Put So Much Faith in Central Bankers?
Well-known management consultant Peter Drucker perfectly described the predicament faced by central bankers.
You can’t manage what you can’t measure.”
So why do we put so much faith in central bankers?
Initially, central banks were conceived as the lenders of last resort for the banking system, but in the words of economist Pascal Hügli, they have mutated into “dealers of last resort.” They are the fire department called in to put out the world’s economic fires.
The Federal Reserve’s response to the coronavirus pandemic is what we’ve come to expect from our central banks. The Fed almost immediately cut interest rates to zero and then launched QE infinity, buying up trillions in Treasury bonds and mortgage-backed securities. But it didn’t stop there. It set up lending programs, buying risky small business loans, and even dipping its hand into the stock market.
As the governor of the Bank of Canada put it, “A firefighter has never been criticized for using too much water.”
Some would argue central banks are using gasoline to fight the fire instead of water. Peter Schiff made this very point during an interview on Fox Business as the stock market tanked in the early days of the COVID-19 pandemic.
Everything the Fed has done since the 2008 financial crisis has only exacerbated the problems that created that crisis, which is why we’re on the precipice of a much larger one and why the pricking of this bubble is so risky. And if the Fed, of course, goes back to the drawing board and just cuts rates again, all it’s doing is throwing gasoline on the fire that it lit.”
Nevertheless, mainstream faith in central banking remains unshakable, even as the Fed and other central banks balloon their balance sheets to unprecedented levels. Hügli noted that even if some economists question the wisdom of central bank intervention, the general opinion seems to stand firm.
Central banks are without alternative, being the only actors that can stem the tide of economic and financial destruction. They have no choice but to intervene and bloat their balance sheets, the common understanding goes.”
The question remains: why should we put our faith in the central bankers?
In an article published by the Mises Wire, Hügli argues that we shouldn’t – not because central bankers aren’t smart, highly competent people, but because they are trying to do what Drucker called impossible – measure the unmeasurable.
Our economy, like so many other ‘things’ in life, is a complex adaptive order. Variables are unknown, and even if they were known at some point in time, because of the adaptive nature of the system, variables constantly change unexpectedly, making precise measurement virtually impossible.”
And yet central banks are tasked with “managing” the economy and the financial system. Hügli writes that the fact they can’t manage it by definition is one thing. But that they seemingly don’t even try is another. Take their obligation to measure inflation. They fixate on CPI and ignore asset inflation.
With the focus only on consumer prices, though, inflation in stocks, bonds, real estate, or any other financialized asset is left out of the picture completely. But this is rather sarcastic as people are degraded to mere wage earners not interested in owning any productive assets within an economic order.
Anyone in touch with reality would know that this could not be farther from the truth. People are really saving their money, not to buy a price-stable banana at the grocery store, but to afford a house to live in one day. And this very house is currently not incorporated into inflation measures. If it were, inflation would have to be officially reported as being much higher.
Because central banks have been relentlessly turning a blind eye to the fact of asset inflation when calculating overall inflation, one can’t help assuming that they don’t even try to get at least closer to the truth. One is reminded of a person looking for car keys under a street light at night. Asked by a passing stranger if the car keys have really been lost right here, the person answers no. Asked by the baffled stranger why he looking for the keys there, the person in search of the keys replies: “Well, this is where the light is.”
In a nutshell, the Fed and the rest of the world’s central banks are tasked with an impossible task: anticipating, measuring and managing the economy.
But all they can do is play God and try to uphold the illusion of competence.”
The problem isn’t with any particular central banker or even a specific monetary policy. The problem is deep and it is systemic. Simply put, nobody knows the “correct monetary course” the Fed should follow. It’s not something that can be planned.
So the question remains: what do we put so much faith in these central bankers? And a second question: should we maybe rethink that?