Do we just need smarter people at the Federal Reserve?January 17th, 2012
No, no, no! Emphatically, NO!
This Friday, I covered the release of five-year-old transcripts last week by the Federal Reserve which show just how clueless everyone at the Fed was about the impending housing crisis and economic crash. If you didn’t give it a read, I highly recommend you check it out so you can marvel for yourself at “just how clueless everybody at the Federal Reserve was about the very thing that they are supposed to be the most well-informed and best-able to forecast and positively influence.”
In the article, I also point that there were many economic commentators (mostly of the Austrian school of economic thought) like Congressman Ron Paul and investment broker Peter Schiff who were able to predict the economic calamity to come, even with with less privileged knowledge than that available to the Federal Reserve’s open market committee members. So is the solution to simply fire Ben Bernanke and company (as Newt Gingrich proposes) and replace them with “smarter” people like those who saw the housing crash coming literally years in advance? No!
As with many (maybe most) problems, the problem isn’t people, it’s process. The problem isn’t bad leadership, it’s the critically-flawed premise that a very small group of really smart people can successfully lead the trillions of economic decisions made by an entire world full of people– even if they really are “really smart” like those who saw the crash coming. It is in fact, those people who predicted the crash who said that the crash would happen as a result of central economic planning. Even the smartest person in the world cannot successfully run a critically-flawed system.
So what is the critical flaw in the system? As Austrian economist, F. A. Hayek wrote in The Fatal Conceit: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” The flaw in the system is its premise that anybody could possibly have enough knowledge over something as complex as the modern global economy that they can guide and engineer its success better than the aggregate result of billions of human beings peacefully pursuing their own separate interests, cooperating and exchanging with each other on a mutually voluntary basis for their mutual benefit.
In a system like this (which some of us call “free market capitalism”), reality reigns supreme. The reality is that you cannot consume something you haven’t produced. You cannot magically conjure wealth and prosperity into existence. There ain’t no such thing as a free lunch. Risks or rewards come with every human action, and so material success results from the success of individual decision making. The false pretense of economic central planning is that the central planners can outsmart reality, that they can engineer a better future for people than their response to the natural and already-existing incentives of a reality that rewards productive behavior and does not reward unproductive behavior.
But any revolt against reality is doomed to fail. Revolt against the reality of gravity by jumping off of a cliff, and you’ll find that reality will not be cheated. Try to conjure up a free lunch for the world’s people via the printing press, and you’ll find that there ain’t no such thing as a free lunch. Try to engineer their behavior better than they can, and you’ll find that the reality of incentives and disincentives in our world– and their trillions of separate responses to those realities– would have done a better job. Those critics of the Federal Reserve who predicted the housing crisis don’t imagine they would have done better. Their argument is that the Federal Reserve shouldn’t have done anything at all. They want you to be free to make your own decisions, and they believe you and a billion others would do a better job than any central planner.
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