Fed News Friday: Keep rates the same, maybe sprinkle on a little “easing” –a fatal conceit

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” -F. A. Hayek

This year’s last meeting of the Federal Reserve Open Market Committee concluded this week, cautiously upgrading its economic outlook in light of some rosier economic metrics (like consumer confidence, small business optimism, and unemployment) but acknowledging “significant  downside risks” from the growing European debt crisis.

The Federal Reserve decided that interest rates would remain at their historically low level of 0 – 0.25% until mid-2013 and left open the possibility of some moderate “easing” via asset purchasing (via creating money with an accountant’s magical pen!), which some commentators are predicting could happen as soon as January, especially if economic data indicate faltering in the alleged economic recovery:

Bernanke and his colleagues may be considering more measures to aid growth and improve public understanding of Fed policy, which could be unveiled as soon as their next meeting taking place Jan. 25-26, said Julia Coronado, chief North America economist at BNP Paribas. The Fed reiterated that it expects joblessness to drop “only gradually.”

“They still see downside risks, so I still think they’re tilted toward easing,” said Coronado, a former Fed researcher who is based in New York. She said she expects a new round of asset purchases in the second quarter, or as soon as the January or March meetings should the economy deteriorate faster.

The “recent strength in data” allows Fed officials to “be a little more patient than they otherwise might be,” Coronado said.

A group of government sponsored finance bureaucrats gathered this week on the pretense that their economic models and numbers can predict the future, even though these models and numbers failed to give them any hint as to the financial collapse that has ravaged the world’s economies over the last four years, which it is comforting to know, because if these models did in fact give the bureaucrats advanced warning, we should wonder why the bureaucrats gave us none, and be forced to conclude that they are not merely mistaken, but actually evil.

Giving them the benefit of the doubt, we shall say they are simply mistaken and pretentious, blinded by a fatal conceit that they can design a better economic future, a blindness made apparent by their failure to successfully design the economy we’re living and working (or not working) in now. These self-appointed, but hardly accurate oracles, after issuing their prophecies outlook, then presumed to fix the price and quantity of money, hoping to design a better future than the one they designed before the financial crisis. They would do well to remember the lesson from the story of Icarus: that when you chart a course too high on wings of wax and paper, your wings will melt and you will plummet.

Austrian economists have been explicating this concept in economic terms for years in a concept and theory referred to as the Austrian business cycle. Frenzied economic booms fueled by the artificial expansion of credit are necessarily followed by a period of correction. The artificial high must be paid for with an economic bust because of an immutable rule of reality that economists have formulated thusly: There ain’t no such thing as a free lunch. The economic outlook cannot be predicted from the metrics and models used by central banking bureaucrats. It can be predicted from the actions of the central banking bureaucrats. We know it can because Austrian economists have been doing it for a century now.

So here’s my economic outlook: The bureaucrats are holding interest rates artificially low and continuing to expand a monetary supply already stretched too thin, therefore the future of the global economy is in critical danger. Its fundamentals are not strong. It is not recovering from the hangover, just nursing it with a few more drinks. Tomorrow’s hangover will be even worse than today’s.

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