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Monday, January 16, 2012

And Deliver Us From Systemic Risk: The Fed Transcripts

The Federal Reserve System is as independent of politics as any of our government institutions. It hires some of the best economists trained in the top PhD finance and economics programs. Each of the fifteen district banks has its own research department, which produces and analyzes tons of data.

The Federal Reserve Board employs some two hundred and twenty five Ph.Ds. The current Chairman of the Fed, Ben Bernanke, is a leading specialist on monetary policy and the business cycle. His predecessor, Alan Greenspan was universally praised as a master of data analysis. If anyone could see trouble ahead, it was supposed to be Greenspan.

Reading the just-released transcript of the Fed Open Market Committee meeting on December 12, 2006 reminds me of the 9/11 Commission Report. The Fed vaguely identified some of the dots, but not one committee member raised the possibility of a housing collapse.

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1 comment:

  1. To understand and incorporate the systematic risk, we need unhindered history of numbers, and not thoughts. The making of an average economist is devoid of learning the unconditional history, quantitatively or qualitatively---there are some exceptions: Milton Friedman, Ben Bernanke, Alan Greenspan, Douglas North, Paul Gregory, Ken Rogoff, ..., but, the exceptions (e.g., Nouriel Roubini) do not rule . The age of Samuelson (mathematics) has had its own pitfalls; losing ourselves in the publishable beauty of math, ignoring the Black Swans (assumed exogeneity of systematic risk), and minimizing the idiosyncratic (gradation of various white Swans) over the last few decades. These are all the hallmarks of our tentative progress, which is not different than saying that, 'you have come a long way baby' in ignoring the fat tails of the Black Swans. In our bull parties, while we are manning the ladle (interest rate) in the punch bowl (liquidity), we are not aware of the drunk NINJAS (No Income, No Job, And No Assets) whose 'collective' decisions/behavior determines the faith of the system (our pensions).

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