The Federal Reserve's Shifting Makeup … The professional background of the Federal Reserve's leadership has moved from one that was dominated by bankers to one that is heavily academic … Fed research economists are Ph.D.s by training who worked in the Fed's economic research divisions and typically publish academic research; Fed administrators worked as managers in other aspects of Fed operations, such as payment systems, bank supervision or as general counsels. – The Wall Street Journal
Dominant Social Theme: The Federal Reserve attracts some of the best theoretical minds in the world. That's why we can trust it – and them.
Free-Market Analysis: This squib of a story (and revealing graphic) in The Wall Street Journal provides insight into the makeup of the current Federal Reserve. It shows a significant lessening of banking participation and the rise of academic involvement, including research economists.
Most importantly, the graphic helps confirm our belief that much of the Fed's function is, well … promotional. Academic professionals publish papers and give talks. This provides the Fed with an entire conversation built around the mechanism of its operation.
What this conversation does NOT do is question the fundamental reality of the Fed's existence – why it was created and whether or not it should exist. Given the Fed's abysmal record of currency debasement, this ought to be a main topic of academic conversation but anyone with insight into Fed activities knows how aggressively the Fed has co-opted academia over the years of its existence.
There are at least two ways that the Fed ensures the Western academic conversation about central banking revolves around operational ephemera rather than fundamental issues. First, the Fed directly provides relatively large sums of money to the academic community via grants, scholarships, etc.
Second and even more importantly, if one wants to work as a trained economist, one for the most part has to accept that central-bank price-fixing and money manipulation is a valid methodology for helping economies prosper. A corollary to this is that one must accept the fundamentally flawed view of John Maynard Keynes and his "great" work, The General Theory.
As we often point out, the only antidote to Keynes is Austrian, free-market economics. Keynes and the Austrian FA Hayek had a great debate in the 1930s over their respective views, one that was somehow decided, according to mainstream commentary, in Keynes's favor.
It should not have been, of course. Hayek and his mentor, Ludwig von Mises, had figured out that the normal business cycle was rendered highly volatile by the advent of central bank influence. Central banks kept interest rates too low as a matter of course and flooded economies with cheap money. Consumers and industry borrowed inordinately and then could not make payments when the boom turned to a bust.
Busts were continually exacerbated by aggressive central bank credit, which eventually caused deep recessions and depressions. Everything about the decision-making process of the Fed, enforced via the power of the state, was skewed by the determination to concentrate monetary power in the hands of a few selected individuals.
This was the analysis that Hayek presented in the 1930s and beyond. Keynes's theoretical analysis started AFTER the bust and never attempted to explain the economy's serial contractions (though he did mumble occasionally about "animal spirits").
Hayek and Mises (and Murray Rothbard) among others explained that the only way to weather a contraction was to let it continue until the marketplace itself purged rotten institutions. Keynes, on the other hand, was confident that the government itself could create conditions for an economic renewal by taking public money and paying to put people to work.
There is a mythology that this was successfully applied in the US during the Great Depression, but in fact, there are considerable questions as to whether it really did. Certainly, we can see today that such nostrums seem relatively powerless to affect trillion dollar economies. "Pump priming" – we have noticed – does not end up creating employment but simply devolves into a very expensive form of welfare.
As we have seen in this latest Great Recession, policy makers seeking to use a Keynesian approach are relatively helpless in the face of prolonged recession. In fact, government and Fed officials have declined to allow the great bubble of 2008 to entirely deflate even some seven years later.
This causes continual problems because the refusal to allow large entities to subside into bankruptcy has meant that subsequent stimulations have lacked any potential impact. Market participants have no idea who is bankrupt and who is not. In such conditions the "buy-in" necessary to a recovery does not exist.
The larger point here is that the Keynesian approach is as fantastical as the rest of the rhetoric surrounding central banking. None of it seems to correspond to the way the world actually works.
Let us continue.
Faced with the rise of the Austrian, free-market school in the 19th and 20th century, the British establishment (which essentially hired Keynes) developed the idea we know today as "econometrics." This adds another miserable layer of mathematical sophistry to what is already logically insupportable.
Econometrics is basically the idea that one can use complex mathematics to overcome the essentially dysfunctional nature of monetary forecasting. Central bankers have a difficult time of it because it is impossible to use backwards-looking data to predict the future.
This is a fundamental flaw in any expert system established in the 20th and 21st century: Whether it is industry or government, highly respected and well-paid individuals find that they must regularly generate economic and industrial predictions – ones that logically are impossible to make.
The solution is to teach very complex forms of mathematical analysis to aspiring economists. Econometrics enabled the economic community to claim, at least for a while, that it had solved the problem of forecasting. If the process were complex enough, the results would be more accurate. Or so the argument went.
Having "solved" the initial difficulty of using backwards-looking data to make forward-looking projections via econometrics, supporters now proceeded to expand the process. Today this expansion (in our view, anyway) is known as "technocracy."
As regulatory democracy gives ways to increasingly complicated forms of regional and global governance, it is the technocrat who is elevated as the ideal manager. He has the degrees, the interpersonal skills and the academic knowhow to "manage" hugely complicated political programs.
The root of this modern, expanding disaster must be traced back to central banking itself. Proponents of central banking have, for at least the past several centuries, been desperate to justify the idea that a few, select individuals ought to be trusted with regularly fixing the price and value of "money." Modern technocracy is founded on the idea of the "expert" who has the requisite econometrical skills to predict the future.
Throughout the 20th century, anyway, universities, think tanks, corporations, media properties, military ops and any other part of society with significant influence or power were pressured to adopt the technocratic model. The result has been that what started out as a desperate attempt to justify the disastrous price-fixing of central banking has now infected the entire body politic.
So much of what passes for expertise these days is simply ill-founded speculation justified by degrees and publication in journals that are supposed to be unbiased but are not. Meanwhile, there is a panoply of protected interests, often associated with banking influences that academics may be expected to comment on. The commentary often has a ritualistic and predictable flavor – and over time its repetition engenders what we have called "memes."
It all begins with banking, however. The modern world – and much of its formal, public conversation is surely the result of the need to justify the unjustifiable practices of modern money creation. In every direction, one can see the "expert" glorified, the application of "wonkery" celebrated and the leadership of the "technocrat" upheld.
With so much competence available, we would surely expect the 21st century to be a time of celebration and continual human progress, but is this so? "Progress" in many ways depends on price discovery and around the world today, the price discovery of the marketplace has been supplanted by central bank-initiated price fixing.
The bright light shining above this confusion is the Internet itself. Revealing long-concealed principles of free-market economics, the Internet has been responsible for a resurgence of clarity when it comes to the public conversation generally and economics specifically. Mechanisms of control and disinformation have been discovered and revealed in disciplines as varied as physics, art, archeology and medicine.
The Internet has also provided an electronic home for idiosyncratic viewpoints and for free-market oriented pundits. The alternative media itself often publicizes the views of these individuals and thus far more than in the 20th century there is an array of viewpoints that do not conform to standard mainstream memes.
These approaches have significant influence and have fractured the mainstream information monopoly. In some cases, the views of these individuals may have received attention anyway, but the Internet has certainly amplified their opinions.
We can see an example of this sort of thing occurring just this week in an interview with libertarian financier Jim Rogers posted by the prestigious financial publication Barron's. Rogers was interviewed from a "hotel room in Beijing" and provided a series of Austrian-influenced observations about the global economy.
Among other comments, Barron's relates his "concern that mounting worldwide debt and too much easy money will lead to a global bear market."
"The next time around, we are going to have a very serious problem, I'm afraid," said Rogers …. "So basically what I'm saying is that I'm not racing around looking for markets." …
Rogers concedes that global stock indexes could have "another leg up" as central banks "panic" and keep short-term rates low. But it will end badly, he concludes.
During a 40-minute interview with Barron's.com, Rogers offered a few ideas for U.S. investors, including a few China ETFs he holds, and a few short ideas. He also shared his take on commodities, including gold.
Barron's goes on to provide excerpts of its interview and readers of The Daily Bell will be aware of some of them from past articles.
Jim Rogers restates his uneasiness about the "American stock market [that] has been in a bull market now 6 ½ years." He adds that, "Big problems are going to come from the U.S. essentially because it has been the American central bank which has been the most at fault. We're the ones who started all this money printing and everybody else of course copied us."
He continues to recommend agriculture, calling low agricultural prices "amazing" and pointing out that the "average age of American farmers is 58 now and the average age in Japan is 66."
Rogers adds he is more apt to buy oil now than gold, though he still expects a "great opportunity to buy gold in the next year or two." He summarizes his current perspective as one in which he would "buy agriculture with both feet, energy with a toe and watch the others."
None of this is necessarily earth shattering, but Rogers's voice has been amplified by the Internet along with many others who provide viewpoints and information not regularly available in the mainstream media. True, Barron's is a mainstream publication but Jim Rogers regularly comments to the alternative media, which has played a big part in maintaining and expanding his popularity.
Most importantly, what one receives from Rogers and others like him is a point of view that does not support the mainstream technocratic perspective. One can argue this has had a continuing impact on undermining the myth of the "expert" and the larger mythology of technocratic leadership.
Today, one can certainly argue that a growing number of people have broken away from the mainstream intellectual straightjacket, rediscovering truths that their grandfathers and great grandfathers understood and put into practice. Some of these truths are ones that The Daily Bell and other alternative media publications have reported regularly.
Such truths almost inevitably emphasize personal independence, unbiased marketplace analysis and human action. At a time when banking elites are increasingly ferocious about the veracity of a variety of failing memes – mostly involving the legal force of technocratic leadership – the alternative media provides a perspective that supports individual freedom and self reliance.
Jim Rogers's perspective on buying and holding farmland, physical gold and even second residences is part of this alternative viewpoint – and it is one that is growing as the alternative media expands. Certainly, it is not always necessary to adopt mainstream investing perspectives to accrue wealth. The mainstream approach can be counterproductive and even terribly dangerous.
Most importantly, what the alternative media offers is an independent analytical approach that can help one understand the way the world really works instead of accepting what powerful forces want one to think. Perhaps that's the most valuable lesson of all.