by Kyle Johnson
Does being wrong matter?
It might seem like an absurd question. Being wrong obviously matters for individual investors. But if you are part of the privileged class, then the answer is… not always.
Last month, I wrote a brief history of failed economic predictions from academics, economists, and a Fed chairman. Their forecasts notwithstanding, these individuals are praised far more than criticized. The fact they’re still held in high regard suggests they play a different game than many perceive.
To understand a game, you must learn the rules—might as well consult a maestro. That’s the nickname bestowed upon former Federal Reserve Chairman Alan Greenspan due to the 1990s boom. But I think he’s a maestro because of how he deflected blame after the Fed, under his leadership, created a housing market bubble that took the global economy with it when it went bust.
Greenspan concluded, “The Fed didn’t cause the housing bubble.” If he bears any personal responsibility, Greenspan reasoned it was due to his trust in the free market. He claimed, “Everybody missed (the housing bubble)—academia, the Federal Reserve, all regulators.” In his lengthy post-crash autopsy, Greenspan failed to mention his own failed forecasts, pointing instead to the lingering impact of the dot-com crash. He took refuge in noting that financial models rarely anticipate recessions unless artificially forced.
Recognize the playbook?
Deny responsibility for causing a problem. Insist that nobody could have foreseen the problem—despite evidence to the contrary.
And what about bad predictions?
Not a rebuttal of core beliefs. The models just need tweaking.
Foot in mouth?
Maybe it was just some of his infamous FedSpeak (deliberate gobbledygook).
But never mind misdirection. High-profile economists undoubtedly make public statements knowing they’ll be proven incorrect. Recall how, during a private speech, even Hillary Clinton spoke of the need for both a private and a public opinion on certain matters. Why would economists and central bankers behave any differently?
Most economists fantasize about becoming Fed Chair. Few ever will. But with the right credentials, they can help themselves and others receive disproportional benefits from the money machine. They can earn a pretty penny by justifying the Fed’s existence.
Why say foolish things for personal gain? Some might “need” to.
Markets often react wildly to Fed Chair commentary. A truthful statement could trigger a crash. Fed speakers likely view lying as necessary.
This is all incredibly frustrating for people like you and me. But it’s all just part of the game for the privileged class—and this game is likely to continue.
Keynesians and other math-heavy economic ideologies control academia. Their ideas provide intellectual cover for government meddling in the economy. They have political protection. The biggest threat faced by the current power structure comes from within, not without.
Perversely, the power structure is (on the whole) rewarded with each successive failure. As they see it, every economic downturn was caused by a lack of regulation and control. They position themselves as saviors. The power only ratchets up.
And so, like the heads of the hydra, bad economic ideas never die.
Why would any of those in power voluntarily slay the beast that benefits them?
This game continues because The Powers That Shouldn’t Be are largely immune from consequences. Giving credit where due, their ability to kick the can down the road has been extremely impressive.
Maybe this is all one big misunderstanding. Investors are free to believe that the Fed dutifully and impartially carries out its dual mandate. But perhaps the privileged class put their own interests above all else.
As our Lobo Tiggre says: caveat emptor.
KJ
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