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Ignorance Is Confidence: Bernanke And The Occasional Irrelevance Of Truth

Submitted by Christopher Whalen

Source - Institutional Risk Analytics

Ignorance is Confidence: Fedtalk or Newspeak?  

Andrew Jackson on Repealing a Central Bank

"Why were the rating agencies trusted? When they became required for Federal deposit insurance their incentives for upward bias was common knowledge. The requirement was attacked by a Chicago economist, Melchior Palyi, on philosophical grounds (the expertise is excessively secret) and technical (Moody‘s forecasts were inaccurate). The Federal government financed a massive study of bond ratings which developed a technical response to remove the bias. The study required a trade with the rating agencies so the authors wrote prudently to avoid offending the agencies. They disguised the meaning of their procedures and did not discuss the full dimensions of Palyi‘s challenge. When the technical methods failed, the loss of memory did not allow us to recover Palyi‘s warning about non-transparency."

“Prudence with Biased Experts: Ratings Agencies & Regulators"
David M. Levy, George Mason University
Sandra J. Peart, University of Richmond
September 2010

In this issue of The Institutional Risk Analyst, Richard Alford, Christopher Whalen and members of the Herbert Gold Society opine on the Fed's attitude toward veracity and transparency in an age when confidence is the paramount policy concern. In the process of seeking to restore and maintain confidence, in the financial system and in the Fed as an institution, the Board of Governors in Washington led by Chairman Ben Bernanke seem to follow the last of the three slogans of the Ministry of Truth in George Orwell's book, 1984: "Ignorance is Strength." The chief threat to the Fed's continued existence  is not the growing plurality in Congress who support such measures, but the refusal of the organization to disclose and describe its policies and operations to the American people in an honest, forthright fashion.

Fedtalk or Newspeak in the Age of Transparency

The current Fed emphasizes communication policy and transparency more than any of its predecessors. Despite the emphasis, however, the Fed continues suffer communications problems and is less than transparent as it employs “talk” to shape expectations and perceptions about the economy and policy. The content of monetary policy pronouncements and also the Fed’s financial disclosure offer two cases in point that suggest deliberate obfuscation has become acceptable and, indeed, standard operating procedure at the Fed.

Shortly after Chairman Bernanke’s second 60 Minutes appearance on December 5, 2010, commentators from Caroline Baum, in a Bloomberg News article, to Jon Stewart, on the Daily Show, criticized Bernanke for reversing his position regarding QE and the “printing of money.” During his first appearance Bernanke equated QE and the printing of money while on the second appearance he said QE was unrelated to money creation. Baum also found it difficult to stomach Bernanke’s newly found 100% confidence in his ability to forestall inflation in the future despite the ballooning of the Fed balance sheet. Baum summarized her misgivings about Bernanke’s second 60 Minutes appearance: “What’s so troubling about the Sunday interview is that it wasn’t Bernanke, the media-shy economist, talking. It was a politician attempting to bolster confidence in his constituents and support for his policies. That’s not an ideal character trait for a central banker….”

However, Baum as well as many other observers are woefully behind the times. Under Chairman Bernanke and even before, the central bank has defined “Fed talk” as a policy tool, a decision that makes Fed officials indistinguishable from the other paid agents who operate in Washington. For at least the last five years, “Fed talk” has consciously, continuously and publicly been aimed at managing expectations about policy, the future course of the economy, interest rates and inflation. In short, “Fed talk” is and has been for some time exactly that to which Baum objects.

Further, in the collective mind of the Fed, doing what Baum objects to is exactly the optimal role of a policy maker. Central banks have changed levels set for targeted variables; they have changed the variables that that they target; they have changed their operating procedures. Central banks have been criticized (almost continuously by one party or another) for these changes in policy, but few would disagree with the premise that policy should adjust in response to at least some changes in the economic and financial environment. To the Fed, the relevant criteria to be used in evaluating “Fed talk” is the standard used to evaluate any policy tool, i.e. does it promote the goals of policy. In such a framework, the truth becomes irrelevant from time to time.

Now onto Andrew Jackson's Veto of the Second Bank of the United States.

Read the rest at IRA...




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