How The Federal Reserve Distorts The Economics Profession--And Why We Suffer.

Posted by: Bruce Nussbaum on September 9, 2009

There is an amazing piece of investigative and analytical journalism on the HuffPost showing how the Federal Reserve and its market-is-always-right kind of economic theory has shaped the entire economics profession. We all need to read—and re-read—this piece. It shows how ideology, not social science professionalism, shaped policy in the US and around the world (since the US exported this ideology everywhere). And it shows how Alan Greenspan, believer and enforcer of this ideology, was instrumental in promulgating it—until he admitted he was totally wrong.

Here is the quote that I love most:
“Greenspan told Congress in October 2008 that he was in a state of “shocked disbelief” and that the “whole intellectual edifice” had “collapsed.” House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.) followed up: “In other words, you found that your view of the world, your ideology, was not right, it was not working.”

“Absolutely, precisely,” Greenspan replied. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

Now think a bit. Who is in charge of the Fed today?

Reader Comments

TC

September 9, 2009 7:26 PM

" ...shaped policy in the US and around the world (since the US exported this ideology everywhere)."

Not right. The US laissez fair economic ideology was exported principally to the UK, who adopted it fully. Thus the much-touted self-congratulations of the superiority of Anglo-Sexton economics of the past 2 decades.

The rest of the EU run economics their way and rejects the US way. Japan walked away from US ideology after their 1991 bubble burst. Rest of Asia Tigers is capitalistic but tampered with customs. China and S America rejected US ideology wholesale. And finally but not least, US closest neighbor and cousin Canada, while having a similar economic and financial setup, never adopted US unfettered ideology, has a different central banking system, rejected systemic greed, and run things according to classical Canadian prudence.

Sergei Dovgodko

September 10, 2009 4:09 AM

One should not be surprised that an ideology makes people to see what they want to see. That is called confirmation bias.

Closed mind leads to failure as the disconnects become untenable.

What is surprising indeed that the US business culture is known OUS as being pragmatic. How could it happen that it was hijacked by the ideologues?

Perhaps it is the side effects of the Cold War, euphoric win, and arrogance? Or nationalism and the role of religion?

Squeezebox

September 10, 2009 4:44 PM

You can't blame Greenspan too much for what happened. He inherited the fed from Paul Volker, who broke the back of the stagflation that had taken permanent hold of the US economy. Greenspan made some colossal mistakes, but the economy held steady until he was out of office. A thirty year streak of growth is nothing to sneeze at.

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