Fifty years ago, after a few scuffles, the Free Speech Movement established its foothold at the University of California, Berkeley. On December 2, 1964, Mario Savio gave a well-known speech before a thousand or more students. In part: “There’s a time when the operation of the machine becomes so odious – makes you so sick at heart – that you can’t take part.”
In February 2014, Neil Fligstein, a sociologist at U Cal Berkeley, along with professors Jonah Stuart Brundage and Michael Schultz, released a paper: “Why the Federal Reserve Failed to See the Financial Crisis of 2008: The Role of Macroeconomics.” In conclusion: The suppressed and carcinogenic operation of the country by the Federal Reserve has become so odious – it should make Americans sick at heart – that it took a sociology department to exercise free speech, when no economic department dared take part.
From the professors’ abstract: “One of the puzzles about the financial crisis of 2008 is why the regulators were so slow to recognize the impending collapse of the financial system. In this paper, we propose a novel account of what happened. We analyze the meeting transcripts of the Federal Reserve’s main decision-making body, the Federal Open Market Committee (FOMC), to show that they had surprisingly little recognition that there was a serious financial crisis brewing as late as December 2007.”
This certainly is novel. No economist exposed to the Federal Reserve’s tentacles (99%), would dare write this paper.
The sociologists explain their methodology: “We use topic modeling to analyze transcripts of FOMC meetings held between 2000 and 2007, demonstrating that the framework provided by macroeconomics dominated FOMC conversations throughout this period.”
From “topic modeling” (whatever that may be), the sociologists explain why the Fed will do nothing as the current asset bubbles pop: “The topic models… show that each of the issues involved in the crisis remained a separate discussion and were never connected together.”
For current asset allocation, that is all you need to know.
Just as Federal Reserve Chairman Ben S. Bernanke said – and he really did believe – that subprime mortgage defaults were “contained” (abandoned houses in Maricopa, Arizona and the Inland Empire would not inhibit the nation’s economy), whoever rules the suffocating Eccles Building when stocks, bonds, houses, and paper currencies gasp for air, will do no differently.
There is talk now that Fed Chair Janet Yellen is monitoring bubbles. She is doing no such thing. It is impossible for Yellen to see outside her oh-so-tiny world, having lived her life in the minutiae of the late-20th-century economic sandbox (regression analysis). If reports are true (this seems hard to believe, but, life and art…) Yellen set her sights in high-school to be a researcher for the Federal Reserve. She loves this stuff! So does everyone else in the room. There are the occasional interlopers, such as Richard Fisher today. The problem though, is academic economists cannot understand anything outside their own abstractions, since the only reference to their own abstractions are their own abstractions.
The Berkeley professors write: “Our results suggest that regulators use economic theory to make sense of a macro economy that, in key respects, does exist independently of their models. This understanding limits their ability to understand the “real” connections between markets.” Since models have been constructed for the mutual pleasure and (more-so-then-ever) need to retain academia’s credibility, discussion at FOMC meetings is of the construction of models, not of anything real.
The sociologists write: “Not surprisingly, the majority of people appointed to the FOMC are formally trained as economists.” They add a footnote: “Incidentally, we also found that, despite their status as central bankers, only 6 of 31 FOMC members had spent any time working in the financial industry.” This is not “incidentally.”
There is so much in the University of California paper that has been said for years – but never by the academic economist mafia. Such as, the Federal Reserve’s own zero-interest rate policy (ZIRP) of the early ‘oughts was directly responsible for the housing-CDO-private equity-TBTF bank failures. To say this again: If not for the Federal Reserve’s ZIRP policy, there would have been no financial crisis in 2007 and 2008. Fannie and Freddie would never have grown beyond their Lilliputian mandates; Angelo Mozilo would be managing a tanning salon; and Bernie Madoff could not have levitated predictably increasing returns without the Federal Reserve’s constantly rising cushion of credit absorption.
Let’s review footnote number 11 of the paper: The first paragraph may frustrate those not interested in the sociologists’ theory, but please bear with it: “It is possible that the FOMC’s macroeconomic models were performative in the specific sense of “counter-performativity,” defined as a situation in which economic models shape economic processes in such a way ‘that they conform less well to their depiction by economics’ (MacKenzie, 2007, p. 76; emphasis added).”
Okay. Theory in place, let’s go to the evidence: “[T]he Fed’s extended interest rate accommodation of the early 2000s, designed-at least overtly-to promote growth through the standard policy channels of consumer and corporate investment, also appears to have directly fueled asset prices, contributing to the housing-price bubble at the same time that the FOMC’s models consistently rooted housing prices in economic ‘fundamentals’ (see below). Further research would need to demonstrate the extent to which the FOMC could be considered counter-performative in this and other respect.”
The evidence is manifest.