Central Economic Planning Will Get Better, Promise!

The Good and the Bad

Bloomberg, which is a major purveyor not only of useful economic and financial data, but also a major proponent of economic central planning as practiced by modern central banks, informs us that Fed chair Janet Yellen has actually found the holy grail. Finally, central planning will work! At last, the promise of the “scientific monetary policy” is about to be fulfilled. Nirvana has practically arrived.

In a once again slightly confusing Bloomberg headline we are told: “Yellen Takes the Good Greenspan, Leaves the Bad”. If that’s so, obviously nothing can go wrong. It does make us wonder though what she’ll do about the ugly Greenspan.

In a way, this is an almost prophetic poster, with its references to risk taking and someone “doing the cutting”…

So what is the promising secret sauce discovered by Ms. Yellen? After a string of abysmal failures over the past century, how is central economic planning by the Fed finally going to lead us to salvation? As the headline already indicates, tweaking Alan Greenspan’s playbook is believed to do the trick:

“Janet Yellen looks to be taking one page out of Alan Greenspan’s playbook while tearing up another as she plots monetary strategy for 2015 and beyond.

The Federal Reserve chair and her colleagues signaled this month they would be willing to push unemployment below its so-called natural rate — a feat Greenspan as chairman managed in the late 1990s without fanning much inflation. Yellen showed less desire to pursue her predecessor’s “measured” approach to raising interest rates in the mid-2000s, suggesting his strategy may have fostered complacency that made a small contribution to the financial crisis.

The late 1990s “was a very good period for the U.S. economy, and Greenspan made the correct call on monetary policy,” said Michael Gapen, a former Fed official who is now senior U.S. economist for Barclays Capital Inc. in New York. On the other hand, “there is a general consensus the way they did policy wasn’t right” in the run-up to the housing bust that preceded the 2007-2009 recession.”

There was in fact little practical difference between the late 1990s policy, the Fed’s reaction to the bursting of the asset bubble this policy fostered, and its reaction to the bursting of the next bubble its policies then caused. In fact, the demise of the late 1990s bubble was what motivated Greenspan’s early to mid- 2000ds policy. And the end of this echo boom in turn has motivated current policies. Apart from technicalities, it is very difficult to discern any differences. Dangerous credit and asset bubbles have formed every time, and the central bank then proceeded to provide the fuel for even bigger credit and asset bubbles. We do not need to “guess” about this, or consider trivial details, we only need to ponder a chart of the money supply.

US broad true money supply (TMS-2) since 1988 (via St. Louis Federal Reserve Research): the three bubble eras can be easily recognized. It ain’t rocket science, as they say – click to enlarge.

Professional Bubble Spotters At Work

Fed members are evidently aware that the institution has rightly been charged by critics with fomenting numerous asset bubbles and these days feel compelled to make statements that indicate that A) this time they “have a plan”, and B) no bubbles are in sight anywhere, so there’s no need to worry anyway. Right.