Tuesday, March 25, 2008

Central banking in a nutshell

The Daily Reckoning has a good history lesson on the failures of central banking:

The foundation for modern central banking theory was laid down in the very year Alan Greenspan was born - 1926. That was when one of the first "neoclassical" economists, Professor Irving Fisher, published "A Statistical Relationship between Unemployment and Price Changes," arguing that a little inflation was a good thing, since it seemed to stimulate employment.

Then, "in the 1970s," writes Nobel Prize winner Edmund Phelps in the Wall Street Journal , "a new school of neo-neoclassical economists proposed that the market economy, though noisy, was basically predictable. All the risks in the economy, it was claimed, are driven by purely random shocks - like coin throws - subject to known probabilities..."


Professor Fisher lived long enough to see the gods laughing at him. Just days before the stock market crash of ' 29 he wrote, "stock prices have reached what look like a permanently high plateau." Then, when the crash came he said that the "market was only shaking out the lunatic fringe," and claimed that prices would soon go much higher. A few months later, Fisher had lost his fortune and his reputation, but still told investors that recovery was just around the corner.

So far, Alan Greenspan has only gotten a few chuckles, as he attempts to explain where he was and what he was doing when the world's biggest bubble took shape. But the more he explains, the more people understand: that the 'science' of central banking is nothing more than claptrap, and Mr. Greenspan is a scalawag.