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So Alan Greenspan is not God after all. If he was, no one would be able to replace him as chairman of the Fed; retirement, old age, even permanent departure from the scene - these do not sit well with divine status.
Several million words have already been devoted to the appointment of Ben Bernanke as the new chairman, and what this might mean to US monetary policy and hence to the American economy and hence to the global economy - and hence to the man or woman on the street, whether in Peoria, Petah Tikva or Penang. This is a mere drop in the ocean compared to the billions of words written about Greenspan during his 18-year tenure as the head of America's central bank - but hey, it's a start.
The assumption underlying the obsessive interest displayed by the financial world in the Federal Reserve Bank, its head and policy, is that the chairman of the Fed is "the second most powerful man in America" - after the president, but ahead of the chief justice of the Supreme Court. This power stems from the ability of the Fed - in practice, of its chairman - to determine monetary policy (ordinary people read "interest rates").
This assumption has become so universally accepted that anyone questioning it must be suspected of latent communist sympathies or of being retarded. Nevertheless, we will raise two initial points with regard to the Fed and to monetary policy in general: first, it is reactive. Indeed, under Greenspan, this became a fundamental doctrine; the fierce argument that has raged for the past 10 years regarding the Fed's failure to prick the stock market bubble of the late 1990s, and its current hesitancy in addressing the real estate bubble, is focused on the validity or otherwise of Greenspan's view that the Fed should not prick bubbles, but react to their aftermath.
Second, monetary policy - which is what central banks engage in - is only one aspect of economic policy. Worse, it is a very short-term element. The prominence it has received in the last generation is the result of the failure of central bankers in the 1960s and 1970s, and the resultant worldwide inflation. This led to the rise of the new dogma of "stability" as the sine qua non for economic development, and the crowning of central bankers as the high priests of the new religion, whose jihad was and remains fighting inflation.
Yet there are worse diseases in the economic lexicon than inflation. As the Japanese can testify, deflation is certainly one - and it also belongs to the monetary policy complex.
The changing of the guard at the Fed is an opportunity for second thoughts on the usefulness of the obsessive focus on monetary policy and, by extension, on the dominance of monetarist economics and its belief that money is the critical factor in economic policy-making. As soon as you move beyond the fixation with what the Fed will do at its next meeting, the very limited capability of monetary policy becomes apparent. Here are a few examples, from areas currently in the news:
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â€¢ Delphi, the largest car-part manufacturer in the US, has gone bust. General Motors will follow suit in due course, weighed down by unfunded pension and health-care liabilities that have grown remorselessly over the decades. Many other major American companies have the same problems. Monetary policy didn't cause them, nor can it solve them.
â€¢ The focus in the energy market is moving from gasoline to heating oil, but the basic problem is ever clearer: there is a dire shortage of refining capacity in the US which has developed over 15-20 years. Monetary policy wasn't responsible, nor can raising interest rates improve oil supply. All it can do is trigger a general recession, thereby temporarily reducing demand.
â€¢ Hurricanes are genuine acts of God, but the extent of the damage they cause is determined by the policy of government at every level, and by the behavior of ordinary people. If interest rates had been higher or lower last year (or last decade), would New Orleans be in better or worse shape?
â€¢ Whether the world slips into protectionism or takes radical steps to promote freer trade in agriculture and services will be determined in negotiations over the next few weeks and months. These negotiations will decide the fate of hundreds of millions of people, most of whom have never heard of the World Trade Organization or the "Doha round of trade liberalization." Whether the Fed funds rate goes up 25 or 50 basis points over the same period will make no difference to the outcome.
What moves the world are, almost exclusively, long-term trends in demographics, social behavior and technology. What moves markets on a daily, hourly and minute-to-minute basis are the words and decisions of central bankers.
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