The Federal Reserve and Borg Assimilation: Focus
Larry Summers would have been a very good Fed Chair http://t.co/47Anu8xuzL pic.twitter.com/HZy5WOVcNB
— Matt O'Brien (@ObsoleteDogma) February 9, 2015
and rightly so–or at least I agree, and have been saying the same thing…. But I’m interested in Matt’s remark that Larry would have made a good Fed chairman. Quite possibly–but would he be saying the same thing if he were in fact at the Fed?… There is a big divide on monetary policy right now among people who seem to share the same model of how the world works…. Everything seems to depend on whether you are currently in an official position or not. Stan Fischer and Olivier Blanchard are pretty Keynesian, but seem ready to hike; Larry and yours truly think about the asymmetry of risks, and are aghast at the thought. So if Larry were at the Fed, would he be saying what he is, or would he have been assimilated by the FedBorg?
And:
I think that everyone who has ever worked for Larry will have the same reaction to Paul’s question: “Of course he would not be assimilated!”, followed by laughter. What you need most in Larry’s office is not to guard against groupthink and paying too much attention to the recent-past consensus, but rather someone whose core competence is: “Let’s think about this some more. If we still think this is a good idea in a week, we could always do it then…” Someone with as much confidence in his own judgment and as much enthusiasm as Summers is the personality type least likely to be assimilated by the constant drip-drip-drip of concerns and questions.
Indeed, the argument that Janet Yellen would be significantly better at making the Fed run in harness smoothly while Larry Summers would be better at taking bold action when it was called for even without an FOMC consensus behind him was the substantive point at issue in the choice between the two.
Where I think Federal Reserve groupthink takes hold is in a narrowing-down of the tails: you run your models, you make your forecasts, most of the time the outcome is pretty close to what you had forecast, and so you gain confidence–especially because there is an immense amount of information flooding in that validates and backs your central-tendency forecast.
The main argument against a June 2015 interest-rate liftoff and a 0.25%-point/meeting climb in interest rates thereafter to a normal level of 4% in mid-2017 are, after all, two:
-
The financial markets are betting that such a liftoff would then be reversed and interest rates lowered sometime in 2016.
-
With such a path two bad shocks in 2016 would create a very dangerous situation; while with liftoff delayed two good shocks in 2016 would not cause serious trouble.
But Fed groupthink has the effects, I guess, of making the Federal Reserve confident that, like Jon Snow, the financial markets know nothing; and of focusing attention on central tendencies at the expense of giving proper weight to the asymmetry of risks in the tails…