Why Bernanke needs the wizard’s curtain

If so many trillions of dollars weren’t riding on it, the hoo-ha over the release of the results of the two-day meeting of the Federal Open Market Committee — expected this afternoon — would be laughable.

If so many trillions of dollars weren’t riding on it, the hoo-ha over the release of the results of the two-day meeting of the Federal Open Market Committee — expected this afternoon — would be laughable.
Huddled at their Bloomberg terminals and staring at CNBC, the world’s biggest movers and shakers at banks, hedge funds and giant corporations are anxiously awaiting word to emerge from the holy of holies — will interest rates edge up? Will they stay the same? What message will be delivered? Will it be a clear statement or that special Fed combination of inscrutable and banal?
The tension will abate when we finally learn what the Fed solons have decided. Tomorrow, we’ll spend the morning reading newspaper coverage and interpretation of the news and watching a collection of experts on TV commenting wisely on what it all means.
And then we’ll re-enact the ritual all over again in a few months.
I don’t mean to minimize the import of the Fed’s decisions on interest rates and the money supply. In the short run, the Fed’s moves and utterances affect the price of loans, mortgages and other credit instruments, sending ripples and sometimes shock waves throughout the economy.
Over the longer run however, it’s the big, lumbering, diffuse world economy that determines interest rates and currency values (a reflection of money supply), not the Federal Reserve Board’s governors. But that view of reality is too lacking in drama and is too frightening — since it implies that the economy is ultimately uncontrollable — to win many converts.
Just like the Ozians needed to believe in their wizard, it seems that we need to believe that the Fed has almost supernatural powers. There seems to be a collective hope that Ben Bernanke need only pull the right levers behind a big protective curtain for everything to work out just swell.
Unfortunately, Ben and crew are only human. Even sainted Alan Greenspan is a fallible mortal. Despite his protestations, he was just as clueless about the mortgage bubble as most of the rest of us.
So let’s strip the Fed of the godlike powers we ascribe to it and imagine what really goes on in those top-secret Open Market (how’s that for an oxymoron?) meetings:
“Do you think we should increase rates by a quarter percent?” asks one governor.
“I dunno, what about three-eighths of a point?” says another.
“Oh, let’s wait a while and see what happens,” suggests a third.
I’m sure the actual conversation is more somber and data-filled, but I don’t doubt for a minute that the governors are as incapable of hitting the “correct” interest rate as you or I might be.
As economic philosopher Friedrich Hayek pointed out in “The Fatal Conceit,” economic planning can’t work, because the planners don’t and can’t have the information to make price and resource allocation decisions that only markets can provide. That the Fed can decide the proper rate of interest and supply of money is a conceit. It may not be fatal, because they lack total control, but it sure is laughable.