The Error Of Keynesian Central Banking In One Paragraph

We might as well repeat our mantra: The problem with runaway government spending, soaring public and private debt, insensible speculation in the financial markets, egregious redistribution of wealth to the tippy-top of the economic ladder and flagging living standards among the wage-earning classes is not simply the miserable outcome of today’s faux elections between the two wings of the UniParty.

The underlying and preponderant ill is the Fed, the Fed and the Fed. It is the nation’s unelected, unchained and all-powerful financial agent that enables all the other the economic afflictions and societal disabilities.

Moreover, we are not talking about mere tactical errors of too little too late on rates or a bloated balance sheet that needs trimming or a failure to read the incoming data correctly or to fully anticipate market adjustments to its own actions.

No, the real problem is Mission Impossible. That is, the very idea and framework of today’s Keynesian approach to central banking doesn’t work because it’s not really central banking at all in any classic sense. After all, historic central banking was about integrity and sufficiency of the money and the functioning, stability and liquidity of the commercial banking system.

To the contrary, what they do in the Eccles Building and at their Liberty Street annex is plenary monetary central planning. For all practical purposes this entails state management of the nation’s vast, globally integrated $29 trillion GDP via what amounts to a monetary Gosplan, precariously mounted on handful of targets for inflation, employment and the related variables of overall growth of output, productivity and business and housing investment.

At the end of the day, however, the entire Keynesian Central Banking project turns on toggling overnight interest rates on the theory that they provide the master-key to the entire flow of the financial markets and the wider macroeconomy in which they function. Hence the Fed’s mantra that its maneuvers at the interest rate dials are fully-informed and driven by the vast sea of incoming data from the length and breadth of the macroeconomy.

To be sure, they pretend this vast usurpation of the function of free markets is not that at all, but some kind of ersatz central banking endeavor designed to regulate the monetary system. To that end, a few years ago when Ben Bernanke left the Fed, he posted a blog explaining exactly why the Fed had no choice except to set money market interest rates.

Yet in what turned out to be his first utterance in civilian life, Blogger Ben actually refuted the case for modern central banking in a single post.