Wednesday, January 19, 2011

Huffington Post: How The Federal Reserve Bought The Economics Profession

This is an older article but still interesting: From the Huffington Post
A lot if interesting statements in the article, and I believe they get this correct:
"In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry."

Not so much this:

"Paul Krugman, in Sunday's New York Times magazine, did his own autopsy of economics, asking "How Did Economists Get It So Wrong?" Krugman concludes that "[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system." So who seduced them? The Fed did it."

I have a hard time believing that the Fed promotes or believes in a frictionless market system. If so, it certainly doesn't practice what it preaches.  Perhaps this belief is conditional on the their mandate for the social planning of money and interest.  But the housing crisis is a demonstration of just how 'frictionless' markets are given these interventions. If anything, what was missed was the consequences and frictions created by departures from market based information coordination and resource allocation.  (Fear the Boom and Bust)

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