Saturday, December 5, 2009

Quote Of The Day: David Stockton

I found today's QOTD in the latest copy of my undergraduate alumni magazine. The magazine ran an article on alumnus David Stockton who is the director of the Federal Reserve's Division of Research and Statistics. Before getting to the key quote, let's look at the article's description of David's responsibilities.

..Stockton oversees one of the world's largest economic research teams -- approximately 290 economists, financial analysts, computer scientists, research assistants and other personnel. Stockton and his staff sort through and interpret information streaming from the country's financial markets each day. One of Stockton's primary responsibilities is presenting periodic economic forecasts to the Federal Open Market Committee (FOMC) on job losses, housing wealth and business spending.
You won't find many people with greater access to economic and financial data than Stockton. The article quotes Bernanke as saying that "David's wise counsel, keen insight and deep knowledge of the economy have proved invaluable to me and the other members of the FOMC through the years, but most especially during the recent time of financial turmoil."

Now to the QOTD from Mr. Stockton:

What economists don't know about how the economy operates dwarfs what we do know. Our research program is intended to chip away at the margins of our ignorance.

I had a mixed reaction when I read this. On the one hand, it's very refreshing to have one of our leading economists so clearly state how little the Fed really knows about how the economy works. On the other hand, it's very disturbing to have one of our leading economists essentially admit that the Fed has no sound basis for its monetary policy.

If economists and the Fed don't really understand how the economy operates, how can they possible presume to know where short-term interest rates should be set?

The Fed's track record this past decade is abysmal. Artificially low rates helped fuel the internet bubble and the housing/credit bubble. Now, the Fed is again keeping rates absurdly low and is again fueling the next crisis. All of this is being done within "the margins of our ignorance."

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