Posts Tagged ‘built to fail’

The Fed And The Robot Brownie Experiment

Tuesday, March 11th, 2008

There’s been a lot of commentary that Fed Chairman Ben Bernanke was “too slow”.

Bernanke has been “too slow” sort of the same way as if a bunch of us sit around a big puddle of gasoline, passing around lit matches until we catch fire, then shout as we roll out the flames, ‘Man, that one person sure was stupid– he got “too close”.’

Federal Reserve operations have failure built in.  Chairman Bernanke is just the lucky one left holding the hand grenade. Now we’re starting to hear the first murmurs that the Fed Chairman is being too accommodative.  Soon he’ll have experts shouting “too slow”, “too fast”, “too loose” and “too tight”, in exact cacophonous balance.

A poignant irony for Wrong Way Ben, but most of us are going to be too pre-occupied with our own private (crashing) economies to spare him much sympathy.

Let me demonstrate what I mean about the Federal Reserve as built to fail– never really in control of monetary policy– with another lame allegory.  Because the key elements are robots and brownies, I call it The Robot Brownie Experiment:

Monetary Policy Lab 1 (The Robot Brownie Experiment)

Equipment: -Robot with a finely adjustable cattle prod.

-Large supply of brownies.Subjects: -50 University Students (Preferably economics majors).

The Experiment: A small brownie is placed before the student subject.  When subject reaches for the brownie, the robot with a cattle prod gives the subject a mild shock.  On further iterations of the experiment, the subject is tempted with ever-larger brownies, but deterred with increasingly severe electric shocks. 

Hypothesis: Although most of the subjects will initially take and enjoy the brownie, at some point this behavior will cease.   Secondly, if the brownie size and cattle prod voltage is increased at the threshold of student perception, the point at which he or she will cease attempting to get the brownie can’t be predicted.  Third and last, if the robot was produced under a government contracting process, it will go berserk and chase me out of the lab and down the street, until I escape by throwing the brownies I’d pinched at the feet of a mother and child while shouting, “There they are, get ‘em!”

While the ethics of the experiment may be questioned, I believe that the theory and principles (including a lack of ethics) can be overlaid directly onto modern day central banking.

Like myself as the robot brownie experimenter, our Fed tempts economic actors and then shocks them, trying to drive them toward the economic course deemed to be in the economy’s interest.  And similarly, there is no way to predict how or when the behavior of people independently looking to determine their interests might change, or exactly how punchy and out of touch they may get from easy credit, or how scared, angry and tentative when a shock feels unexpected.

Government economists and TV commentators discuss supply and demand as if supervising someone making soup. It’s just a matter of a few key ingredients and temperature adjustments.  What’s so obvious that of course it has to get lost– people are behind what happens in the economy– people supply the supply and demand the demand.

People aren’t numbers– they aren’t even lab rats or university student archetypes.  The idea that the Fed can manipulate money and stay one step ahead of our responses as we try to adjust to such a key factor in our lives and ambitions is silly. Conventional economics doesn’t have much to say here– if you start with a silly premise, then PhD’s, brilliant formulas and complex measurements may be able to make the silly premise appear serious, but they can’t make it actually work.

The Fed can’t control money demand, since it can’t control us.  We may ignore stimulus, then adjust to it, and then ignore it again.  We’re alternately (in no particular order, which is kind of the point)– too emotional, too calculating, too smart, too stupid, too cocky and too afraid– all in varied, fractally periods and sizes simultaneously too small for Fed tweezers and too big for their cranes.

Then again, once in a while we may abandon all of the above ‘cause we’re just plain tired of getting zapped.

By Les Lafave

Abolish The Federal Reserve – themaestrosrep.org