Should Ben Bernanke Roll the Dice?
Reuters writer Felix Salmon writes up an idea I've never heard before, or even thought I'd hear:
[Nick Denton] has a theory about how we ended up in the midst of this huge economic crisis: he blames the hubris of central bankers in general and Alan Greenspan in particular — people who thought they had abolished the business cycle, and whose belief was shared by the business and finance worlds. It’s the theory of the Greenspan put, basically — we all reckoned that if things got really bad then the Fed would bail us all out, as they did in 1991-2 and then again in 2000-1. As a result people weren’t nearly as cautious as they might otherwise have been inclined to be, and dangers built up until they exploded.
How to fix this? Is it not the job of the Fed to try to minimize the severity of recessions? One alternative approach would be to consider it to be the job of the Fed to minimize the severity of the worst possible recession. What would happen if, for instance, rates were set using a random-number generator? Every FOMC meeting, some kind of virtual die would be rolled, moving rates up or down even if that was the opposite of “correct” monetary policy. The resulting uncertainty would force people to take a more defensive stance at all times, just in case rates went sharply upwards — even if the probability of such a rate hike was quite low.
Maybe monetary policy is a bit like optimal poker strategy: a certain percentage likelihood that you’ll do this, a certain percentage likelihood that you’ll do that. The Fed governors can then release a decision saying, essentially, “we plugged in a 10% chance of a 50bp cut, a 50% chance of a 25bp cut, a 25% chance of keeping rates steady, and a 15% chance of a 25bp raise, and rolled the electronic dice; guess what, we we ended up with the 25bp raise.”
"OK, so that’s probably a silly idea," Salmon says. "But some element of uncertainty is I think useful in monetary policy." He's right about the uncertainty bit. And I'd add another rationale for this idea that admittedly we shouldn't try: It further reduces the capacity for human error. Looking back, I think you have to conclude that Alan Greenspan wasn't as insulated from traditional incentives as some have argued. He liked being reappointed. He liked a happy Congress. He liked being a hero on Wall Street. And how insulated from intellectual trends can you be if your wife is Andrea Mitchell?
Salmon's idea takes the traditional independence of the Fed to another level. It admits that insulation from short-term electoral concerns is not the same as insulation from politics and popularity altogether. You may not be an elected official. But you're still human. And the fact that you're human -- that you demonstrate patterns and tendencies -- makes you somewhat predictable, and thus lowers an investor's perception of uncertainty, and thus his caution. Introducing computerized randomness that even you, the human, couldn't control would help counteract that.
Anyway, probably not a good policy proposal. But interesting to think about!
(Photo credit: AP photo.)
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