On Opaque Transparency

There are two things that I want to comment on Fed policy this evening: Transparency is overrated, and Bernanke does not understand savings.

Transparency is Overrated

Ever heard of the phrase “data overload?”  Greenspan would do that verbally in his testimony to Congress, providing them with more data than they needed, and occasionally contradictory so that each side could quote what they wanted.

Well, the present transparency policy of the Fed is another version of data overload.  Give lots of data — some similar, some different.  Opinions, forecasts, policies — average people have a hard time with the nuances; even some professionals do.

After a certain point, the more data you reveal, the harder it gets to evaluate what is going on.  Far better to reveal to the public the core data that explains policy than to make them slog through big data releases.

Transparency is overrated.  Not sure which foolish economist thought of this one, but more data does not mean better decisions, or better public understanding.  Humans are not Vulcans (only logical), nor Ferengi (only greedy); we are complex, and that makes prediction of actions difficult.

Bernanke does not Understand Savings

Twice in his press conference yesterday, Bernanke showed that he was out of touch with average Americans.  He argued that average people could keep up with a 2% increase in the price level by investing in stocks and (presumably short-term) bonds.

(Speaking to The Bernank)

I’m sorry, Ben, but ya gotsta come down from the uneducated ivory tower and wallow in the mud wit da restov us.  There are three problems with what you said:

  • It’s hard to earn 2% (after-tax) consistently when the Fed funds rate is zero.
  • Only the top 20% of the wealthy have enough assets to keep themselves afloat using the asset markets.  Most people would like to do something to protect themselves from inflation, but lack the means to do so.
  • Average people do not invest, they save at financial intermediaries like banks, S&Ls, and life insurers.  Fed policy kills rates for savers.  They will not become investors, because they lack the knowledge to do so.

I am again sorry, Ben, because your policies discriminate against the poor, and the lower middle class.  Yes, the rich and the upper middle-class clever can escape the penalties stemming from your policies, but the lower-middle class and the poor can’t.

Think of it this way: your policies are making it more palatable for average people to buy gold, because the alternatives in savings are lousy.  If there is no income, why not grab safety from inflation?

Are you really trying to wrest the thorny crown of “worst Fed Chairman” from Arthur Burns?  If so, well done, you are achieving your goals.  Even Alan Greenspan did not do that, though he tried.

My advice to you is simple.  Raise the Fed funds rate to 1%, and stop the QE, and pseudo-QE.  At the zero bound, monetary policy has no punch, and the same for QE.  It affects asset markets; it does not affect goods markets.

Time to abandon useless theories about the Depression, and embrace the practical difficulties that we now face.  Ben, grow up and abandon your failed theories on the Great Depression.  And resign, if you can’t grow up.


  • Doug says:

    David, I have a couple of comments:

    I totally agree with your “data overload” thesis. This is not unlike “malicious compliance” that my management team used to practice when I worked at a small regional bank in Vermont. We were a multi-bank holding company with regulators from the Fed, the OCC, the FDIC, and the OTS all coming in during foliage season. We would prepare a *massive* examination package and dump it on them–telling them to figure it out. That allowed us to get back to work, and they could pore over the reports and enjoy the fall colors.

    But I disagree that QE doesn’t raise inflation. Check out http://bpp.mit.edu/usa/. It sure looks like QE1 and QE2 resulted in an acceleration of the price index. And this is from a daily screen-scrape of a billion offerings on the internet, not from some bureaucratic construct managed and manipulated by the government. The problem with QE is leakage. Because of our reserve currency status, other countries are importing our monetary policy. Like or not, the Fed is partially responsible for much that happens overseas.

    I don’t want to think of the Fed as evil, but they are self-interested actors. James Buchanan was right: government does not act in a vacuum. The problem with the Fed right now is that they are maximizing their utility function, for all their good intentions.

  • Pacioli says:

    @ Doug –

    The following quote from your link tells us all we need to know regarding how many grains of salt that data should be taken with: “The price of services, in particular, are not easy to find online and therefore are not included in our statistics.” Additionally, I think it’s disingenuous to suggest that the Fed is responsible for other nations’ monetary policy.

    @ the blog author –
    Your obsession with the Fed and its policies as a major factor contributing to a lack of economic recovery is confounding.
    The Fed is simply doing whatever it can. But Fed policy alone will never be enough to appreciably impact the overall economy. That is a matter of fiscal policy. Additionally, your suggestion that poorer people ‘lack the knowledge’ to invest is almost offensively erroneous. What they lack is the means (by definition – they are poorer). But the way you characterize it makes you sound like the ultimate hypocrite when you talk about Bernanke being in an ‘ivory tower’.

    • tspare says:

      @ Pacioli –

      I think the point regarding the Fed is that they need to learn that pushing on the string has unintended consequences.

      As far as the poor lacking the knowledge to invest, why is that offensive. I would think most people include some very sophisticated investors probably feel or should feel that they “lack the knowledge” to invest. Humility is probably a good safe guard against greed. I would say that if you don’t have too much money, then you inherently don’t need to care about investing and therefore don’t accumulate that knowledge. Its not saying that you lack the ability to gain the knowledge. At the same time, I don’t think the poor or anyone want the government to slowly stealing their money through policies that result in inflation when the policies don’t do much anyway and then explain that they can prevent the theft by taking more risk with their money.

      • Pacioli says:

        @ spare –

        “As far as the poor lacking the knowledge to invest, why is that offensive.”
        It is offensive because the lack of knowledge has ABSOLUTELY NOTHING to do with being rich or poor. There are countless fabulously rich people who know absolutely zero about investing. They are too busy with their actual jobs and do not have the time (same thing with lots of poor people, incidentally). So again, rich/poor is absolutely irrelevant. Bringing in the irrelevant rich/poor dynamic is just an attempt to support the blogger’s flawed arguments regarding the effects of current Fed policy.

        “I don’t think … anyone want the government to slowly stealing their money through policies that result in inflation…”
        Are you aware of where inflation has been for the last couple years? Nearly nonexistent.

    • miguelmartinez says:

      Most people do not have what it takes to be good investors. Most people who are poor do not have the knowledge, time or money to do what it takes to make sound investment advice on their own. That is not an ivory tower statement. It is the way things are.

      Most people do not have the physical frame, athletic ability, and dedication to throw a ball 100 miles an hour. That is not an ivory tower statement. It is the way things are.

      We are not taught in our public schools how to handle money or how our economic system really works.

      We end up with a society where the poor struggle, the middle class saves, and the rich hire people who are good at investing to do their investing.

      On top of everything, the Republicans have a tendency to help the rich, the Democrats pretend to help the rich while in reality helping the rich.

      It is not that people do not have the intelligence to be good investors. Most people have enough brains. But without time and knowledge, even people with money will be soon parted from their money.


  • timoth3y says:

    I enjoy your blog tremendously. I have a minor semantic quibble. “Transparency” is not at all the same thing as “disclosure” or “data”.

    Transparency is not a collection of random facts, but requires that information be presented in a consistant and understandable way.

    I would agree that “data” or “information” is overrated, but we are in great need of more transparency in how monetary policy is decided and executed.

  • miguelmartinez says:


    Another terrific posting, but did you have to ruin the inner lining of my stomach by bringing up the name of Arthur Burns? I have not thought about that man in years.

    Taxing the poor and middle class by an unfair monetary policy is never a good thing. How sad that the poor and middle class do not recognize that they are being taxed!


  • Conscience of a Conservative says:

    Bravo and well said!

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