September 13, 2015

The more qualified experts become, like the Fed’s, the more in awe will too many be of their inscrutable mumbo jumbo.

Sir, Sebastian Mallaby writes: “By toggling short-term rates, the Fed hopes to guide the more important long-term ones that matters to homebuyers and businesses, but the transmission mechanism is unstable” “Whether they raise or hold, central bankers are due a fall” September 12.

But the transmission mechanism has been also made more unstable than usual by means of very faulty bank regulations that have been imposed on banks.

Mallaby writes: “Gone are the days when the Fed was a holding pen for cronies and chancers… modern bankers have become more scientific and sophisticated [but] there is a danger in pushing this reverence too far”

Indeed, Edward Dolnick in his “The forger’s spell” wrote about Daniel Moynihan opining “There are some mistakes it takes a Ph.D. to make” and also quoted George Orwell, from “Notes on Nationalism”, with: “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.”

And the pillar of current bank regulations, the portfolio invariant credit-risk weighted capital requirements for banks, is a truly great example of the kind of mumbo-jumbo that can be produced by experts.

John Kenneth Galbraith wrote in his “Money: Whence it came, where it went” 1975: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” And one of the great dangers of these times of ample access to information is that the number of those pretending knowledge is increasing exponentially.