The Great Pretenders

It will be 50 years on Wednesday since economist Friedrich Hayek’s Nobel Prize lecture, “The Pretense of Knowledge,” our Alex Pollock reminds us. That was the speech in which Hayek decried the “accelerating inflation” of the day — and the bitter irony that it had “been brought about by policies which the majority of economists recommended and even urged governments to pursue.” He concluded: “As a profession we have made a mess of things.”It was of a piece with Hayek’s role as a contrarian in the economics profession that his “brilliant presentation,” Mr. Pollock notes, “explained the inherent limits of economics and the inevitable failure of trying to make it a predictive mathematical science.” Fifty years on, Hayek’s warning “applies particularly to central banks and their yearning to be economic philosopher-kings,” Mr. Pollock adds. Is this anniversary being marked by the pretenders at the Fed?After all, nowhere is the gap between the “pretense of knowledge” and practical outcomes wider than at the Fed. This was marked in September by the Wall Street Journal in an editorial headlined “Has the Fed Learned Any Lessons?” Published as the Fed was readying to lower interest rates in the aftermath of “the worst inflation in 40 years,” the editorial noted that “no one should forget the monetary mistakes” that led to the wave of price increases.The groundwork for that disaster can be traced to the experimental Quantitative Easing program launched by Chairman Ben Bernanke in 2008. Mr. Bernanke scoffed at inflation fears over his runup of the Fed’s balance sheet, pledging that if inflation showed signs of reviving, “we could raise interest rates in 15 minutes, if we have to.” The result was a reckless accumulation of trillions of dollars in assets, accompanied by artificially low interest rates.Mr. Bernanke’s confidence upon launching QE — a Grade-A “pretense of knowledge” — was striking in light of his, and the Fed’s, failure to foresee the 2008 financial meltdown. “The crisis came from causes not captured by the new Keynesian models used at the Fed,” the Fed chairman later explained by way of an excuse. His colleague and successor at the Fed, Secretary Yellen, similarly shrugged that “I wouldn’t have seen it in the data.” Mrs. Yellen apologized later “that light bulbs didn’t go off in my head a couple of years before they really did.” Chairman Jay Powell wasn’t as forthright in apologizing for dismissing as “transitory” the early signals of inflation in 2021. The best he could muster was to say that “The one piece of guidance that we gave that I probably wouldn’t do again,” he said, “is we said we wouldn’t lift off unless — until we saw both maximum employment and price stability.”That convoluted Fed-speak, the Washington Post had to explain, was Mr. Powell’s way of admitting he shouldn’t have waited to raise interest rates. The problem uniting all three Fed chiefs, though, was an overreliance on what proved to be flawed economic models instead of looking to the basis of monetary value — gold. Before the Fed’s QE, the dollar was worth a 775th of an ounce of gold. Four years later it had plummeted to less than a 1,700th.That was a warning of incipient inflation. Similarly, the Biden inflation wave was accompanied by the dollar plunging even further, to less than a 2,700th of an ounce of gold. “There’s something off,” these columns noted in 2014, about Mr. Bernanke and Mrs. Yellen “blithely talking about how they didn’t see trouble in the data” even as they continued “to ignore the signals in gold.” We reminded that “a search always ends in the last place one looks.”The refusal to consider gold as a factor in monetary deliberations reflects the failure to heed Hayek’s warning of 50 years ago. Mr. Pollock conveys a hope that institutions like the Fed “have taken to heart Hayek’s lesson that the ‘insuperable limits to knowledge’ ought to teach humility.” Central bankers, in Mr. Pollock’s telling, have reason to be “skeptical about their own forced guessing.” Yet if there is one thing that is in short supply at the Fed, it’s humility.

The Great Pretenders

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