I chose the title because the original work was a defense of religious views, written by Cardinal Newman, the famous religious scholar of the 19th. century, whose name you see on any Catholic campus. In my view, any doctrine that is arbitrary, that is not subject to falsification in the Popperian sense, or whose falsification is ignored, can be called religious. So in that sense I consider conventional, academic economics, as exemplified by the beliefs of Mr  Bernanke, as a religious belief system. Today, he made a speech to the Harvard graduating class which expounded upon the success (as he sees it) of monetary policy.

I’d like to pick out some examples for comment.

However, since Paul Volcker’s time, the Federal Reserve has been firmly committed to maintaining a low and stable rate of inflation over the longer term.

Mr Bernanke, perhaps you should have said, since the end of Paul Volcker’s time, to be clear. Mr Volcker made it clear that his inflation target was zero, not “low.” It is well known that you favor a fixed positive inflation rate target, 2% or so. This means that investors must earn 2% after taxes just to achieve a zero real return. In effect, the first 4%, at a minimum, of investment income is skimmed off by the government. In your chairmanship, actual price inflation has been much higher and is destroying the U.S. economy. Your “firm commitment” is a flat lie. Indeed, Mr Volcker has been sufficiently outraged by your inflationary behavior to break the traditional silence of retirement and publicly criticize your policy.

Productivity growth revived in the mid-1990s, as I mentioned, illustrating once again the resilience of the American economy. Since 1995, productivity has increased at about a 2-1/2 percent annual rate. A great deal of intellectual effort has been expended in trying to explain the recent performance and to forecast the future evolution of productivity.

Mr Bernanke, I’ll save you any further intellectual effort. Productivity improvement is an illusion resulting from the systematic understatement of price inflation, as a deliberate result of methodology changes beginning in the mid-1990s. These changes cause real output to be over-estimated, leading to the apparent productivity improvement.

Finally, as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance. By damping business cycles and by keeping inflation under control, a sound monetary policy improves the ability of households and firms to plan and increases their willingness to undertake the investments in skills, research, and physical capital needed to support continuing gains in productivity.

Business cycles have been damped, Mr Bernanke, that is true, but by a series of asset bubbles inflated by excessively loose credit and low interest rates. As a result, if we examine the well-known identity that savings = investment, we find that contrary to your assertion, households have abandoned saving and investing. Their savings rate has been driven to zero or less, as they turned to speculation in view of the negative returns on their investments that your policies have guaranteed.

Even though average economic well-being has increased considerably over time, the degree of inequality in economic outcomes over the past three decades has increased as well.Yes, it has, to an extent only previously seen (in the U.S.) in the 1920s.

For the same reason. Wealth has come from successful speculation, conducted by those with an information advantage, or willingness to participate in the widespread frauds.

Most people, the wage earners, are seeing their real standard of living deteriorate daily. The concept of a breadwinner and caregiver has been replaced by dual incomes and daycare, yet living standards have continued to decline. Sir, shame on you.

The poor forecasting record of economists is legendary

Yes, because macroeconomics is not a scientific discipline and therefore cannot offer reliable predictions. Its “theories” are historicism, explanations retrofitted to history. As a result, your manipulations yield unpredicted and unforseen outcomes, Nicholas Taleb’s “Black Swans”. One is coming now.

Thanks to naked capitalism for pointing out this interview with Nicholas Taleb.

Let me introduce you to Brooklyn-born Fat Tony and academically inclined Dr John, two of Taleb’s creations. You toss a coin 40 times and it comes up heads every time. What is the chance of it coming up heads the 41st time? Dr John gives the answer drummed into the heads of every statistic student: 50/50. Fat Tony shakes his head and says the chances are no more than 1%. “You are either full of crap,” he says, “or a pure sucker to buy that 50% business. The coin gotta be loaded.”

The chances of a coin coming up heads 41 times are so small as to be effectively impossible in this universe. It is far, far more likely that somebody is cheating. Fat Tony wins. Dr John is the sucker. And the one thing that drives Taleb more than anything else is the determination not to be a sucker. Dr John is the economist or banker who thinks he can manage risk through mathematics. Fat Tony relies only on what happens in the real world.

I certainly spend a fair quantity of bits criticizing conventional economics and economists. However, there are always exceptions who question authority and see what is really going on. Paul Kasriel of Northern Trust is notable, but here’s another, Richard Alford. He is interviewed by Institutional Risk Analytics.

If the US consumer were to go back to savings rates of the 1996 period, then you are talking about savings going from essentially zero today to approximately 8% of disposable income. Since US GDP is about 70% consumption, that implies a decline in demand of about 5 to 5.5%. That would be a very dramatic effect.

No kidding. Because of course the decline in demand would reduce employment, which would further reduce income in a vicious circle. That is why Ben is moving heaven and earth to avoid an increase in savings.

Politically and economically, there is no painless solution to the imbalances in the US. For US policymakers, it seems that even short-term pain is intolerable. Nobody in Washington wants to bite the bullet and explain the full dimension of the required change to the US electorate, so we muddle. Going back to the early 1990s, US politicians have bought support from the voters by keeping consumption on an ever rising trajectory. For at least 12 years, we’ve had debt induced increases in consumption and the political class optimized their behavior to maintaining that illusion of rising consumption even as the economic fundamentals worsened.
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The US population is not ready to hear that their real levels of income, assets prices and other indicia of national well being may be falling or relatively stagnant for the foreseeable future. This is just politically not acceptable. So our politicians will attempt to maintain the appearance of growth, but not address the underlying causes.

George Soros has written another book, “The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.” He uses the current credit crisis as an example to help crystallize his ideas of “reflexivity,” the notion that markets influence the events that they supposedly predict. Or more precisely, that the manipulation of markets is intimately connected to the manipulation of fundamentals, so that the principles of mainstream economics, like supply and demand equilibrium, cannot be relied upon to keep markets in check. He argues that regulation is needed to avoid runaway markets, although he admits that the regulators have no better idea of the underlying realities than any other market participants. He is strongly influenced by the works of Karl Popper, as I am too, and is strongly aware of the limits of what we can know. He then moves from epistemology to the current markets and provides some general views, as well as a log of his trading activity earlier this year.

He believes that government intervention to save the banking system will prevent the recession, although deep and long, from becoming a depression. [I disagree - I think he does not give sufficient weight to the shutdown and failure of the "alternate" banking system - securitized credit].

It is an interesting and quick read, somewhat of a “cri de coeur” from a man who wants to be seen as just not another lucky rich guy, but as someone who has a real intellectual contribution to make. Which he does, as he helps to expose the deeply flawed nature of academic economics.

Helicopter Ben made it very clear that he would move heaven and earth (helicopters, too) to prevent deflation. He is now starting to panic. Ignoring his words, we look at his actions. Swapping Treasuries for credit card receivables, auto loans and student loans is hardly a sign of a receding credit crisis. The fear is tangible despite the efforts to soothe and jam the markets. He will stop at nothing. This is good, in a way, because the Keynesians must be shown to have exhausted all their options in order for them to be completely discredited. Just a quick post from Sivota (geography test).