Janet Yellen and the Hubris of Central Bankers

Federal Reserve Chairman Janet Yellen made headlines recently for her comment that we will never see another financial crisis within our lifetimes. It’s mind-numbing that someone in her position would say something like that and especially disconcerting that someone in charge of the central bank would deny the possibility of a future crisis in the coming years. Unfortunately, Yellen’s statement is not that much different from previous statements by economists and central bankers who really should have known better.

Fed Economists Have a Poor Track Record

Influential economist Irving Fisher is well-known for his famous quote that stocks had reached a “permanently high plateau” – this coming only nine days before the 1929 stock market crash. And even after the market crashed, Fisher maintained that it was only a temporary drop. In fact, stock markets didn’t reach their pre-Depression levels until the early 1950s.

Former Fed Chairman Alan Greenspan stated famously that the gold standard was no longer necessary because the Fed was acting as though it were still on a gold standard. As we know now, that wasn’t true. The Fed’s monetary policy led to the Dotcom bubble and later to the housing bubble. As late as 2005, Chairman Greenspan still denied that there was a housing bubble or that a housing bubble would be likely to occur.

Chairman Bernanke made similar mistakes, stating in 2007 that “the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Events were to prove him wrong, as everyone knows by now. The difficulty in the subprime mortgage market was just the tip of the iceberg, and we ended up in the worst financial crisis in decades.

How can such educated, intelligent people be so wrong?

The Pretense of Knowledge

The Nobel Prize-winning economist Friedrich von Hayek called this the “pretense of knowledge” and addressed this in his Nobel acceptance speech in 1974. Hayek argued that no single individual could ever attain the amount of knowledge necessary to plan society. Knowledge has limits that cannot be overcome: “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.”

Yet generation after generation of economists and policymakers have failed to heed Hayek’s warnings, believing in their own superior intelligence or believing that the vast and ever-increasing amounts of data at their fingertips can help them to guide the course of economic policy. The results are obvious, as Chairman after Chairman of the Fed has guided the economy into recession after recession. Rather than acknowledging the inability of bureaucrats to manage the economy, the Fed continues to double down on its misguided notions, to the point that now they even deny the possibility of another financial crisis.

In an era of unprecedentedly loose monetary policy, that kind of attitude should give investors and savers real cause for concern. Not only is the Fed’s monetary policy pushing the economy full-steam towards a cliff, now the Fed doesn’t even believe that the cliff is there. If there were ever a time to invest in gold and silver and protect your assets against a coming crash, now is it.