Central Banking Psychology
As central bankers around the world struggle with the consequences of the actions taken to rescue economies from the grip of the latest bank induced recession, and as monetarists and Keynesians come to blows over who has the best prescription for the future, most need to take a step back in time and reconsider the lessons of the early eighties when the Federal Reserve, led by Paul Volcker, jump started growth not by adherence to any set of ideologies but by focussing on the psychological consequences of their actions.
What the Volcker Fed showed was that sometimes you have to upset markets, politicians, ordinary people and other economists in order to break the behavioral cycles that come to govern macroeconomic behaviour. It rather looks like we’re going to need something similar to divest investors of their belief that markets are a one way ticket to riches, courtesy of hand outs from middle class taxpayers. Let’s revisit Volcker.
As central bankers around the world struggle with the consequences of the actions taken to rescue economies from the grip of the latest bank induced recession, and as monetarists and Keynesians come to blows over who has the best prescription for the future, most need to take a step back in time and reconsider the lessons of the early eighties when the Federal Reserve, led by Paul Volcker, jump started growth not by adherence to any set of ideologies but by focussing on the psychological consequences of their actions.
What the Volcker Fed showed was that sometimes you have to upset markets, politicians, ordinary people and other economists in order to break the behavioral cycles that come to govern macroeconomic behaviour. It rather looks like we’re going to need something similar to divest investors of their belief that markets are a one way ticket to riches, courtesy of hand outs from middle class taxpayers. Let’s revisit Volcker.
