Screen Shot 2015-01-24 at 2.52.33 PMThe hills are alive with the panic of central bankers. First there was the fallout from the Swiss National Bank’s decision to unshackle the Franc from the Euro. Then, how much Q Mario Draghi put with his E. It turns out his €60 billion per month program was seen as a “positive surprise.”

In the meantime Bloomberg reported Canada’s central bank “is trying to make sure [Canada] survives an oil price crash,” by cutting its benchmark interest rate by a quarter of a point. Bank of Canada governor Stephen Poloz is trying to stop the bleeding in Calgary where existing home sales slid 25% in December from November and listings rose 36%. Never mind that housing continues on its decade long tear in Toronto and Vancouver, up 71% and 67% since 2005, respectively.

The very same week the Danish central bank, “clearly panicking about the peg of the Danish Krone to the EUR” doubled down “with its second rate cut for the week, this time sending the rate from -0.20% to -0.35%.”

The PhDs running the world’s central banks are scrambling to blunt the forces of economics. No country wants to take its medicine after years of boom and bust-time monetary expansion. The smartest guys and gals in the room are playing hot potato with their currencies.

Back in 2013 The Economist wrote,  “Mr Poloz seems a good choice. His expertise and experience look just right for the job. He got his PhD for a thesis on currency movements. Before joining the [Export Development Canada] in 1999 he spent 14 years at the Bank of Canada.”

The Swiss National Bank’s Thomas Jordan earned his doctorate in 1993 writing a thesis on the subject of the European Monetary Union.  He spent three years as a researcher at Harvard.

Mario Draghi earned a PhD in economics from the MIT in 1976 with his thesis titled Essays on economic theory and applications. Mr. “Whatever it Takes” was the Financial Times Person of the Year in 2012 and was the 8th most powerful person in the world last year according to Forbes, two places behind Federal Reserve Chairman Janet Yellen.

In 2011 “Super Mario” was said to be uniquely qualified to head the world’s second most important central bank. Thomas White International wrote before he took over, “if his track record is any indication, the ECB could not have found a better person to take on the challenge than Mario Draghi.”

Eurostagnation can’t possibly be his fault.

High hopes for central banker skill and prescience have been a constant since Milton Friedman wrote of Arthur Burns’ appointment as Fed Chair in 1970. He “is the first person ever named Chairman of the Board who has the right qualifications for that post.”

The Burns appointment by Richard Nixon was a turning point in central banking as I describe  in “Arthur Burns: The Ph.D. Standard Begins and the End of Independence” a chapter for a book published last year, The Fed at One Hundred, edited by David Howden and Joe Salerno.

Burns was an academic and political operative with zero banking or business experience. He had been plucked from the faculty at Columbia University by Dwight D. Eisenhower to be chairman of the Council of Economic Advisers. This appointment launched Burns’s career in government and fortunately cleared the way for the acceptance of Murray Rothbard’s PhD thesis The Panic of 1819, which Burns had blocked, despite having known Rothbard since he was a child and being asked by David Rothbard to look out for his son.

Burns was close to Dwight D. Eisenhower’s Vice President, Richard Nixon, and when Nixon gained the presidency, the Columbia University professor was tapped to be Fed Chair.  Of course, like the Draghis and Yellens of today, Burns was thought to be a brilliant monetary mind. “He understands the monetary system and its relation to the economy at a depth and subtlety that has not been equaled by any past Chairman of the Board,” Friedman gushed at the time.

But more than anything, Nixon’s monetary man craved attention and praise from his superior. “Burns loved to be near the center of government power: he worked very hard at his job and was devoted to the president,” wrote Maxwell Newton.  “He was extremely vulnerable to presidential flattery, particularly the flattery of being told the ‘inside story’ or being ‘in the know.’”

However, the president tired of Burns quickly and while the Fed Chair would make a beeline from the Eccles Building to the White House when summoned, Burns’s quality time with his old friend became a rarity.

Screen Shot 2015-01-24 at 2.18.28 PMBurns still supported Nixon at every turn (with one exception) accelerating money supply growth, championing Nixon’s wage and price freeze, tax on imports and various stimulus measures.  Burns wrote in his diary. “I assured the President that I would support his new program fully.  I could do this readily, except for the gold suspension.”

The Burns monetary expansion led to the stagflation of the early 1980s, with CPI reaching 13.5%.  The Fed Chairman insisted his policies weren’t to blame. It was the large budget deficits, “exuberant mood,” and “waves of speculation” that were to blame.

Burns, like his mentor, business cycles economist Wesley Clair Mitchell, placed great dependence on empirical research. From the data, Burns believed he could formulate policies to set the economy on the right path. It never worked out that way.

Central bankers are serving either the executive branch as Burns did, or more often since the financial crash, the big banks and hedge fund community. Burns, reportedly with a straight face, said if the chairman didn’t do what the president wanted, the Federal Reserve “would lose its independence.”

Draghi’s “program amounts to a giant bailout in the form of a big fat central bank ‘bid’ designed to prop up prices in the immense parking lot of French, Italian, Spanish, Portuguese etc. debt that has been accumulated by hedge funds, prop traders and other rank speculators since mid-2012,” writes David Stockman, who calls the scheme “the greatest heist since Bernanke bailed out Wall Street in September 2008.”

Forty-five years of PhD central banking has brought the world, booms, busts, malinvestment, and inflation which market forces are desperately trying to cleanse. Standing in the way are the wise wizards of money, scurrying about to save their kingdoms and their friends.  When their plans fall apart, someone or something else will take the blame.

 

This article originally appeared at mises.ca.