Bernanke discusses the appropriate use of an unfamiliar putter in a game of miniature golf that you are currently winning.

Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!

Except that this is exactly wrong. There is no reason to expect that the danger from an overly lively putter outweighs the danger from an overly soft putter in miniature golf. Thus you should strike as normal.

Now in standard golf Bernanke would have a point. Because in standard golf, getting to the putting stage itself is an accomplishment. You are now on the Green and if you screw up royally you could push yourself off the Green and be worse off then where you started. If you tap the ball too lightly then at worse you will be exactly where you started. Thus, the smart strategy is to be conservative.

There is a larger point to this as will hopefully become clear.

Before I  get right to that, however, this is a decent although not entirely appropriate excuse to thrown in some Oakeshott so I am going to take it. From On Being Conservative:

In short, [conservatism] is a disposition appropriate to a man who is
acutely aware of having something to lose which he has learned to
care for; a man in some degree rich in opportunities for enjoyment,
but not so rich that he can afford to be indifferent to loss.

That is, of course, to say resistance to change or conservatism comes more naturally to those who are in a preferable state because most of the states that they could potentially change to are likely to be worse than their current one.  It is natural then for the Fed, having much to lose in terms of position or influence to be conservative. They are – so to speak – already on the Green.

However, where is the economy of which they are supposed to be stewards? Is it on the Green? Or, is it, as I believe, stuck in the sand trap; mired in the worst economic downturn since the Great Depression with the baseline scenario giving us low growth and high unemployment for years to come?

As such it is not appropriate for the Governors in their capacity as agents of the economy to be conservative. Careful and deliberate, yes, but conservative, no. It is not all the case that over striking the ball and winding up with a rapidly growing economy and too much inflation is a superior concern to winding up with a too weak economy and too little inflation.

The members of the Open Market Committee as individuals have a reason to be conservative, but the Members as Members do not.

About these ads