Bloomberg Magazine has a piece on the MIT economists who dominate central banking today. If you ask them why, they will say it’s because of their particular blend of theory and practice.
I think it’s more a matter of this was a group of smart kids who were really interested in macro, because in the 1970’s they were still optimistic about its ability to be useful. A small group like that can create a positive feedback loop pretty easily, because having a recommendation from other successful macro economists is very important.
Yet, given the recently released Fed minutes from 2006, we see these Cambridge macro savants are a lot like the world’s leading psychoanalysts all being from Vienna in 1930–experts to be sure, just not at actually helping people. Here’s what US central bankers were saying about Greenspan when he left in 2006
For the Fed 2006 began with the departure of Mr. Greenspan, who presided in January over his final meeting as Fed chairman and was then widely regarded as the epitome of a central banker, a master who had guided the American economy through almost 20 years of remarkably consistent growth.
Ms. Yellen said: “It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.”
If they didn’t see our greatest recession since the great depression coming, why should we expect them to see inflation before it’s too late?