The Committee to Destroy the World. Lewitt Michael E.

and corrupt prosecutors (of which there are no shortage).

We have come a long way from February 1999 when Time Magazine celebrated “The Committee to Save the World” – Alan Greenspan, Robert Rubin, and Lawrence Summers (see Figure I.1). Time’s misguided anointment of these three men coincided with the birth of the European Union, which enslaved vast swathes of southern Europe in an economic straitjacket. Shortly before the three men were celebrated by Time, they had successfully thwarted efforts by U.S. Commodity Futures Trading Commission chair Brooksley Born to regulate over-the-counter derivatives, a decision that contributed less than a decade later to the worst economic crisis since the Great Depression. As we came to learn, with men like these in charge of saving the world, the world was going to find itself in deep trouble.

Figure I.1 Apocalypse Then

      SOURCE: Time, February 1999.

      A decade later, Mr. Greenspan admitted to Congress that his basic assumptions about economics and human behavior were wrong. Mr. Rubin was trying to justify his $100 million sinecure at Citigroup, Inc. while refusing to acknowledge any responsibility for the actions of his underlings that pushed that bank into insolvency and a federal bailout on his watch. And Mr. Summers kept failing upward, retaining his sneer of intellectual superiority while consistently demonstrating why academic economists like him are the last ones anyone should ask for economic policy advice.

Unfortunately, economic governance would get much worse and “The Committee to Save the World” was succeeded by “The Committee to Destroy the World” (see Figure I.2) after the 2008 financial crisis (although the mainstream press never identified them as such, leaving that to me in The Credit Strategist5). In 2015, the troika leading the world’s largest central banks was still pursuing crisis-era policies long after the crisis had passed. By that time, new strains were appearing in the global economy due to the failure of fiscal policymakers to adopt meaningful pro-growth policies and the perpetuation of crisis-era monetary policies long past their sell-by date.

Figure I.2 The Committee to Destroy the World

      SOURCE: Haruhiko Kuroda photo by Michael Wuertenberg, https://commons.wikimedia.org/wiki/File: Accelerating_Infrastructure_Development_Haruhiko_Kuroda_(8410957075).jpg#filelinks; Mario Draghi photo by Remy Steinegger, https://commons.wikimedia.org/wiki/File: Mario_Draghi_World_Economic_Forum_2013.jpg; Janet Yellen photo by Day Donaldson, https://www.flickr.com/photos/thespeakernews/16165619661.

      Governed by intellectual fallacies and cowed by markets, The Committee to Destroy the World adopted policies that were guaranteed to lead the world straight into the jaws of another financial crisis. Global interest rates were kept at, near, or below zero for years while central banks purchased trillions of dollars/yen/euros of government bonds based on the delusion that these policies would stimulate economic growth. Naturally, they did precisely the opposite.

      Einstein supposedly said that the working definition of insanity is repeating the same mistake and expecting a different result. That remark should be applied to the working definition of stupidity and central bankers. By 2014 (if not earlier), there was abundant and irrefutable evidence that quantitative easing was failing to stimulate growth in the United States. In fact, it was sapping economic vitality and market liquidity and contributing to the most disappointing economic recovery in memory. In the 2011–2014 period, GDP growth in the United States averaged a measly 2.0 percent according to the Bureau of Economic Statistics. And during Barack Obama’s presidency, the high point for annual GDP growth was a tepid 2.5 percent in 2010.

Nonetheless, faced with mounting evidence that their policies were not working, central bankers, demonstrating that there is a difference between being educated and being smart, refused to change course; instead, they persisted with their failed policies. Their subsequent expectations for economic growth never came close to materializing. Table I.1 shows the “central tendency” projections of GDP growth by Federal Reserve governors and bank presidents compared to actual GDP in the 2011–2015 period.

Table I.1 “Central Tendency” Projections of GDP Growth Compared to Actual GDP in the 2011–2015 Period

      SOURCE: Federal Reserve Board.

      Looking at this record, one could reasonably conclude that it would be more useful to ask a group of English professors to forecast the economy.6 In the wake of their failures, the Fed left behind a grossly over-leveraged economy whose fragility was disguised by artificially inflated stock prices, artificially low interest rates, and artificially suppressed volatility. You have to hand it to Ben Bernanke and his progeny – they couldn’t have designed a more disastrous set of policies had they consulted Dr. Victor Frankenstein.7

      Things didn’t have to be this way. A sounder and more creative intellectual approach and bolder political initiatives would have produced far better results. But there are no Paul Volckers running central banks today and no Winston Churchills leading the world. Mr. Volcker was willing to battle inflation while being demonized in the press and Churchill fought the Nazis from an underground London bunker while being bombarded by the Luftwaffe every night.

      Today, we are left in the hands of people like Janet Yellen and Barack Obama. Mrs. Yellen was terrified to raise interest rates by a mere 25 basis points for years for fear of upsetting markets while Mr. Obama, who tellingly removed Churchill’s bust from the Oval Office, loaded the American economy with job-killing regulations and multi-trillion dollar entitlements while appeasing tyrants, betraying our allies, and apologizing for American power and principles. They say that societies get the leaders they deserve. I say we deserve better.

A Crisis Wasted

      Shortly after President Obama took office in 2009, I received a telephone call from one of the Obama administration’s top economic advisers. I was asked whether I was willing to speak to the small group advising the president how to regulate derivatives after the financial crisis. The individual who called me said he was uncertain whether he could get me a hearing but felt it was important for them to hear my views (which were published, among other places, in the first edition of this book) since the president and Lawrence Summers, the president’s top economic adviser, believed it would be appropriate to leave regulation of derivatives in the hands of regulators. My view, which the caller had shared with the group, was that regulators do not understand derivatives and are not qualified to regulate them. After some back and forth, I was not invited to share my views with the group; there was little appetite to hear them, and derivatives regulation was left in the hands of people who do not understand them.

      On the first page of his magnum opus, Stabilizing an Unstable Economy, the great economist Hyman Minsky wrote: “Economic theory is the product of creative imagination; its concepts and constructs are the result of human thought.”8 There is nothing foreordained about economics; it is merely a series of intellectual constructs about how the world works. It is a soft science. Accordingly, its forecasts are more often wrong than right. As a human intellectual construct, it is subject to the deficiencies of human thought – in the shorthand of the markets, greed and fear. These flaws lead economists to make less than optimal policy choices, and that is nowhere

7

One had to shudder listening to Fed apologists like former PIMCO economist Paul McCulley appear on CNBC in August 2015 and proclaim that the Fed should “declare victory” and “take a victory lap” with respect to policies that had failed in virtually every respect. Other than preventing a total meltdown of the financial system in 2008 (which their policies led to), these policies have been abject failures. They distorted markets, destroyed liquidity, increased wealth inequality, failed to produce the type of inflation they desired while grotesquely inflating asset prices, failed to promote genuine employment growth (the labor participation rate in 2015 was at its lowest level since the 1970s), and contributed to the largest misallocation of capital in history through the largest debt buildup in history. Federal Reserve governors routinely make public statements demonstrating their total ignorance of how the real economy works while cowering in fear of the markets. They don’t trust markets and neither do their apologists. Rather than declaring victory, they and their cheerleaders should be hanging their heads in shame. The intellectual failures of policymakers and those who pimp for them in the media and on Wall Street have inflicted enormous damage on this country and its economy.

8

Hyman Minsky, Stabilizing an Unstable Economy (New Haven, CT: Yale University Press, 1986), 3.