Federal Reserve Chairman Ben Bernanke spoke yesterday on the state of the American economy and its plans for stimulating growth. Today, the results were felt. The world’s financial markets plummetted after the Federal Reserve noted that it sees “significant downside risks” to the U.S. economy. This is the first time in the history of the Federal Reserve’s 92 years that a chairman has been as vocal as Bernanke – and it has not bade well for the American economy. It is an honorable and respectable policy of transparency, but announcing the Fed’s every move and view creates serious short-term problems. The world’s financial markets have taken enormous hits after nearly every one of Bernanke’s speeches.
Is it better to have a policy of total transparency where the public reacts to every word uttered, or is it preferable to leave the public in the dark and remove publicity from the equation of recovery? We say something closer to the latter is best; although transparency is excellent (and it should still exist in the release of financial documents), allowing the public’s erratic emotional behavior to play into the recovery is folly. It is as if Ben Bernanke is ignoring behavioral economics. Economics is not simply cold, mathematical theory.
There is a human element, because the economy is a system constructed by humans in a human society. Bernanke gives us entirely too much credit. A single financial advisor or stock trader may be an intelligent person. But together, they are a mob of emotional animals. This is not because they are of a single mind, but rather because they all realize that people panic. When a hedge fund manager hears that the Federal Reserve’s outlook has dimmed, (s)he will sell his or her holdings to avoid taking the larger loss that will come in the next ten minutes as computers sell off. Everyone knows this will happen, and thus the drop is significant. How Bernanke has forgotten that bad news results in stock drops is inconceivable; either he believes the effect is short-term enough to be negligible, or he is a socially ignorant technocrat. We can only hope that he has some tricks up his sleeve. As it is now, central banking does not look to be much of an economic solution.