Daily Archives: August 24, 2010


L. Randall Wray

Another one in the category of “you just can’t make this up”. Recall that Fred Mishkin was on the Fed’s Board of Governors when the global financial system bombed. Now watch this:

For Mishkin’s report on Iceland, go here. For Tyler Durden’s commentary on the report and the video, go here.

If you are an academic, his performance makes you want to curl up under a table. If you are not in academics, it might make you want to take a baseball bat to the pointy-headed intellectuals at the nation’s “elite” universities. To be sure, what Columbia University’s Mishkin did to Iceland is no worse than what economics professors at Harvard—hey, Larry Summers, that includes you—have been doing to countries all over the world. The “research” they are paid to do is not research at all—it is marketing. In the case of Iceland, Freddie was paid by the Chamber of Commerce to do a fluff job—and he fluffed the heck out of Iceland. I wonder what the good people now suffering in Iceland would like to do with him.
One could give him a bit of slack—after all, why would anyone expect that Freddie knew anything at all about Iceland. His research method was to “talk to people” and to “trust the central bank”. That he didn’t see a financial collapse coming right around the corner isn’t, I guess, too surprising. Besides, if you are paid well to not see a crisis coming, you probably will not look too hard. Still, his squirming video takes the cake—even more fun than Geithner’s performances in front of Congress. Oh, right, his doctoring of his CV to change the title of his paper from “Stability” to “Instability” is a “typo”. And, right, he cannot remember how much he was paid as fluffer, but it is in the “public record”. Give us a break.

Actually, I had seen Mishkin squirm like that before. At the very beginning of the US financial crisis (April 2007)—when most still did not see it coming—Mishkin as member of the BOG gave a dinner speech. There was no indication in his speech that he “saw it coming”—he predicted moderate growth, emphasized some strong data in housing as well as low unemployment, and said the Fed would keep its interest rate target at 5.25. While it is hard to believe now, the Fed and most of the press was still worried about inflation at that time—even though anyone who was paying attention could see the economy was beginning to collapse into what would obviously be the worst crisis since the Great Depression. Still, commodities prices were being driven by a speculative boom coming mostly from pension funds—a story for another day. So Freddie was peppered with questions from the media present asking whether the Fed would be able to prevent an inflationary burst. Mishkin’s response was eerily similar to the response he gave in the video—you’ve got to trust the central bank. Do not worry, the Fed has ample ammunition to kill inflation.

When he returned to our table, we grilled him a bit more on that topic, and some of us also argued that the real danger facing the US was a financial crisis and deflation—not inflation. Let me interject that I liked Mishkin. He was a pleasant conversationalist, not at all arrogant, and even somewhat self-effacing. But when he gave his pat answer, “don’t worry, we are the Fed and we know what we are doing”, Jamie Galbraith pressed him for details: what are you going to do about inflation? And, if you raise interest rates now, when debt loads are so high, won’t that cause a wave of delinquencies on mortgages and consumer debt? That’s when we saw the same transformation you just witnessed in the video—from an easy, affable, confidence to sheer horror. Mishkin had been found out and was looking for the exits.

I must say that it was never clear exactly what that horror was. At the time I did not believe that Mishkin’s heart was in the inflation story. Surely he could not have believed, then, that the real danger was inflation. He’d been coached at the Fed about what he ought to say—and the Fed was riding the inflation story to divert attention away from the real danger. The Fed needed to keep the speculative bubbles going as long as possible—an election was around the corner and Republicans needed help. I was sure that he was actually afraid that we were right: the economy was going bust. And the Fed had nothing up its sleeve to prevent Armageddon.

Shortly thereafter, Mishkin left the Fed (August 2008—the second-shortest term ever served). That looked suspicious—and although I never tried to find out why, it fit with my interpretation that he knew what was coming, and so like Greenspan jumped the sinking ship before the Fed would be exposed as the impotent Wizard of Oz behind the curtain.

However, since then, Greenspan has publicly admitted that he had been clueless. His whole approach to economics was dangerously wrong. He never saw nothing coming. And after viewing this video, I am not so sure Mishkin had any clue, either.

Maybe his term at the Fed, like his research for Iceland, was nothing but marketing, too.
Columbia professor? Check.
NBER researcher? Check.
FDIC researcher? Check.
Highly paid consultant for international research? Check.
Vice President of NYFed? Check.
Former BOG member? Check.
Top selling money and banking textbook author? You betcha.

All he needed was a few months at the helm of the central bank, something he could add to the textbook blurb, to ramp up those sales.