Director MBMG Investment Advisory
Is the Fed a Cult? - Part 2
In my previous article I wrote about why the Federal
Reserve is beginning to look like a cult, with its dogmatic beliefs in a
system which, to the outsider, clearly does not work.
With that in mind, I decided to do a quick review of how the Fed installs
such beliefs. Wikipedia lists cognitive and social biases which affect
belief formation, business and economic decisions, and human behaviour in
general1. Below are part 1 of the ones which I believe facilitate the ‘Cult
of The Fed’:
The tendency to overestimate the likelihood of events with greater
“availability” in memory, which can be influenced by how recent the memories
are or how unusual or emotionally charged they may be – The Fed can use the
apparent positive outcomes of its policies by pointing at the short term
performance of capital markets
A self-reinforcing process in which a collective belief gains more and
more plausibility through its increasing repetition in public discourse (or
“repeat something long enough and it will become true”). - The Fed cult gets
its members to recite the QE+ZIRP= recovery mantra ad infinitum, all the
central banks lack is a Gregorian chant
When people react to disconfirming evidence by strengthening their
beliefs. – The more contraindications that start to appear, the more this
seems to confirm the opposite – hence illogicalities such as good news is
good markets and bad news is good for markets become accepted
The tendency to do (or believe) things because many other people do (or
believe) the same. Related to groupthink and herd behaviour. This becomes an
extension of the availability cascade.
Base rate fallacy or base rate neglect
The tendency to ignore base rate information (generic, general
information) and focus on specific information (information only pertaining
to a certain case). – We all know that creating more debt to repay debt is
illogical and yet when we wrap it in ZIRP & QE paper, it becomes acceptable.
The tendency to search for, interpret, focus on and remember information
in a way that confirms one’s preconceptions. I’d say that the Fed & co have
probably clutched a record number of straws in recent years.
The tendency to test hypotheses exclusively through direct testing,
instead of testing possible alternative hypotheses. –AT no point can I
recall the Fed justifying policy with reference to alternatives except to
say that if they hadn’t done exactly what they did, precisely when they did,
then it would have been calamitous..
The tendency to insufficiently revise one’s belief when presented with
new evidence- The BoE’s own researchers came out with the is proof of
QE+ZIRP and while it was factually accepted, it was practically disregarded.
The tendency to spend more money when it is denominated in small amounts
(e.g. coins) rather than large amounts (e.g. bills)- This is along the lines
of the fed’s refusal to face the music in 2008 and take sever pain (a la
Iceland) but instead to suffer a longer, slower but much more agonizing
The neglect of the duration of an episode in determining its value –
ditto the above
Experimenter’s or expectation bias
The tendency for experimenters to believe, certify, and publish data
that agree with their expectations for the outcome of an experiment, and to
disbelieve, discard, or downgrade the corresponding weightings for data that
appear to conflict with those expectations-This is so apt on so many levels!
Limits a person to using an object only in the way it is traditionally
used.- Policymakers globally refuse to look at alternatives such as debt
Focusing effect The tendency to place too much importance on one aspect of
an event- The Cult of The Fed stems from the moment that everything was
about saving the banking system and the assumption that this was in the
Framing effect Drawing different conclusions from the same information,
depending on how or by whom that information is presented – sounds like
every time Draghi opens his mouth
The tendency for people to have a stronger preference for more immediate
payoffs relative to later payoffs, where the tendency increases the closer
to the present both payoffs are. Also known as current moment bias,
present-bias, and related to Dynamic inconsistency.- All policy makers are
drive by the need to produce the goods now and hang the long-term
Illusion of control
The tendency to overestimate one’s degree of influence over other
external events-The Fed think that they can push water uphill and have spent
6 years preventing it flowing with ultimately disastrous effects because
they think that they’re in control.
Illusion of validity
Belief that furtherly acquired information generates additional relevant
data for predictions, even when it evidently does not- seems to tie in with
fed clutching at straws- particularly using asset prices to validate the
lack of real economic recovery.
Inaccurately perceiving a relationship between two unrelated events-
again back to the correlation/causation blur.
To be continued…
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