Former Fed Staffer Says Central Bank Is Under the Thumb of Academics
https://www.wsj.com/articles/former-fed-staffer-says-central-bank-is-under-the-thumb-of-academics-1486551600
Danielle DiMartino Booth, who worked at the Dallas Fed, accuses the central bank of ‘hubris and myopia’ in her new book
The Federal Reserve
building in Washington. Former Dallas Fed staffer Danielle DiMartino
Booth in a new book says that “global systemic risk has been
exponentially amplified by the Fed’s actions.”
Photo:
brendan smialowski/Agence France-Presse/Getty Images
By Michael S. Derby
The Federal Reserve is dominated by academics who don’t know how finance and the economy really work, according to a former Federal Reserve Bank of Dallas staffer in her new book.
Danielle DiMartino Booth, an adviser to Richard Fisher when he was Dallas Fed president, says the economists who control most of the central bank’s seats of power filter their decision-making through theoretical models. That led the institution to miss the forces that created the financial crisis, and then adopt the wrong policies to put the economy back on track, she says.
Ms. Booth makes her case in a book called “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America,” set to be published Tuesday.
Her book comes as other Fed critics are pushing for more diversity at the central bank. They often focus on the dearth of women and minorities among the top officials, but some have said a broader range of educational and professional backgrounds also would widen the central bank’s perspective. Of the 17 Fed governors and regional bank presidents, 16 are white, 13 are men, and 10 have a Ph.D. in economics.
Ms. Booth’s arguments echo those of her former boss, who led the Dallas Fed from 2005 to 2015, and frequently voted against the central bank’s aggressive stimulus efforts during and after the financial crisis. “If you rely entirely on theory, you are not going to conduct the right policy, because policies have consequences” that in many cases people with real-world experience are particularly well-suited to spot, Mr. Fisher said in an interview late last year.
Mr. Fisher hired Ms. Booth, a former Wall Street trader turned financial journalist, to work at the Dallas Fed in 2006 on the strength of columns she had written warning about the state of the housing market and financial markets. She eventually rose to be his appointed eyes and ears on financial markets.
In her book, Ms. Booth describes a tribe of slow-moving Fed economists who dismiss those without high-level academic credentials. She counts Fed Chairwoman Janet Yellen and former Fed leader Ben Bernanke among them. The Fed, Mr. Bernanke and the Dallas Fed declined to comment.
The Fed’s “modus operandi” is defined by “hubris and myopia,” Ms. Booth writes in an advance copy of the book. “Central bankers have invited politicians to abdicate leadership authority to an inbred society of PhD academics who are infected to their core with groupthink, or as I prefer to think of it: ‘groupstink.’”
“Global systemic risk has been exponentially amplified by the Fed’s actions,” Ms. Booth writes, referring to the central bank’s policies holding interest rates very low since late 2008. “Who will pay when this credit bubble bursts? The poor and middle class, not the elites.”
Fed officials have defended their crisis-era stimulus policies, saying they lowered unemployment and helped the housing market recover. Opponents feared near-zero interest rates would cause excessive inflation and dangerous market bubbles, neither of which has happened.
Ms. Booth also is among the Fed critics who see a worrisome revolving door between the central bank and the financial firms it regulates. She points to New York Fed President William Dudley, a former Goldman Sachs chief economist, as an illustration of a “codependent” relationship between the central bank and markets. The New York Fed declined to comment.
He and three other regional Fed bank presidents have worked for or had associations with Goldman Sachs. With this in mind, she writes, “Goldman has positioned players on the Fed’s chessboard.”
A Goldman Sachs spokesman said the bank encourages its employees to “give back” to the community, adding “many have left the firm to serve their country in a variety of roles, and they have done so with distinction.”
Mr. Fisher praised Ms. Booth’s book in an interview last month, highlighting the insider perspective it offers.
“All the books that have been written so far” about the financial crisis “have been written by the principals themselves,” and it’s natural for those authors “to make themselves look as good as possible,” he said.
He said the book’s greatest value is in describing “the hubris of Ph.D. economists who’ve never worked on the Street or in the City,” as well as flagging “the protected culture” of Fed officials in Washington.
Many central bankers are “not going to like” the book, he said.
Write to Michael S. Derby at michael.derby@wsj.com
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