NP - Perverse Reputational Incentives In Central Banking (for kai)

[David Morris]

http://www.slate.com/blogs/moneybox/2011/12/21/perverse_reputational_incentives_in_central_banking.html

"I was reading recently in Hjalmar Schacht's biography Confessions of
the Old Wizard, and part of what's so incredible about it are that
Schacht's two great achievements—the Weimar-era whipping of
hyperinflation and the Nazi-era whipping of deflation—were both so
easy. The both involved, in essence, simply deciding that the central
bank actually wanted to solve the problem.

To step back to the hyperinflation. You might ask yourself how things
could possibly have gotten that bad. And the answer really just comes
down to refusal to admit that a mistake had been made. To halt the
inflation, the Reichsbank would have to stop printing money. But once
the inflation had gotten too high for Reichsbank President Rudolf
Havenstein to stop printing money and stop the inflation would be an
implicit admission that the whole thing had been his fault in the
first place and he should have done it earlier. It was easier to say
that hyperinflation was a necessary consequence of allied demands for
reparations payments and that he had no choice but to print currency
in the quantity demanded. [...]  Again, as a technical matter there
would have been nothing difficult about reversing this policy. But to
reverse course would be to admit that a mistake had been made. So
things continued for several years until a new government brought
Schacht on as a sort of currency czar. Schacht stopped the private
issuance of money, launched a new land-backed currency and simply . .
. refused to print too much of it. The problem was solved both very
quickly and very easily.  [...]

The institutional and psychological problem here turns out to be
really severe. If the Federal Reserve Open Market Committee were to
take strong action at its next meeting and put the United States on a
path to rapid catch-up growth, all that would do is serve to vindicate
the position of the Fed's critics that it's been screwing up for years
now. Rather than looking like geniuses for solving the problem, they
would look like idiots for having let it fester so long. By contrast,
if you were to appoint an entirely new team then their reputational
incentives would point in the direction of fixing the problem as soon
as possible.