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Priceless: How The Federal Reserve Bought The Economics Profession

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01/18/2011

Ryan Grim reports on an issue becoming evermore widely known:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed’s thrall, the economists missed it, too.

‘The Fed has a lock on the economics world,’ says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. ‘There is no room for other views, which I guess is why economists got it so wrong.’

One critical way the Fed exerts control on academic economists is through its relationships with the field’s gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll — and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after ‘flipping’ had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that ‘a national severe price distortion [is] most unlikely.’ A year later, current Chairman Ben Bernanke said that the boom ‘largely reflect strong economic fundamentals…’”

Update: Jeremy H. provides a link to this insightful article by Dr. Larry White on the subject: The Federal Reserve System’s Influence on Research in Monetary Economics

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