How the Fed got it all wrong

Fed’s Shoddy Data, Not Greedy Bankers, Drove Wall Street Off Cliff: Books

By James Pressley

Pick a rogue, any rogue: Villains pervade the story of the worst financial train wreck since 1929.
Yet economist William A. Barnett resists the urge to wag a scolding finger at greedy bankers, feckless homebuyers or evenAlan Greenspan, whom he calls a salesman, not a monetary maestro.
“While there is plenty of blame to spread around, something deeper has happened and needs to be understood to recognize the real source” of the crisis, says Barnett, a former Federal Reserve Board staffer.
That “something” was shoddy monetary data and how they fooled some of the smartest people on Wall Street, he argues in“Getting It Wrong,” an important contribution to our understanding of the $2 trillion meltdown...
The Fed’s monetary data are poor, inadequate and “nearly useless to the public,” he says. The totals suffer from the common error of adding apples and oranges or, as he puts it, subway trains and roller skates...
Barnett’s argument culminates in two fever-line charts. They indicate that the nation’s money supply in recent decades grew at a far faster pace, when measured by Divisia, than the Fed’s data suggest.
For M1, Divisia shows about $400 billion more being added to the money supply from 1980 to 2005 than the Fed’s simple sums record. For M2, the deviation increased by an astonishing $2 trillion.
The charts offer a clue about why many Wall Street bankers were lulled into thinking that Maestro Greenspan had engineered a Great Moderation, inducing them to ratchet up leverage.
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Comment: It is amazing to read how the author who forcefully proves the incompetence of the Fed suggests that some kind of other statistics would do better. The solution is not a "better" Fed, the solution is to get rid of the Fed. Complexity cannot be regulated by the state but by the spontaneous order of the market.