The MIT Money Experiment, that we are in

The MIT Money Experiment, that we are all caught in

Are we headed towards a "Group think" disaster ?

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NOTES for a WSJ article:

Inside the Risky Bets Made by Biggest Central Banks


Introducing the Dramatis Personnae / "The MIT Engineers"

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+ Ben Bernanke, Fed Chairman, MIT Phd, 1979

+ Stanley Fischer, Bank of Israel Gov'r, MIT Prof.: 1973-1995 (& Phd adviser to BB)

+ Mario Draghi, ECB President, MIT Phd, 1977 - (also advised by Stanley Fischer)

+ Mervyn King, Bank of England Gov'r, MIT Visiting prof., 1983-84

+ Jeremy Stein, Fed Reserve Gov'r

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Others: Olivier Blanchard, Charles Bean, Duvvuri Subbarao, Jose De Gregorio, Athanasios Orphanides, Phillip Lowe


+ Central Bankers meet evry two months in Basel, Switz.

+ Since 2007, they have flooded the world financial system with more than $11 Trillion: a high stakes "experiment"

+ This strategy has not been tested in elections, or blessed by politicians : the C-Bankers are independent


+ If correct, the CB's will help the world economy avoid a repeat of the mistakes of the 1930's, which may have caused a depression

+ If wrong, they may kindle inflation, or sow the seeds of another global financial crisis: & the world may turn on the bankers


Ken Rogoff: "Will history decide they did too little or too much?"

"We don't know because it is still a work in progress... They are taking risks because it is an experimental strategy."


+ The goal is to lower borrowing costs and stimulate stock markets to encourage spending and investments by households


Stocks HAVE recovered almost all of their 2008 falls : SPY-chart (see below)



+ But the extent of the risks are unknown, they are providing stimulus on an unprecedented scale


+ Central banks are stretched, governments have over-borrowed


+ Central bankers have promised that once the global economy gets back on its feet, they will withdraw the stimulus quickly enough to forestall inflation. But doing so effectively is a huge challenge - and the ability to take on the vested interests that will fight such a decision is something that Central bankers have never demonstrated. in this unprecedent experiment.


+ Central bankers are highly isolated - they are relying on each other for counsel. Many of those involved know each other from their time at the MIT economics department. Six times a year meetings at the BIS (in Basel) are an important place where their strategies get discussed. They now have a tight-knit fraternity, where tough decisions can get made quickly through a phone call.


This set-up is ideal for fostering "group think", where important risks get ignored, because the group has not already put them on the table in their regular discussions.

GROUP THINK



Groupthink is a psychological phenomenon that occurs within groups of people, in which the desire for harmony in a decision-making group overrides a realistic appraisal of alternatives. Group members try to minimize conflict and reach a consensus decision without critical evaluation of alternative ideas or viewpoints. Antecedent factors such as group cohesiveness, structural faults, and situational context play into the likelihood of whether or not groupthink will impact the decision-making process.



The primary socially negative cost of groupthink is the loss of individual creativity, uniqueness, and independent thinking. As a social science model, groupthink has an extensive reach and influences literature in the fields of communication studies, political science, social psychology, management, and organizational theory.

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/wiki : http://en.wikipedia.org/wiki/Groupthink

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ONE of the obvious problems:

Central bankers have promised that once the global economy gets back on its feet, they will withdraw the stimulus quickly enough to forestall inflation. But doing so effectively is a huge challenge - and the ability to take on the vested interests that will fight such a decision is something that Central bankers have never demonstrated. in this unprecedent experiment.

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The Group-thinkers are likely to not question their own ability to meet the challenge of withdrawing stimulus