Skip to main content

Dig Deeper


Frederick Mishkin

Federal Reserve
B.S. Economics – MIT; PhD Economics – MIT

Mishkin’s chief role in the financial crisis is that of a propagandist for the completely bogus economic theories that buttress the Fed’s active role in the economy.  When the Fed was first created, it was envisioned that the Fed would only intervene in the economy passively.  While the Fed would be the proverbial “lender of last resort’, the Fed would only lend against certain types of collateral and at a penalty rate of interest.  The collateral would be highly-liquid, short-term assets like commercial paper or “bills.”  This passive role in the economy wasn’t stumbled onto by chance.  It was a central bank’s passive role in the economy – which came to be enshrined as “real bills doctrine” - which the world’s most successful central bank, the Bank of England, had used for centuries.  

Nevertheless, within a few years of the Fed’s founding in 1913, the Fed began to think that it knew better than history or tradition.  The Fed created an “open market committee” in 1923 in an attempt to more actively manage and control the economy.  At the same time, the head of the NY Fed, Benjamin Strong, took it upon himself to goose credit markets in the US to benefit Great Britain.  Strong’s easy – and active - monetary policy to benefit Britain culminated in a secret meeting of central bankers on Long Island in July 1927.  The policy results from this meeting led directly to the climax run of the 1920s stock market bubble and the subsequent Great Depression.  

None of this easily verifiable history or even simple common sense – there is no way for a group of people as small as the Fed’s Open Market Committee to successfully manage an economy the size of United States’ – means anything to Mishkin.  Mishkin surveys the Fed’s active role in causing the Great Depression, the runaway inflation of the 1970s and the tech bubble of the 1990s, and somehow reaches the remarkable conclusion that it is the passive real bills doctrine which has been “thoroughly discredited.”  Amazingly, Mishkin appears to believe he can simply invoke the opinion of mainstream economists like himself to buttress his argument on the infallibility of central bankers/economists, and their superiority to what he believes are the old-fashioned superstitions of real bills doctrine.  Mishkin is completely unaware that outside the academic and central banking circles that he runs – and skis - in, mainstream economists and their idiotic theories are held in utter contempt.  

The best proof of Mishkin’s nearly complete technical incompetence and the ludicrousness of his theories on central banking are provided by his analysis of credit markets in Iceland.  In May 2006, and just a few months before starting his term with the Fed, Mishkin co-authored a report for the Iceland Chamber of Commerce titled “Financial Stability in Iceland.”  In this report – for which he was paid over $100,000 to prepare - he gave a clean bill of health to the Icelandic banks and economy.  Outside of it being an enduring testament to educated stupidity, little can be gained by reading this report today.  However – and fortunately for the author - a sampling of the colossal stupidity latent in the report can be gleaned from the executive summary and conclusion alone;

“(Iceland’s) financial regulation and supervision is considered to be of high quality… There are three traditional routes to financial instability that have manifested themselves in recent crises…None of these routes describe the current situation in Iceland.   Our analysis indicates that the sources of financial instability that triggered financial crises in emerging market countries in recent years are just not present in Iceland, so that comparisons of Iceland with emerging market countries are misguided”

“This analysis suggests that although Iceland’s economy does have imbalances that will eventually be reversed, financial fragility is not high and the likelihood of financial meltdown is very low (emphasis added).”

Whoops!  Might have gotten that one wrong!

In the same way that the “tequila crisis” of 1995 was spawned by banks borrowing in one currency, the dollar, and earning income on those borrowings in another currency, the Mexican peso, Icelandic banks had borrowed huge amounts of money in foreign currencies.  As clearly demonstrated in the tequila crisis, borrowings of this type are fraught with enormous risk. Icelandic banks borrowed euros and pounds but issued loans in the local Icelandic currency, the króna.  If the króna fell in value against the euro or the pound, then it would take far more króna to pay back the loans.  Mishkin’s sanguine outlook on the health of the Icelandic banks and financial system was completely blind to the enormous currency risks these banks were wallowing in.  

By January 2008 the Icelandic currency, the króna began a calamitous collapse against the Euro.     Soon after the banks in Iceland collapsed and took the entire economy with it.   At the time of the banking collapse, Icelandic banks had loan books many times larger than the entire Icelandic economy; a classic sign of a banking system thoroughly out of control.  Corrected for the size of the Icelandic economy, the collapse of the banking industry in Iceland was the largest banking collapse in history.  In his post-crisis memoir, Ben Bernanke – Mishkin’s colleague at the Fed – described the problems among Icelandic banks in October 2008 as “too severe” for the Fed to offer any succor or support.  Bernanke drew this conclusion barely two years after Mishkin reviewed these banks and determined there were no problems at all!  

Additional Information:

See Alan Blinder (#5), William Dudley (#19) and Charles Evans (#20) for more examples of the silly ideas that pass for economic insights among the economic PhDs who sit on the Fed’s Open Market Committee.  See Blinder for more details on the “tequila crisis.”  See Alan Greenspan (#29) for his efforts to goose credit markets in October 1998 and the eerie similarities between Greenspan’s actions rate and Benjamin Strong’s meeting of central bankers in July 1927.