Hubris at the Fed

Intertemporal Bridge

Everything Bubble

Unnatural Heights

Cleveland, British Columbia, and Dallas(?)

Finding just the right word brings great pleasure to writers like me. As I think and write about the Federal Reserve, the word “hubris” keeps coming to mind.

The Merriam-Webster dictionary defines hubris as “exaggerated pride or self-confidence.” The entry notes the concept originated in ancient theater.

“In classical Greek tragedy, hubris was often a fatal shortcoming that brought about the fall of the tragic hero. Typically, overconfidence led the hero to attempt to overstep the boundaries of human limitations and assume a godlike status, and the gods inevitably humbled the offender with a sharp reminder of their mortality.”

This fits well if you think of central bankers as characters in a Greek tragedy. In recent decades many decided “human limitations” would no longer constrain their policies. The inflation they thought defeated came back to humble them.

Today we’ll conclude my exploration of William Chancellor’s new book, The Price of Time: The Real Story of Interest. I have only touched on his main points; this is an important, must-read book and I urge you to get it when published next month. You will learn much.

We can draw a direct line from the Fed’s low rate regime to today’s surging inflation, asset inflation, and income and wealth inequality. Low rates produce asset bubbles which ultimately pop, but not before blowing themselves larger and multiplying into other bubbles. The process that pushed stock prices higher is the same one that is now pushing food, energy, labor, and every other cost higher. Just follow the bouncing ball.

Chancellor demonstrates a theme that has been repeated throughout history. Reinhart and Rogoff’s magisterial This Time Is Different has more historical context. Today’s central bankers have no excuse for not knowing what happens when hubris meets even good intentions. It always ends in real tragedy: maximum pain for the middle and lower classes.