The Fed as Oracle
The consultation of oracles, a practice long thought dead, continues today in many forms, perhaps in a more subtle and less institutionalized than during antiquity, but powerfully nonetheless. In Michael Wood's new book, The Road to Delphi, he explores this "extended metaphorical afterlife of oracles".
Wood draws primarily from history and literature, connecting the dots to show lines of continuities that run through all of these oracles. Some of these common elements include consultation, the voice of authority, the need for interpretation and the entailment of a future.
While reading the book, the thought of Greenspan as a conspicuous example of a modern oracle seemed unmistakable. Wood, too, makes the connection.
Wood writes, "…the most important of current oracles in the West is surely the chairman of the United States Federal Reserve Bank." He does not elaborate on the observation, only making this passing comment in a chapter on the vestiges of oracles in modern society, in which he only glances at economics. He readily admits earlier in the book that he would "do more than glance if I were not so baffled by the subject [of contemporary economics]. "
So we will fill the gap and look at some of the ways in which Greenspan and the Fed are oracles. Even admitting such a comparison, why would it matter? It matters because it adds to the depth of our understanding about the institution and helps explain the Fed's ongoing support from the general populace in the face of compelling economic reasons to the contrary. Yet Oracles do die, in a literal and figurative sense, and understanding why may offer a glimpse of the Fed's final day of reckoning.
The most famous of all oracles and the prototype for all oracles that followed was the oracle at Delphi. The Delphic oracles responded to questions about the future by issuing prophecies. Croesus, the last king of Lydia, famously approached the oracle before his invasion of Persia, seeking to know the wisdom of his actions. He was told that a great empire would fall. Croesus thought that the great empire the oracle was referring to was Persia and that he would be victorious. For Croesus, it turned out that it was his empire that would fall.
Of course, the oracle could not help but be right. If Croesus were victorious, the oracle would be still be right. The art of prophecy involves equivocation; the oracle only needs to avoid being unequivocally wrong. Ambiguity means the oracle's prophecies are open to interpretation.
What are Greenspan's speeches if not ambiguous? Don't Fed pronouncements equivocate? In the recent announcement that the FOMC decided to leave its target federal funds rate unchanged, the FOMC declared that rates could remain low for a "considerable period." Articles appearing in newspapers the next day all mulled over the FOMC's release looking for meaning and interpretation. Greg Ip's piece in the Wall Street Journal noted, "The biggest question hanging over Fed policy is what it means by 'considerable period'." Observations and quotes by other analysts and economists are then typically included in such pieces, all looking to interpret the oracle's latest pronouncements—just as the ancient Greeks pondered the riddles of their oracles.
Here is one paragraph from the FOMC release:
"The Committee perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal. In contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level. The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future. In these circumstances, the Committee believes that policy accommodation can be maintained for a considerable period."
Note all the murky phrases. What is an "unwelcome fall in inflation"? What is the "foreseeable future"? Wood called such phrasing "slither" to denote the room it leaves for later interpretation and reinterpretation. The metaphor of slither is "a functioning mythology that allows logical alternatives to haunt each other incessantly, without seeking or finding a middle space of resolution." The FOMC release could be written at any time. It is a melange of stock phrases; it is imprecise, pregnant with haze. This is the oracle equivocating, leaving itself room to always be right, and designed to conceal the fact that they know nothing about the future.
The ambiguous speech of oracles does not conceal truths that have yet be revealed, but instead conceal the fact that the oracle is revealing nothing, because the future is unknown. It only needs to supplement the loose mythology of the efficacy of central banking because, as Wood writes, "faith, enthusiasm and ingenious interpretation will do the rest." While criticism of the Federal Reserve is in greater supply now than during the boom years of the late 1990s, there are still plenty of economists who will buttress the Fed's cause.
The ancients also used oracles to obtain sanction or approval, even though they had already decided on their course of action. Croesus, for example, did not really want the oracle's opinion on whether he should go to war with Persia or not. He had his mind made up before he approached Delphi. He was looking for confirmation. In a similar way, note how Greenspan's opinion is sought on issues such as tax cuts and spending plans. Why? Are his opinions likely to dissuade, say, the Bush administration from pursuing its agenda? What is sought is sanction from the oracle, a confirmation. In a similar way, governments seek the blessing of the UN, even though their decisions have already been made.
Wood's book reveals that our attachment to oracles is as much a coping mechanism as anything else. It helps us deal with the unknown future and fear and hope that accompanies such a state. Wood writes "The balancing of hopes and fears is a human constant, and oracles are an important part of that balancing act." Greenspan lacquers a slate of ignorance with a thin coating of knowledge. His existence satisfies a contradiction in human thought that longs for, in Wood's words, "certainty and infallibility in those areas of human life where they are characteristically least available."
This search for certainty can have much wider and more sinister implications. Wood discusses an interesting study by Theodore Adorno on horoscopes, another modern form of oracular consultation. Adorno finds in the devotion to mass horoscopes "the very same traits that play such a conspicuous role in totalitarian social movements" and believes there is a widespread dependency in modern society that likely "prepares the minds of the people for astrology as well as for totalitarian creeds." Adorno writes that people tend to take astrology for granted and they are not interested in its justification.
Herein we find another interesting take on why the Fed continues to exist amidst general support. The institution thrives on a generalized dependency on feeling in control. Ignorance about markets have led to the creation of illusions that they can be controlled and managed to increase the prosperity of all. Bernard Fontenelle, who wrote a book on oracles in the late 17th century, is quoted in Wood's book. Fontenelle offers a memorable aphorism on ignorance (or "beautifully skeptical definition of ignorance" as Wood describes it): "I am convinced of our ignorance not so much by those things that are, and of which reason is unknown to us, as by those that are not, and for which we find the reason."
Fontenelle sees ignorance as a form of invention. People who don't know how markets work create reasons for how it works, reasons that fit the purpose at hand.
Some look favorably upon Greenspan's latest Jackson Hole speech, in which he seems to admit the uncertainty of the future and expresses a lack of confidence on the precision of the Fed's monetary tools. But what Greenspan seemed really interested in doing was defending the ambiguity of the Fed's approach. The Fed has come under increasing criticism that it is not clear enough in its pronouncements and that it is creating additional uncertainties in the marketplace. An excerpt from the speech follows:
"Some critics have argued that such an approach to policy is too undisciplined—judgmental, seemingly discretionary, and difficult to explain. The Federal Reserve should, some conclude, attempt to be more formal in its operations by tying its actions solely to the prescriptions of a formal policy rule. That any approach along these lines would lead to an improvement in economic performance, however, is highly doubtful. Our problem is not the complexity of our models but the far greater complexity of a world economy whose underlying linkages appear to be in a continual state of flux."
Greenspan says, in effect, that we can't be so simple because the world is complicated and if we made our pronouncements simple we would be easily shown to be very wrong and our ignorance would then be manifest. His vagueness is deliberate. He is practicing the ancient craft of equivocation, a trade plied by oracles thousands of years ago.
The hopeful aspect of this fed chairman as oracle comparison is that oracles do die, not because they have lost their effectiveness, but because no one wants them anymore. An oracle that doesn't know the future has no future. It becomes obsolete. If the greatest of ancient oracles no longer exist, then the modern replica of Greenspan should not expect to last forever. The current economic turbulence may further expose the fact that Greenspan and company are false prophets, charlatans of finance. That is a hope, admittedly, but history proves oracles are not permanent institutions, at least in terms of their influence and power.
There is another footnote to this story. The opposite of an oracle in many ways is a sibyl. A sibyl offers generalized predictions of disaster but is not listened to or believed for a variety of reasons. The most famous sibyl is Cassandra. Her predictions are not riddles, but paint a future that anyone could see if they could bear to look. As Wood writes, "she is the figure who reveals everyone's denial to the truth, the god's gift to her is a merciless clear-sightedness in a world in love with blurred vision." Therein lies a neat metaphor for the Austrian School of today, the Cassandra of contemporary economics.