Operation Twist-the-Truth

by George Selgin October 14th, 2013 2:07 pm

That's the title of a paper I'm writing for this year's Cato Monetary Conference (the subtitle is "How the Federal Reserve Misrepresents Monetary History"). For it, I'd be very grateful to anyone who can point me to examples (the more egregious the better) of untrue or misleading statements regarding U.S. monetary history in general, and the Fed's performance in particular, in official Fed publications or in lectures and speeches by Federal Reserve officials.


7 Responses to “Operation Twist-the-Truth”

  1. avatar Bradley Jansen says:

    What about from *former* Fed officials?

  2. avatar Thomas Hogan says:

    Bernanke has claimed that the Fed's bank bailouts of 2008 were conducted according to Bagehot's rules for a lender of last resort. Linh Le, Alex Salter, and I have a short working paper critiquing his statements. Here's a link:



  3. avatar jvdelong says:

    I reprint a comment I left with Arnold Kling expressing puzzlement about the Fed's explanation of monetary policy. (Arnold's response is at http://www.arnoldkling.com/blog/contemporary-money-and-banking):

    In trying to pull a signal out of the noise of economic commentary and thus assess the possible outcomes of FRB policies, I have been delving into some papers on money.

    Like most non-economists who are educated professionals (if you count Harvard Law as an educational institution), my starting point is the classic Econ I view that the key is fractional reserve banking. Banks take deposits, make loans, hold reserves as required, make more loans, and so on. The loans create money, and the overall money supply is determined by the FRB through its reserve requirements and their multiplier effects and through interest rates on reserves.

    Recent papers, including one by FRB staff, say this is not true (and Stella’s piece is in this chain). In fact, the FRB makes reserves available as banks need them for loans, and the basic tool for controlling the money supply is the interest rate, which may or may not be effective. In fact, says the FRB paper, the macro models do not use the reserve model at all, even if that is still the dominant narrative of public discourse and the text books. (That is, to the extent that they use financial models at all; I understand that many models do not.)

    Apparently, the economists & central bankers changed these key premises underlying monetary analysis, but did not bother to tell anyone about it, and have not replaced them with anything. Indeed, the official FRB intellectual models seem quite simplistic (see Yellen speech)

    All this leaves me befuddled as to what the FRB and the econ profession are using as a model of the money machine. So I ask you, as an economist who has always had my respect, WTF is going on?

    As the line has it in “Margin Call” – “speak as you would to a small child or a golden retriever” (or a Harvard Law graduate).

    Some of the papers to which I refer:

    Yellen Speech http://www.federalreserve.gov/newsevents/speech/yellen20130302a.htm

    FRB paper – “Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?”

    Modern Central Bank Operations— The General Principles -http://www.cfeps.org/ss2008/ss08r/fulwiller/fullwiler%20modern%20cb%20operations.pdf

    Bindseil, Monetary Policy & Reserve Position Doctrine

    David Malpass & Vernon Smith articles —

    Myth of the Money Multiplier

    Stella articles & comments

    Can QE Cause Market Distortions & Even Bubbles?

    Interest Rates, Savings Rates and Their Impact on the Economy


  4. avatar Per Kurowski says:

    Capital requirements for banks which allow banks to lend to the Treasury against much less capital, even zero, than when lending to an ordinary citizen, translates directly into a borrowing subsidy of the Treasury.

    The Fed might not be doing it on purpose but, reporting low Treasury interest rates without disclosing such a subsidy, amounts to a de facto twisting of the truth.

    The consequence or it is allowing pundits like Martin Wolf to suggest governments should take advantage of these extraordinary low real rates, to launch great infrastructure projects.

    Nowhere is anyone including the huge opportunity costs that most certainly are being incurred by the real economy, as a result of so many “risky” businesses not having access to bank credit in competitive terms, because banks are busy making profits refinancing the safe past and the sovereigns, instead of financing the risky future.


  5. avatar will.luther says:

    Around 3:57, Bernanke says: "The reason the federal reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in the *unregulated environment in the 19th century*." http://www.youtube.com/watch?v=b-hRS2WtNmc

  6. avatar Bill Stepp says:


    Easy Al denying the Fed entity's role in creating the housing bubble.

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