The Fed And The “Lost Pilot” Effect

While the Bureau of Labor Statistics released a recovery-esque Non-Farm Payroll employment number for January, it is hard to see whether this will lead to a buoying of public sentiment or will not have much of an effect on anything. The ballyhoo in the media about the superb January NFP is more than likely an aerial not grounded in reality and the true path of the United States’ economy. It is a dis-interpretive conclusion that serves to mislead the general public. While the unemployment rate ticked down a few tenths of a percent, people are still leaving the labor force all together; our true unemployment rate is still above 10%, and has only been moving horizontally:

The longer the Eurozone can hold out without exploding into a million tiny pieces of smoldering sovereign debt, the longer the U.S. has to insulate and protect itself from Europe. But U.S. and European country’s % change in GDP has mimicked each other quite closely for the past 15+ years, so a change now does not seem on the horizon. It seems that our fates are intertwined; any forthcoming or past predictions of decoupling are either fantasy or did not come to pass. The Fed could have intervened to alleviate some pains of the current crisis and the possible perdition to later come, but it has suffered  from the “Lost Pilot” effect. Zero Hedge reposts SocGen’s Dylan Grice’s article on Popular Delusions;

[This week I want to think about] the incorrect application of faulty models. In essence, that’s all those studies on confirmation bias are really about. Subjects applied a faulty model – a mental algorithm saying “accept only supporting evidence” – which resulted in a biased assessment of the evidence. “Trying harder” didn’t work because the problem was the faulty model, not the lack of effort, and applying that faulty model with more determination just caused an even bigger error. Psychologists have a name for this. They call it the “lost pilot effect” after the lost pilot trying to reassure his passengers by saying “I have no idea where we’re going, but we’re making good time!”

Flawed thinking got us into this mess. But rather than change that flawed thinking, our policy makers are applying it with even more rigour: we have more debt for insolvent borrowers, more financial engineering, more complicated banking regulations, more blaming speculators for everything, more monetary experimentation by central banks. Our policy makers have absolutely no idea what they’re doing, but they’re giving it a go!

And while the central bankers and policymakers are doing more of the wrong thing, this creates a false sense of accountability. Even if they do know the applicable solution to our vast problems, the financial system will have none of it. The “Lost Pilot” effect in the financial system disincentivizes the the installation of a fix. The Fed recently pushed expectations of zero percent interest rates to years, and there is always the possibility of entering the realm of a negative interest rate policy. The Fed has also set target inflation at 2%. It is the same stale old policy Bernanke has been pushing for the last few years. These cannot be attributed to a “mistake”. Rather, the incentives to pilot the system in a straight line through a field of asteroids places these “mistakes” in the realm of possibility. We are inclined to believe the people in power will steer for us, but instead they leave the wheel unattended and find ways to profit for themselves and their friends in the back room. And the masses see policies being pushed, not working, then the policies get pushed harder to accommodate “attempts” to fix the problem.


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