Odd Lots - 53: Why We Stopped Trusting Experts

Episode Date: November 4, 2016

One could argue that "expert" has become a bad word. People routinely roll their eyes at the advice of experts and sometimes mock them. Perhaps nowhere is this more clear than the Federal Reserve. In the 90s, Alan Greenspan was lauded as the author of the great economy. Today, the Fed is a political punching back. On this week's Odd Lots podcast, Joe Weisenthal and Tracy Alloway talk to Sebastian Mallaby about Greenspan, experts and the huge changes at the Fed in the last couple of decades.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at cIT.com. Put knowledge to work. Hello and welcome to another edition of the Odd Lots podcast. I'm Tracy Allaway, executive editor of Bloomberg Markets. And I'm Joe Wisenthal, managing editor at Bloomberg Markets. Joe, can I just say I'm glad to have you back because I missed you for two episodes. That is really sweet of you to say, and I am very glad to be back. I had some interesting travels around the world, but glad to be getting back in the routine.

And I have to say, I really enjoyed the episode. that I listened to the episodes, I really enjoyed them. So I was glad to see my substitutes did such a video. Great. I'm glad we could provide you with listening material on the plane. I appreciate it. All right. Well, as a welcome back gift today, I think I have a guess that you're going to really enjoy

because one of the things we've been talking about for, I guess, the past few months now, when we've been dealing with things like globalization, Brexit, U.S. politics, things like that is the idea of the world distrusting people in authority and in particular experts and technocrats. Yeah, I think this seems like such a big theme that pervades all aspects of life from the media, which is the industry, obviously, that we're directly into finance, which we cover, and obviously politics, which we have a certain election on our plates right now. So, yeah, I agree. This sort of whole idea of distrust of experts and the erosion of traditional structures

of authority is about as big of a theme as you can get right now. Exactly. And you and I both know that in finance and economics and markets, there is an over-abundance of experts. Let's put it that way. And perhaps one of the, I guess, most stereotypical expert in the field would have to be the central banker, your sort of ivory tax. our technocrat, you know, at the ECB or the Fed or the Bank of Japan sitting in their sort of ivory

tower and I guess pronouncing monetary policy. Yeah. I would say the central banker probably has a unique role in our society. And it's hard to think of any other position quite like it because they're not really accountable to anyone. There's no obvious checks and balances except over time with them. They can implement policy without dealing with the political ramifications, at least in the short term. They're incredibly influential. Absolutely.

That was well put. So our guest for today is actually the author of a new biography on Alan Greenspan, who's one of the most famous central bankers of all time, I guess you would say. It's Sebastian Malaby. He's a longtime journalist. He's also penned a bunch of really good books. many of them to do with economics and finance. And we are going to be looking at this phenomenon of the world falling in and then out of love with experts with technocrats through the prism of Allen Greenspan.

So I think it'll be good. Yeah, I'm looking forward to that. I mean, I think, you know, I remember the 90s economy pretty well. And the degree of reverence towards Ellen Greenspan at the time was absolutely extraordinary. and it's pretty hard to imagine in 2016 anyone quite achieving that level of love into the popular culture and the popular press ever again or at least any time soon. All right. Let's bring Sebastian in. Hi, Sebastian. Thanks for joining us today.

Hi, Tracy. Hi, hi, Joe. All right, so should we maybe start with Greenspan's role as the ultimate technocrat? Can you walk us through how he got to that position and what made him different to other technocrats. Greenspan was the ultimate central banker, partly because of the length of time that he survived in office. If we think of other sort of big names we associate with the Federal Reserve, there's Ben Ben Ben Anki, who survived there for eight years. There's Paul Volker, also eight years. Greenspan, in contrast, survived in office for 18 and a half years, more than twice as long. And if we add in the two and a half years he spent as the chairman of the Council of Economic Advisors in the Ford White House, you get 21 years.

So by sheer dint of longevity, Greenspan is the ultimate technocrat, the ultimate central banker. What's interesting, though, is that he actually created the reverence for central bankers. It did not exist before he got there. He was appointed in 1987 at a time when it was perfectly normal for elected leaders to beat up on the technocrat. to belittle the central bank, twist its arm. And it was really by dint of Greenspan's force of character that he was able to stand up to pressure from the Bush administration. That's the first George H.W. Bush administration. And then when Bill Clinton came into office,

these attacks on central banks stopped, and instead you had the deference towards the technocrats that we have come to take for granted recently. So, you know, I remember the Greenspan era, I think, pretty well. I mean, I was only in high school, but I was very interested. And I remember people referring him as like the author of the great economy and that it was sort of all back to his brilliance that unemployment was so low and everyone was making a fortune in the stock market and all kind of, you know, everything just seemed to be going great in America. You know, when you, you went back and looked at his life, how much. was him and how much was just lucky timing and why were people so quick to give him all the credit? There was certainly some lucky timing. Two things happened. Globalization was rapidly progressing and in particular China was integrating into the world economy and that drove down import prices in the United States and made it easier to control inflation. So that's piece of luck number one. Piece of luck number two was

technological advance, driving out productivity. Again, that took pressure off prices. So if you were a central banker whose mission it was to stabilize prices, keep inflation down, it was easier in that period than in other periods. But I think even when you acknowledge these two pieces of good fortune, it still remains the case that Greenspan stood out for his skill, a particular kind of ago, which was essentially to resist politicians who were trying to push him around. If they took the fight to him, he took the fight to them. And politicians backed off from trying to bully the Federal Reserve because they were essentially scared of being bullied back. Well, Joe alluded to this earlier, but one of the things that makes central bankers different to other types of experts

is the independence that they have or are supposed to have from politicians. So how does that kind of play into Greenspan's rise? Yeah, well, that idea of independence of central banks from politicians is something that was really established in the 90s and did not exist much before. You know, you go back to 1979, when Arthur Burns, who had served as Fed chairman for much of the 1970s, gave a kind of retrospective speech on his tenure. It was all about the fact that Central Bank, banks were inevitably in a political system, in a democratic system, going to be pushed around by

the elected leaders. I mean, those guys had been elected. They had a mandate. They had power. And they were going to beat up on the technocrats if the technocrats did not cut interest rates ahead of elections and deliver other things they wanted. I think that's so fascinating because right now the idea that central bank independence is a really important aspect of a functioning economy. and an important functioning central bank just seems to be absolutely taken for granted and people really bristle any time politicians try to muscle their way in on policy. But it's fascinating to think that that's really a fairly new concept. Absolutely. I mean, even Paul Volcker, who we think of as this sort of rumpled, egg-headed

Churchillian, Old Testament scourge that nobody could possibly mess with. I mean, the reality is that the Reagan administration, appointed people to be governors of the Fed who would be loyal to the Reagan Treasury and not to Volcker. And so Volker was outvoted by his own committee on interest rates once and on regulation at least twice. So, you know, the central bank was a long way from being independent. So in retrospect, and just to play devil's advocate a bit here, is it odd that we have people who wield incredible power through monetary policy? who don't really have a democratic mandate?

No one voted them into office. And we don't have a sort of checks and balances system like we do for the rest of U.S. politics, at least on them. Is that odd in retrospect? Well, I think the way to avoid it being odd is for the democratically accountable elected leaders to come to a sort of settled understanding of what central banks are supposed to do.

so that the goal is set democratically, but then the means of achieving that goal are left to the technocrats to figure out. All right. So let's move it forward a little bit because I remember, obviously, as I was saying, people called, you know, Greenspan was the maestro and the one behind the great economy and the entire world hung on his every word. And now thinking about the kind of attacks that, say, Janet Yellen comes under or Ben Bernanke came under during at least the post-crisis era, you know, 2008 on, it's just hard to imagine any central banker ever again having the being held in as high esteem as Greenspan was, even if the economy were doing well. Do you think we'll ever get that back? Well, I think that the inflation targeting consensus, which, as I said, underpinned central bank independence, is itself coming under attack. I mean, these days, there's all this argument about whether negative interest rates are productive or kind of productive. There's some debate as to whether, you know, you should switch from an inflation target to a normal GDP target. Should there maybe even be targeting of asset prices, at least as, you know, an additional thing to keep an eye on? All these debates mean that the goal of central bank is less clearly defined and then then politicians are inevitably going to want to weigh in.

That's exactly what's happened in the last month. For those of our listeners who have followed the UK debate around the central bank, Mark Carney, the governor of the Bank of England, was under a lot of political pressure because the Prime Minister, Theresa May, had made a comment on quantitative easing and said, well, QE has bad distributional consequences that we should be mindful of. That was interpreted, of course, as being an attack on the QE pursued by the Bank of England. It wouldn't have happened if there had been no experimental tools in the first place. Once you get into this, you know, dangerous and sort of difficult and disputed arena of new tools,

you're bound to get politicians waiting in. I mean, this gets back to the point that I was sort of. of trying to make earlier, which is how do we hold central bankers and other types of technocrats into account, or to account, like when they introduce new monetary policy tools, things like quantitative easing, how do we judge the success of those tools and judge the success of the people who are implementing them? I think in an ideal world, the politicians need to set the objectives and let the central bankers decide the tools. And so quantitative easing is a tool, not an objective.

And so politicians ought to bite their tongues and not speak out about quantitative easing. Now that's easy for me to say and harder for a political culture to deliver. But I think, you know, we've gone through a bit of a learning experience, actually in Britain just recently, with the Prime Minister sort of regretting

that she spoke out about quantitative easing and I suspect that we'll find the same in other societies. There's a reason why politicians decided to give central banks some independence because the credibility of the central bank is actually good for the elected government. It makes the economy work better, and it makes the politicians look better and more likely to be re-elected. So I think this is a lesson that has to be relearned from time to time, but the basic contours of the bargain are politicians should set the goal. And if the goal is, you know, stable inflation or it could be stable nominal GDP growth,

that's, I think, a legitimate political debate. But then when you've had that debate, whether you use negative interest rates or quantitative easing or the purchase of assets other than government bonds, that should be up to the central bank. We have to take a quick break for a word from our sponsor. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, leasing, and treasury management services for small and middle market businesses. Learn more at CIT.com. Put knowledge to work. And we're back with Sebastian Malaby.

He's the author of a new book about Alan Greenspan. and we're talking about the role of experts in modern public life and the sort of decline of prestige of the central banker. Prior to the break, you were talking about how, as the Fed has undertaken new endeavors, naturally it invites sort of a degree of political involvement that wasn't there before when it was just as simple as targeting inflation. But it feels like something that this – my problem there is it feels like this is a story that goes beyond central banking. So this is a clear example. The decline in prestige of the central banker is obvious, but it's being echoed elsewhere, whether we see it in the media whose prestige is down or politicians in general. Is there a sort of grand unified explanation for why experts in any field? even beyond central banking, are just not taken as seriously as maybe they were 20 years ago?

I think there's a basic rule, which is that when experts appear to be delivering results, then you're happy to trust them. And when life does not seem to be improving, then you get mad at the experts and you say, wait a second, who elected those guys? And I think that has happened, you know, across more areas than just central banking. And so the sense of stagnating middle-class living standards and an uncertain future means that people are more skeptical about, for example, technological advance. In the 90s, as I recall those years, people had nothing but good things to say about Silicon Valley, personal computers, you know, fiber optic cable and so forth. Now, if you look at books about technology coming out, they're more likely to be about

artificial intelligence gobbling up your job. The negative side of the fruits of expertise is emphasized when people just feel insecure. One other factor that I think a lot about and that I think it's kind of relevant here is just sort of the changing nature of media and the sort of horizontal peer-to-peer media, social media and the role that that has in sort of breaking down traditional hierarchical ways of conveying information. Yeah, we did a whole podcast about this. We did a whole podcast on that.

But I'm thinking back to like in the 90s, I remember the one place that I saw criticism of Greenspan regularly was not on CNBC or Bloomberg and not on in the Wall Street Journal, but on stock message boards like the raging. Bull message board and people would rage at him when the stock market went down or whatever they were unhappy. And now, of course, that's the norm. I mean, we're all on sort of like a permanent message board. And I wonder to what extent that has something to do with it, that there's just an infinite number of sources and people can construct their own realities or at least their own narratives to describe reality. And that the people that we held up as experts in the media prior to this era, they just don't have the institutional support that maybe they had before. Yeah, I mean, Joe, I think that's a very smart point. And I've thought about it slightly in the

context of presidential politics in the past. It seems to me that in the roughly speaking, the first sort of 75 or so years of the 20th century, technology tended to build up the power of the presidency. You know, you had radio which allowed FDR to do his fireside chats. You had television that was exploited to great effect by John F. Kennedy and his successes. But then all of a sudden, in the second term of Ronald Reagan, he was the first president ever to request a prime time slot on TV to do an announcement and to be refused. And the reason that the network TV people refused is that they were by then competing with cable. And as cable competed, you know, there was more of a cacophony.

But then as you say, after cable came blogs, and after blog comes social media. And the more you democratize the channels of communication, the more the bully pulpit or the presidency becomes the bullied pulpit. And I think that same point can be applied more generally to experts and figures of authority overall. Well, going back to Greenspan, you write in your book that one of the reasons he enjoyed such success in Washington was the way he courted the media and maintained relationships with some prominent journalists. If you're a technocrat now trying to regain the public's trust, how do you actually mount that outreach program if going to traditional media sources is no longer as powerful as it once was?

I think it's incredibly difficult, Tracy. I mean, I think, you know, that's what we're all struggling with. And I was actually part of a startup company in London at the beginning of this year, which put together a website to sort of try to do fact-checking on the Brexit referendum. And the notion was, you know, people were going to spread all kinds of fake information. And we would try to correct those mistakes. quickly and we did that. But the problem is, you know, people can invent their own reality. They could, you know, ignore the facts, even when the facts were distributed with great energy by our team. And we used all the social media techniques that everyone else uses to distribute and make sure, you know, key people understood what the real facts were. But, you know, if somebody else is going to ignore that and persist in making stuff up, what do you do? So on that note, here's the big question from me, I guess, is this distrust in experts that we're seeing now, is it a cyclical phenomenon that's going to go away at some point or has something structural happened that's a permanent state, either because of new technology or because of the way the media works now? Well, I think it's a good question precisely because there's a bit of both.

The stuff that we're talking about with the media feels like a secular trend. You can never put that genie back in the bottle. On the other hand, I do think that, you know, populism comes in waves. People succumb to it, and then they elect a populist, and then the populist messes up, and bad things happen, and that's what happened in Latin America. And then people learn a lesson, and they actually go back to valuing experts and people who know what they're talking about. So I think that bit of it is cyclical.

So let's talk about the real-world ramifications of this day. decline in a reverence for experts. Whoever is the central bank chief, now these days, obviously right now it's Janet Yellen, at some point she'll have a successor. How much harder is their job because they don't have the level of standing and trust that someone like Ellen Greenspan had, that they have all these blogs and social media who are always going to be slamming them? what does it turn into how does this become a practical roadblock for them to execute policy? Well, I mean, I do think that Janet Yellen faces a tougher landscape because of the cacophony of criticism just in the nature of the cacophonous social media world.

But I also think that Greenspan's model of how he ran the Fed teaches some lessons that Janet Yellen could well pay attention to. For example, if you thought about the Fed in the 1990s at the height of Greenspan's power, and you ask yourself the question, what proportion of sort of messages coming out of the Fed are really Alan Greenspan? Like, does Alan Greenspan account for 50% of my consciousness about what the Fed thinks or 80%? No, the answer would have been 99.9%. I mean, he dominated the institution and he spoke for it. And when somebody else tried to speak for it, he shut them.

up. I mean, he was pretty ruthless about controlling other members of the Federal Open Market Committee and making sure they didn't speak too much and too openly and too sort of interestingly to the media. Janet Yellen, on the other hand, has a kind of more democratic approach. She lets her colleagues say what they want. And the result is, we just, you know, we have no ideas, particularly. I don't think, you know, I mean, well, I would say that Janet Yellen's voice is less than 50% of what we're hearing from the Fed today. And I think that's a mistake. I think particularly because the social media landscape is cacophonous, an institution like the Fed needs to speak with one powerful voice. Otherwise, it'll just get ignored. That's really fascinating. I mean, I think there's

so much love for transparency and openness and so forth. But it feels like maybe we're coming to the end of that. And maybe people realize that you can have too much of a good thing or that we haven't really seen many tangible benefits from people always speaking and everybody having their dot and everyone having their own economic outlook. I think it does feel as though people are wondering what we've really got from all this. I mean, I grew up in Britain, as you can tell from my voice, but I spent 18 years in Washington, D.C. And while I was there for a long time working as a journalist, I used to love teasing my friends by saying that the US Constitution was a very good idea in the 18th century when you were revolting against absolutist monarchy, right? But it was quite a bad

idea in the 21st century when there were checks and balances everywhere and, you know, the media was attacking you and you had, you know, umpteen think tanks and lobbies, second guessing everything you did. And that actually you needed to unify power in government more and divide and check it less because the nature of society has become more pluralistic. And I think the same thing applies to experts, to central bankers, and so forth. The more that the world out there becomes a sea of argument, the more in order to break through, you need to have one powerful message. That's a great, I think that is a perfect point to end it on, and that is something

really fascinating to think about, and I think that is a compelling and interesting argument. Sebastian Malaby, thank you very much for joining us this week on the podcast. Thank you, Tracy, and thank you, Joe. So, Joe, welcome back. Was that a good welcome back episode for you? Yeah, I really like that one because, you know, obviously we've talked on this show probably multiple times about this idea of the decline of the expert and the decline of expertise and the way the Internet changes, the way we get information.

But I like the concrete application of it here that is not theoretical that you can look at the central banker now and you can look at who was running the Fed 20 years ago and see pretty clear differences in how they're seen in the world that, you know, it's a nice crisp example of what we've been talking about. Yeah, exactly. It's a prism through which to view it. One of the things that struck me was just Sebastian's last comment about the idea of having more of a universe. voice coming out of not just the Fed, but out of politics in general at a time when opinions are quite disparate, just having a sort of strong voice to unify them. That's an interesting idea. Yeah, I think it's probably controversial, but there's a logic to it that at a time when there's so much, everybody has an opinion, everyone can broadcast it, that perhaps the only way to break through is to be really disciplined and have one viewpoint. The other thing that just strikes me, and I just, the degree to which people revered Alan Greenspan at the time,

I don't think, unless you're paying attention, I just think it's so unimaginable now. I just can't, I mean, maybe one day there'll be enough shifts and we'll have new institutions and there'll be someone that could achieve that. But it's really hard for me to imagine us ever having that again, the idea of a singular figure that everyone in the media just accepts as a genius and that we owe so much of our wealth and prosperity to this one person. I can't even fathom it. Well, this gets back to the cyclical versus structural question, right? Like, are we just in a big populist upswing or are we experiencing something more significant that's going to be with us for a while? I feel like we might shift back towards the experts and the technocrats and the politicians at some point.

But I agree with you. I don't think it's ever, ever going to be quite the same. We didn't even get into this so much. But Alan Greenspan, you know, experienced his own spectacular fall from grace in the form of the financial prices, which was pretty illustrative of the pitfalls of being revered as an expert. No, that's totally true. And, you know, maybe we will one day go through another phase where the role of experts is, built up again. But it might be a really long time. Like, it might be decades before that happened,

because these swings don't just happen overnight. And, you know, we might still be at the early years. We might look back at the year 2016 and say, oh, wow, we've really respected experts a lot more back then. Like, who knows maybe in 20 years. I mean, you never know. Like, we don't know where we are in the pendulum. So maybe it'll swing back, but maybe it's still swinging in this current direction for a ways to go. Yeah. All right. Shall we leave it there? That sounds great. And it's great to be back. Excellent. Okay. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And I'm Joe Wisenthal. You can follow me on Twitter at the stalwart.

And you can follow Sebastian Malaby on Twitter. He is at S.C. Malaby. Thanks for listening. Put knowledge to work and grow your business with CIT. From transportation to health care to manufacturing, CIT offers commercial lending, lease and Treasury Management Services for small and middle market businesses. Learn more at CIT.com. Put knowledge to work.