recovery: The Feds Need to Back Off

Amar Bhide’s in today’s WSJ on what the Fed can and can’t do to “speed recovery”:

.. beyond amelioration and providing the judicial (or in the case of the FDIC, quasi-judicial) procedures for reorganization, there is little more that the government can do to accelerate the unwinding and renewal necessary to put the economy back on an even keel.

The process involves a sequence of negotiations and experiments that cannot be truncated by throwing in more resources. As Frederick Brooks wrote in his celebrated book on software development, “The Mythical Man-Month: Essays on Software Engineering”: “When a task cannot be partitioned because of sequential constraints, the application of more effort has no effect on the schedule. The bearing of a child takes nine months, no matter how many women are assigned.” “Brooks’s Law” suggests that increasing the size of software teams may delay development.

The wide variety of problems and circumstances in an economic downturn precludes the effective use of a single solution. And the federal government doesn’t have the capacity to determine adjustments on a case-by-case basis. The late Nobel Laureate Friedrich Hayek taught that the “man on the spot” with the appropriate local knowledge was much more capable of making good investment decisions than a central planner.

Similarly, the men and women who are closest to the situation have a huge advantage in unwinding the consequences of past miscalculations. The terms of a problem loan are best renegotiated by the borrower and the bank that made the loan. How to cut costs and excess capacity in the automobile industry is best figured out by management, the UAW, bondholders and creditors, under Chapter 11 if necessary.

Ad hoc interventions in the financial markets by the executive branch and Federal Reserve that override private renegotiations and judicial procedures have done serious, long-term harm …

This is terrific stuff — read the whole thing.

Bhide is the author of The Venturesome Economy and was a recent guest of Russ Robert on Econtalk, here the ideas of Friedrich Hayek were part of the conversation — highy recommended stuff.  Bhide discusses Hayek, “the man on the spot” and local knowledge on page 416 of his book.  Earlier in the book Bhide endorses a picture of the innovator as an engaged and experimental “Hayekian chief” in preference to the classic picture of the innovator as a brilliant and isolated “Schumpeterian chef”.

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