It was a scene out of a Ron Paul nightmare as three Federal Reserve Bank presidents gathered at the Granada Theater on Thursday for the annual UCSB Economic Forecast Project. The most memorable voice of the half-day conference, however, was Gillian Tett, U.S. managing editor of the Financial Times, who delivered the closing talk before moderating a discussion between the Fed presidents.

Tett, a social anthropologist by training, argued that the collapse of American and European economies proves that quantitative analysis alone is insufficient to explain economic behavior. “Finance is fundamentally a social construct,” she said, concluding that the bubble that burst at the end of 2007 was based on “pillars of faith.” That faith was placed in credit ratings, computer models, the wisdom of regulators, and the wisdom of bankers who were selling securities that nobody understood. Comparing the financial community to the medieval church which conducted services in Latin that parishioners did not understand but still felt comforted by, Tett called Alan Greenspan the pope.

A second cultural phenomenon that Tett elaborated on was “social cohesion.” As an example of a strong culturally cohesive culture, she offered Japan where she was stationed in the late 1990s. Tett shared a conversation she once had with a Japanese executive forced to reduce spending at his company. He cut all of his employees’ wages by 20 percent and his own by 30. In the United States, he joked, an executive in his position would cut his workforce by 30 percent and give himself a raise.

Tett surmised that the differing attitudes result from the landscapes of the two nations. The U.S. has always been imagined as a land of unlimited resources where the promise of an open frontier has been replaced by confidence in immigration and technological innovation whereas Japan is a small, crowded island nation whose citizens are more willing to share their bounties as well as their losses. For instance, Japan’s debt is owned mostly by its own citizens.

The Eurozone, Tett explained, was formed not because of economic logic, but to fulfill the European elitist dream of healing the wounds of World War II. The “irony,” she said “is that wounds are being reopened.”

The effect of the Eurozone crisis on the U.S. economy was a topic she broached with the three Fed presidents — Dennis Lockhart of Atlanta, Charles Plosser of Philadelphia, and John C. Williams of San Francisco — who were concerned but not alarmist. One of Lockhart’s employees, economist David Altig, said in remarks earlier that the Eurozone may have minimal effects on trade or, in a worst-case-scenario, it could spread across the American financial system.

Tett also pressed the three presidents on how the Federal Reserve Bank could unwind its bloated balance sheet — which has ballooned to nearly $3 trillion from $800 billion in the last three years — without causing inflation. Lockhart said that timing is important but that current bank reserves are “sideline money” unlikely to have an inflationary effect when lending increases. The presidents also concurred that the Fed needs to change the make-up of its assets so that it is holding less short-term debt. After the economy crashed, the Fed bought up government bonds and mortgage-backed securities.

“What we really need is significant long term fiscal reform,” said Williams.


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