Scotland the Brave!

[Gorth]

Slightly ontopic, noticed this in a Danish newspaper a short while ago:

 

Bye, bye England? SNP plans closer Scandinavian ties after independence

 

An independent Scotland would shift much of its attention away from the UK to become a member of the Scandinavian circle of countries, with its own army, navy and air force modelled on its Nordic neighbours, according to detailed plans being drawn up by the SNP

 

The Scandinavia and the World Webcomic version

[Wrath of Dagon]

I've had a simple but brilliant idea, why don't we replace the morons on the Federal Reserve with a computer?

[Humodour]

I've had a simple but brilliant idea, why don't we replace the morons on the Federal Reserve with a computer?

 

Because we do not yet know how to model economics. Economic models are constantly recalibrated to fit current data (reminds me of the Standard Model). So for the same reason human economists fail to predict crashes and bubbles, so too would an AI running the reserve bank (like Watson or some other expert system).

 

The other consideration is that human adaptability and intuition, while perhaps more biased, political and fickle than a computer algorithm, is of benefit more often than it is not. Until we have human-like AI, any computer system running a reserve bank would not have this capacity.

 

Finally, the fact is that we already throw a ****load of computing power at the problem.

[Gorth]

Wouldn't introducing human like AI into a system running the reserve/nation banks just make the disasters and mistakes faster and more efficient?

 

If you on the other hand introduced one without any human traits, you end up with an Old Testament God, all rules and no mercy.

[Wrath of Dagon]

We don't need to model economics, the Fed isn't supposed to be doing Soviet style central planning, they're only supposed to keep the money supply stable, so that's all that needs to be modeled. It's the Fed attempting to do the former that gets us into trouble over and over. As far as all rules and no mercy, you'd have to have a provision to override in emergencies, say for 6 months, but the President would have to declare an emergency and Congress approve it, possibly by a super majority.

[Humodour]

We don't need to model economics, the Fed isn't supposed to be doing Soviet style central planning, they're only supposed to keep the money supply stable

 

Over what time period? I would say all of them: short-, medium-, and long-term. Hence the need for economic modelling.

 

If you only model for the short-term, for instance, then you're ensuring a cycle of boom and bust because you can't see the forest for the trees. And if you're modelling for the long-term, you run into the problem of chaotic dynamics - small initial perturbations in the model lead to increasingly divergent outputs over time (hence the need to constantly recalibrate models).

 

The people running the Fed aren't morons. They're just doing something extremely difficult which is also exposed to political interference.

[Wrath of Dagon]

Keeping the money supply stable isn't a big mystery, it simply needs to expand at the same rate as the economy. The tricky part is measuring the economic growth and the money supply itself, so you need data collection and an algorithm to analyze the data and calculate the correct amount of money to generate. You seem to claim the it is the proper role of a central bank to try to manage economic activity, while my assertion is that by trying to provide feedback to a system they don't fully understand and also with an unacceptably long delay they are in fact destabilizing the economy by turning what is supposed to be negative feedback into positive.

Edited December 12, 2011 by Wrath of Dagon

[Humodour]

Keeping the money supply stable isn't a big mystery, it simply needs to expand at the same rate as the economy. The tricky part is measuring the economic growth and the money supply itself, so you need data collection and an algorithm to analyze the data and calculate the correct amount of money to generate. You seem to claim the it is the proper role of a central bank to try to manage economic activity, while my assertion is that by trying to provide feedback to a system they don't fully understand and also with an unacceptably long delay they are in fact destabilizing the economy by turning what is supposed to be negative feedback into positive.

 

No. A reserve bank doesn't exist in a vacuum. It needs to model the entire economy, and the impact its actions will have on the entire economy (and in the long-term), in order for it to act appropriately and correctly.

 

In fact, I'm struggling to think of a more destabilising way for a reserve bank to act than what you propose - giving no heed to how their actions will develop in the long-term and simply reacting always in the short-term.

 

That isn't to say that a reserve bank should act often - if they're doing their job properly they should very rarely need to intervene.

[Walsingham]

I don't think you're giving WoD sufficient credit. My read of what he's saying isn't that a central bank shouldn't focus on the long term implications, but that it CANNOT.

 

Until we develop some science of predicting long term wider financial impacts, throwing strategic weight around could (very reasonably) be seen to be inherently destabilising.