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This dissenter would make a fine Fed chairman

American author and journalist James Grant has published Grant's Interest Rate Observer, a highly regarded bimonthly commentary on the world's financial markets, for almost three decades. Through the 1980s and 1990s, he anticipated a difficult end to the greatest bull market in history, and was – temporarily, at least – proved wrong again and again. "His command of financial history is unparalleled," a critic once said. "His deductive powers are amazing. And his gift of phrase is Churchillian. How could he have been so wrong?" Most investors were obsessed by rewards, Mr. Grant responded – he was obsessed by risk.

Mr. Grant made news the other day, in a footnote kind of way, when Republican presidential candidate Ron Paul named him as his putative choice for chairman of the U.S. Federal Reserve when Ben Bernanke's term ends in 2014. Mr. Paul, a libertarian congressman from Texas with no chance whatsoever of winning the presidency, explained his choice this way: Mr. Grant "would stop printing money." This intriguing explanation suggests that Mr. Paul thinks he must reach beyond professional economists to find a candidate with such a quaint notion of economic restraint.

"I am … a journalist," Mr. Grant said in an interview in 1996, four years before the market meltdowns began, "rather than a theorist." As such, he regarded the market as a force unto itself. For the Western world to go 30 years without a "bracing bear market" was not evidence of market success, he said. Rather, it was proof of market failure. It was fine for the Fed to sustain the great bull market with easy money, but it meant the Fed would be liable for the consequences. "Before this is all over, there will be a big speculative upset, a loss of faith in financial assets and a loss of faith in the steward of financial markets: [then-Fed chairman Alan]Greenspan himself."

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He disavowed the fashionable economic mythologies – especially the mythology that the Fed could manage the global economy by tweaking a single short-term interest rate (when the market itself set countless other interest rates), especially the mythology that the markets were rational.

Mr. Greenspan, Mr. Grant said in that 1996 interview, led Americans to believe that, by manipulating the federal fund rate, he could regulate "the metaphorical temperature of the economy to give us 72 degrees four seasons out of every year." In fact, though, the Fed's only achievement was to perpetuate the great bull market – without warning people that artificial booms invariably produce real busts. And the busts remain an essential part of the economic life cycle: "The purpose of the downside of the business cycle is to make the economy clean and honest again."

And to suppose that markets are rational, Mr. Grant said, "is to forget that people have burned witches, gone to war on a whim, risen to the defence of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed. … To suppose that central banks can manage markets forgets that no state-of-nature economy exists anywhere on Earth. Central banks are not clairvoyant. They cannot direct the future and they make a fundamental mistake when they pretend that they can."

In the final analysis, he said, central banks function as a cross between a large government bureaucracy and the Wizard of Oz. "It is a remarkable thing that people believe the Fed can and does assure peace and prosperity. People believe that the Fed can do anything, up to and including the prevention of tooth decay."

In a review of Mr. Market Miscalculates, a 2008 collection of Mr. Grant's warnings, a critic asked the obvious question: "If Grant could see what was happening this clearly, and warn [the country]of it, how did the financial regulators fail to avert the crisis?" But then Mr. Grant demonstrated what it means to walk alone – in a time when (as George Steiner, the philosopher, once put it) all God's creatures moved in herds.

The fact is, James Grant would make a fine chairman of the Federal Reserve – although he might not accept the appointment. "Yes," he confirmed when a newspaper asked him whether he knew of Mr. Paul's announcement. "Another damn temporary government job." His first was with the U.S. Navy, as a gunner's mate.

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