By Steve Forbes

Excerpt from Forbes.com:

THE BIGGEST, most immediate obstacle to a vigorous recovery for the U.S. and global economies is the disastrous monetary policies of the major central banks, most notably the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BOJ) and the Bank of England (BOE). Their policies of quantitative easing (QE) and zero interest rates have massively distorted global credit markets and severely hobbled recovery from the 2008–09 economic crisis. Their actions have not only stood in the way of a genuine economic revival but also persuaded governments to put off badly needed structural reforms, because stimulus from easy money would do the job instead!

The manifest failure of these institutions to spark a genuine economic revival has finally begun to generate a much-needed examination of what has gone wrong. Recognizing that there’s a major problem is the first essential step in coming up with solutions and reforms.

One notable sign of this new self-doubt was a recent article in the Wall Street Journal entitled “Fed Stumbles Fueled Populism: Three key miscues by the bank since the financial crisis add to public disillusion with institutions.” Written by Jon Hilsenrath, a reporter with deep sources inside the Fed, the piece discusses what officials there think are the factors that have made mincemeat of their efforts to rekindle economic growth.

Not surprisingly, the insiders’ analysis is way off the mark, since their assumptions about money and the economy are fundamentally flawed. But the Fed’s insufferable, we-know-it-all arrogance has taken a long-overdue hit, opening up the possibility of a productive examination next year. The House has already passed legislation long pushed by Representative Kevin Brady (R–Tex.) that would set up a bipartisan commission to conduct a thorough study of monetary policy. The Senate should quickly follow suit.

The three miscues identified by Fed officials and discussed in the article–its computer model “missed signs that a more complex financial system had become vulnerable to financial bubbles,” the Fed was “blinded to a long-running slowdown in the growth of worker productivity,” and “inflation hasn’t responded to the ups and downs of the job market in the way the Fed expected”–show why this overrated institution has been so flummoxed by events.

Take inflation. Our central bank still subscribes to the long-discredited idea, dubbed the Phillips curve, that inflation goes up when unemployment goes down and moves down when unemployment rises. Events have repeatedly demonstrated the falsity of this alleged tradeoff, but the Fed has rarely let reality get in the way of theory.

Read more at Forbes.com.

Photo Credit: Gage Skidmore