Thanks to Paul Kedrosky’s Infectious Greed, I came across the letter written by Republicans ‘warning’ Mr. Bernanke against any adventurous monetary policy move ahead of the most recent Federal Reserve Open Market Committee Meeting. I wonder how much of an influence that letter had on the Fed deliberations, on top of the continued dissent of three FOMC members themselves. Not that it is going to deter an eventual launch of QE3. But, that is a subject of topic for another occasion and I propose to deal with it in my upcoming MINT column.
Again, thanks to ‘Infectious Greed’, one came across this succinct response by Professor James Hamilton to Daniel Yergin’s piece on peak oil. I have not read the Op-Ed. piece by Daniel Yergin. But, I know for a fact that he has consistently forecasted falling oil prices. One day, he might be right and for a while. Check out the case for ignoring Yergin on the price of crude oil.
Well, as Yves Smith writes in her blog, ‘Naked Capitalism’, the paper by Claudio Borio and Piti Disyatat of the BIS on the role of imbalances in the global financial crisis was not so much blacklisted as ignored. I had downloaded the paper and it still remains in my ‘TO READ’ list. The authors debunk the role of current account imbalances and the consequent excess saving theory that Mr. Bernanke has been peddling for quite some time now, with varying degrees of eloquence.
But, the ‘non-technical’ summary of the paper to be found in this blog post in ‘Naked Capitalism’ is a great read and a MUST READ.
Kedrosky links to a great observation that Nicholas Nassim Taleb had made in a recent Wharton Goldstone Memorial Lecture. That is the virtue of non-action. I have not checked out the video of his talk but these comments are worth thinking about, particularly by the pundits in the US and in the media who cannot have enough of Keynesian interventions:
There’s something called action bias. People think that doing something is necessary. Like in medicine and a lot of places. They don’t understand: you live long by not dying, you win in chess by not losing—by letting the other person lose. So negative investment is not a sissy strategy. It is an active one.
Menzie Chinn has a long post on his blog, ‘Econbrowser’ (co-hosted with Professor James Hamilton), previewing, summarising the conclusions of his book co-authored with Jeffrey Frieden titled, ‘The lost decade – the makings of America’s debt crisis’. One can largely agree with the conclusions on the causes of the crisis that the authors have reached. However, TGS strongly believes that without a mention of ‘hubris and overconfidence on the part of policymakers that they have tamed the business cycles’, no account of the factors that caused the crisis can be deemed complete.
This overconfidence stemmed from overestimating their own abilities while underestimating and ignoring the role of a long decline in commodity prices in ushering in a non-inflationary economic expansion. That was a fortuitous outcome – a combination of several factors. Labour pressure on wages declined as unionisation declined. Policymakers dismissed these factors and exaggerated the role of monetary policy in fine-tuning the amplitude of business cycles. Thus, they transmitted their overconfidence to the financial community with whom they had forged a symbiotic relationship. They took on more leverage and more risk because the cycle had been tamed. Doubtless, regulatory neglect, regulatory arbitrage, forbearance all played a part in this. These are political economy factors.
Also, one cannot fully agree with Menzie Chinn and Jeffrey Frieden that monetary policy was not loose in the period 2002-04. Without recourse to Taylor’s rule, one could easily say that real short-term interest rates during that period were exceptionally low compared to their long-run average. That was led by the US and forced on others who had to do that largely because of the impact on their currencies had they not followed suit. Monetary policy was hence not tight in the Eurozone or in the UK as they write.
As long as we ignore the role of simple and yet all pervasive, universal and eternal human frailties in the crisis and come up with mechanisms that account for these human frailties, we would be doomed to repeat the lost decade.