Blan(char)d on financial markets

Olivier Blanchard, former head of Research at the International Monetary Fund is now at the Peterson Institute. His post on the recent stock market action is amusing at one level and thoroughly useless, at another level. If I may add, it borders on the ludicrous, in fact.

It is evident that it has been written by a thoroughbred academic who has no grasp of financial markets. As stocks fall, Mr. Blanchard thinks that it is due to investors’ herding behaviour. As they rose, …? What drove them? Fundamentals?

Apparently, China is not collapsing. How does he know? Perhaps, in his book, every day confessions of activists, lawyers and others and disappearances of businessmen and booksellers are normal, trivial occurrences and do not suggest that something bigger and more worrying is afoot.

Real GDP growth is boosted by deflation and nominal GDP growth has no bearing to corporate revenue growth. The central bank has asked banks to limit sale of foreign exchange to multinationals and some banks have been stopped from participating in cross-border yuan transactions for some months. So, one presumes that all of these are business-as-usual for Mr. Blanchard.

In the United States, when central banks’ liquidity and stock buybacks drove stock prices, there was no herding. It was all very fundamentally driven. Now that stock prices are declining, they are just herd-like behaviour.

The commentary reveals one thing. The level of understanding , or more precisely, the lack thereof, of theĀ economic reality and its relationship to financial markets displayed by policymakers (ex and current) has one important message for us.

We now know why most of these academic-economists do not acknowledge the consequences of policy actions on financial markets and the impact that asset price movements have on the real economy. They have no clue and they do not seem to have invested any effort in removing that lacuna.

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3 thoughts on “Blan(char)d on financial markets

  1. There are two worlds – one of macro and other of finance. Both are mostly ignorant of each other and are surprised especially after the crisis how the two are so badly interconnected.

    The root cause is the education. Take a typical finance course and there is very little macro. Mostly around balance sheets and financials assuming economic stability forever. Then take a typical econ course and it shall be without any bal sheets, financials etc. Just plain economic forces and all that gyan.

    To top it all both the courses are obviously very very short on history. We are all trained to be these demi gods who know it all and made to believe all this is modern and real gifts to mankind. We fail to figure how much of economics and finance is so historical that it is better to call it ancient.

    But then this is how it goes.

    Like

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