Ken’s big miss

Kenneth Rogoff had a op.-ed., in FT on why negative rates should be persisted with. On the day this Op.-Ed. was published, EU stat reported that the Gross Household Savings Rate went up in 2Q2016 to  12.8% – a five-year high.

Also, see the data provided by Bank of America in this blog post in ‘Zerohedge’. The chart is a marvel.

The law of unintended consequences is fully in operation. The learned professor (Ken Rogoff) simply fails to get it and calls those who dare say so ‘illiterate’.

First, he adopts the standard practice of economists: simply assert what cannot be proved or disproved and hence, over time, it would be accepted as a fact:

If central banks had been able to adopt such policies at the height of the financial crisis, for example, it is likely this would have helped stem the fall in employment, output and asset prices.

One of the first things some of us tell students in economics is that counterfactuals are impossible and hence, economic theories are not theories but models. They are not falsifiable because they are context-specific.

We do not know if these policies would have helped or hurt. There is no way of knowing. If anything, the savings data reported by the EU now, points in the opposite direction to what Prof. Rogoff is pointing.

There is no acknowledgement of costs and benefits of his recommended negative rates and unintended consequences. For example, if high denomination cash is banned and if banks charge fees for deposits instead of paying interest, there is no knowing how households would react. We are seeing some evidence of the unintended consequences in the savings data.

As Hans-Werner Sinn argues in his recent ‘Project Syndicate’ piece,  it might be far better to allow the forces of creative destruction to play out and then rebuild, rather than somehow engineer economic growth, but at a high cost in terms of moral hazard, encouraging risky behaviour, asset bubbles, etc.

Adjustment is inevitable and desirable and might pave the way for more durable growth than band-aids such as negative rates.In the period of adjustment, the State can support the really deserving and the poor while the rest make lifestyle adjustments. That is the way forward rather than financial engineering to conjure up economic growth.

Economic growth has been driven by a huge accumulation of debt before and after 2008. Growth cannot be perpetually brought forward through debt. Mervyn King, a former central banker of repute, has accepted that, in his book. It is time academics shed their intellectual straitjackets and egos.

p.s: Emanuel Derman’s tweet on Rogoff’s article is delightful:

If the aim is to support asset prices at any cost, why not simply have price controls and per done with it? [Link]


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