Attention spans are short, particularly in newsrooms. The past is so stale, and outlets need exciting new click bait. So amidst the latest headlines it’s easy to lose track of larger patterns. Remember how worried everyone was back in January about the plunging stock market? It dominated the news agenda and it seemed how nobody could talk about anything else for weeks?
It gets little or no attention (at least from most journalists), but the market has of course come all the way back. The fear has dissipated. The panic that gripped everyone for weeks is gone. For now.
Of course that was statistically more likely, as I said at the time. It takes no great skill to say that: serious 2008-style panics are also very rare. The deeper concern among markets, I suggested, was more likely that policymakers were out of ammunition. But that might not matter so much, either.
So consider this: it’s difficult to argue that the stock market recovery since January has anything to do with policymakers anywhere. No-one saved the day. There was no committee to save the world. The recovery just happened, despite the fact that none of the problems people worried about – a fragile US recovery, slowdown in China, tension in the Middle East – have been resolved. The risks are still there. Perhaps the ECB expanded QE – but there are doubts about its impact even on European bonds. The panic subsided, the media found new breathless urgent stories, people moved on.
The conclusion? Financial markets and the wider economy do have some inherent stabilizing forces, at least in the short run. Not everything has to be planned or controlled by officials and ministers. Control is less necessary than we think. But the more difficult corollary is we have less control than we usually think as well. The economy is a complex dynamic system which is only loosely coupled to our intentions.
There are limited situations where policy input is crucial, most especially bank runs or other liquidity problems. Bagehot laid out the heart of modern central banking in 1873; if you have a panic, lend freely on good collateral. The libertarian claim that markets are always optimal and right is therefore… wrong. Intervention is sometimes needed.
But policymakers are usually not as important as they sometimes like to think, either. We sometimes like to think someone important is in charge and issuing orders (or at least open to blame later) but much of it is just theatrics. Often the most important things are not conscious deliberate choices, but underlying processes and feedback loops. It helps to spot those at work. But it makes for a less vivid, personalized story.