So as we all dig ourselves out from the snow on the East Coast, the S&P is sliding again. There’s no sign of hibernation from the bears. In fact, there seems to be an unusual amount of pessimism and angst out there among professional investors, and wider unease among the public which shows up in support for populist or socialist candidates in the Presidential race.
So how much should we worry? Is it time to plunge our head in a snowdrift and hope for the best? Let’s take the positive view first, and then go to the dark side.
So far the stock market slide is nothing out of the ordinary, of course, uncomfortable and morale-deflating as it is. We usually get a 10% correction in equity prices every two years or so, based on the historical record. So far it’s a bear cub, rather than a raging grizzly.
Let’s say it gets worse from here. 20% corrections are more lumpy in when they occur, but the long term average is they hit every 3 1/2 years or so. That’s a definite scrape from the bear, but not life-threatening. And we’re still very far away from that.
50% or more plunges, like 2008, are extremely rare, far out the tail of the probability distribution, occurring every generation. Or two. Or three. But because we have painful memories of the most recent collapse, press stories about “worse than 2008” sell newspapers right now. Everything looks dangerous, but just like major earthquakes or hurricanes, it is likely to be decades before another hits us.
Putting this together, the most likely outcome, just in bare statistical terms, is a kind of regression to the mean and therefore recovery rather than another 2008-style catastrophe. That happens much more often in situations like this than a further slide to doom.
The trouble is frequency statistics can mislead. What if something more fundamental is broken? What if there’s cumulative damage? There are always plenty of “This time it’s different” arguments for potential disaster when markets are weak.
So what is different right now? What is so deep-seated and cumulative it could put us in 50% territory?
The main cause of recent market weakness appears to be the slide in oil prices, as well as concerns about a slowdown in China with knock-on effects on commodity producers. Add to those multiple pressures on emerging markets the recent Fed rate rise, which may have disproportionate impact on the outer fringes of the dollar zone.
Yet oil and commodity price swings are anything but unusual. A decline in oil prices is bad for the energy sector but good for just about everyone else in the major western economies. The same applies to a first Fed rate rise in a cycle, even if it does tend to upset markets.
And it isn’t at all clear yet that China really has had a ‘hard landing’, as opposed to volatility on its equity markets. Many people have lost their shirts predicting collapse in the Chinese economy over the last ten or fifteen years.
There is clearly a massive debt hangover, and massive surplus capacity. Let’s affirm it: China has plenty of problems. But it could be a chronic gradual headache for years, rather than a spectacular meltdown which causes the whole world economy to crash. Or a painful temporary interlude, like the many spectacular crashes as the US nonetheless rose to the pinnacle of the world economy between 1865 and 1914.
The same applies to tension in the Middle East. There is obviously a heightened chance of serious conflict, as low oil prices cut budgets and the Saudis are increasingly fretful about Iranian resurgence. But that too could be a chronic, slow-moving problem rather than an immediate hot war. Sunni-Shia tensions date back to before 680AD, after all. This is not unprecedented or unusual territory. “Trouble in the Middle East” is barely even news these days. And if a ship does get sunk or riots break out in a smaller Gulf state, oil is likely to spike – offsetting other worries.
None of this is likely to derail the US economy. It’s compatible with a rotation in economic activity from emerging markets towards the US, rather than a collapse in the world economy. On this story, the US with its relatively minimal exposure to foreign weakness takes over its usual role as the ‘locomotive’ pulling much of the rest of the world economy. Safe-haven capital flows to the US, interest rates rise as the Fed normalizes, the dollar accordingly rises giving a boost to exporters in other countries, and the locomotive is on its way.
Sure enough, there are some reasons to doubt that it is happening just yet – American consumers may be saving some of the dollars they are not spending at the gas pump, or driving more miles than before. But there is no reason to despair, or disbelieve altogether than the US is not going to gain significant impetus from lower energy prices before long.
There are other reasons many people worry about western economies, most notably rising inequality and technological threats to labor. There may be hidden bubbles after all the monetary liquidity we’ve had washing around. I’ll look at those another time – but there’s no reason to think that markets have suddenly become much more concerned about these explanations since New Year’s Day.
The deeper, different problem
Instead, the most interesting possibility is markets are concerned at a deeper level about what we can call the ammunition argument. Let’s say any of these potential threats materializes. We don’t have to predict which one, or time it to the day. Then what?
The US recovery is still fragile. The EU is beset by problems of its own making. The central banks are already at or extremely near the zero lower bound for conventional policy. Fiscal policy is more constrained by the massive buildup of debt from the last major collapse. There is much more suspicion (especially in the US Congress) about bank rescues or lender-of-last resort functions, including more legal chains on Fed actions in a crisis.
So if something does go wrong – the Fed misjudges the strength of the recovery and raises rates too much, say, a Chinese credit crisis leads to emerging market commodity disasters which cause strains in European banks who have lent too much money to middle-income countries – there is no ammunition in the locker.
If we take out the rifle to defend ourselves agains the charging bear, we’ll just hear a muted empty “click” and the bear’s jaws will close on our throat. Unlike any other potential crisis in the last hundred years, we’re defenseless.
On this argument, no-one can really predict the stock market (or the Middle East). It’s not a matter of predicting specific outcomes. But if anything goes wrong, we’re bear food. Talk to Murphy about his law.
And then? This is the deeper fear. Policymakers can’t do anything. They may stage a few theatrics, write “bang” on a piece of paper and wave it at the bear, perhaps. And whatever they do, they’ll likely mess it up. (They’ll probably misspell “bang”). It’s also linked to wider suspicions that elites don’t know what they’re doing.
This ammunition argument is the really important question, and deserves more consideration in the next post. It’s probably not true, but it’s a serious argument.
I’ve often talked about how people change their mind in an uneven, misshapen way. One common pattern is to leap to conclusions on the basis of limited and distorted initial information. That then becomes the frame through which subsequent events are interpreted. It is much more difficult for people to change their mind once those initial pieces of information have solidified, even if the first reports turn out to be wrong.
This often plagues intelligence analysis of volatile economic and political developments. Richard Heuer wrote The Psychology of Intelligence Analysis for the CIA, which is now declassified.
People form impressions on the basis of very little information, but once formed, they do not reject or change them unless they obtain rather solid evidence. Analysts might seek to limit the adverse impact of this tendency by suspending judgment for as long as possible as new information is being received. ..
Moreover, the intelligence analyst is among the first to look at new problems at an early stage when the evidence is very fuzzy indeed. The analyst then follows a problem as additional increments of evidence are received and the picture gradually clarifies–as happened with test subjects in the experiment demonstrating that initial exposure to blurred stimuli interferes with accurate perception even after more and better information becomes available.
The receipt of information in small increments over time also facilitates assimilation of this information into the analyst’s existing views. No one item of information may be sufficient to prompt the analyst to change a previous view. The cumulative message inherent in many pieces of information may be significant but is attenuated when this information is not examined as a whole.
Exactly the same thing applies to financial crises. That’s a particular danger with emerging market crises, where traders and investment managers in developed markets often have little or no familiarity with the underlying economic and political context in a country. There is usually a mad market scramble to learn the basic dynamics of the country in question as soon as it hits the headlines – who leads the main parties, how many months import cover in the reserves, the state of the capital account. (The best first step is almost always the IMF Article IV and staff reports.) Traders jump to becoming instant experts on the banking structure of Cyprus or political maneuvers in Thailand.
When the next EM panic hits, it is essential to be very alert to the quality of the initial information before you lock in a view. There is a temptation to want to appear fully informed and decisive too early, and then spend the remainder of the crisis trying to catch up and fix initial errors.
It also pays to remember country analysts with deep knowledge of local dynamics are frequently the most surprised by developments. (Recall how many Sovietologists predicted the downfall of the USSR.)
People make characteristic mistakes in dealing with crises, but it is possible to recognize many of them in advance.
A few days of volatility in emerging markets is enough to bring the bears out in force again. But some short-term correction is natural and inevitable. We will see a rotation from EM back to developed markets as the US (slowly) recovers, and short-term portfolio flows often exaggerate that transition.
The issue is whether there is any case to be more fearful: are tremors in EM the first sign of broader global macro problems?
It reminds me of 1997-1998, when I was working on UK EM/IMF policy at the Bank of England during the Asia crisis. Events were much more dramatic then than we have seen in 2014 so far, but there was little impact on the US at the time.
Markets sometimes forget that Fed tapering is good news, net net. Any sustainable recovery in the US is going to mean less addition of liquidity, and ultimately rises in Fed funds.
At some point, the US patient has to come off the emergency central bank-administered intravenous drugs, and get up and walk. There may be withdrawal symptoms in some bubbly EM economies, but that’s part of a return to health.
What could go wrong? This is a good take from the Economist:
… there are two things to watch for signs that the present panic might morph into something much nastier. First the streets—for more social unrest and political gridlock. And then the banks—for any sign that their books are rotten.
The same applies to the eurozone, incidentally.
Short-term volatility could ignite or highlight deeper structural problem. After a liquidity binge local EM financial systems are likely riddled with problems. That obviously applies to China, which has deferred some of its problems with a vast credit boom.
Everyone knows China’s growth model has to transition from a low- to middle-income economy, with less growth coming from simply adding more cheap peasant labor to basic manufacturing. The key question is whether the transition will be gradual, or abrupt. For now, I’d count on gradual.
The base case is continued US and wider global recovery. The current EM volatility is not enough to upset that. But signs of deeper financial system problems in China or Europe, or serious problems with political legitimacy would be much more important than short-run exchange rate or local stock market volatility.
I've been talking about how, despite the crazy mess of the government shutdown, the US political system manages to be adaptable and successful over time. This is highly important to markets when the stakes are default, trillion-dollar economic disruptions or systemic breakdown.
The trouble is democracies also get complacent, says this article in the Guardian by David Runciman, a Cambridge academic who has just written a book on the subject of democratic adaptability.
Democracies make more mistakes, Runciman says, but they correct them quicker, too. Toqueville first noticed this in Democracy in America in the 1830s.
The messiness, chaos and frustration of the process means the media and intellectual elites always tend to look on dictatorships with a wry kind of envy, however. At least the Chinese government can get things done in a rational way, they think. People said the same about Ludendorff in the First World War, Mussolini in the 1930s, and the Soviet Union in the 1960s.
But, Runciman says, this can also make democracies too complacent, too. We blithely walked into the 2008 crisis, for example, and have done very little to tackle the underlying causes since.
How to steer a course between unwarranted complacency and unhelpful impatience is the democratic predicament. It is so difficult because countering complacency sounds impatient and countering impatience sounds complacent. This is the confidence trap, and there is no easy way out. ..The pattern of democratic life is to drift into impending disaster and then to stumble out of it.
This is a well-taken point. If you play chicken, there is a risk that one side will miscalculate and you crash in a fiery wreck. And some mistakes cannot be quickly fixed.
That reinforced the importance of looking at misperception, however. Recognizing miscalculation, miscommunication, misunderstanding have to be central for market people trying to make sense of it all. Small miscalculations can have epic consequences.
Clearly the Fed decision not to taper came as a surprise to almost everybody in the market, including me. I had thought the data was too mixed to justify moving in itself. But if the Fed had the market calmly expecting as taper, the advantages of avoiding market disruption with a tiny move were worth it.
Instead, the Fed focused on the mixed data, and ignored the market expectation. Why did they make that judgment?
In normal circumstances, the Fed pays attention to market expectations and tries to shape them, but sees it as at best one factor. “Markets go up, markets go down”, they typically say with a shrug. It's their job to focus on the real economy instead of worrying about Wall St. Other central banks are even less inhibited about surprising the markets.
So was this a case of the blind spot of the market thinking it was more important that it in fact was, or not enough “outside view” of how typically the Fed pays attention to markets? Maybe.
Instead, I think it's evidently at root a different judgment of the risks of market disruption, compared to the lingering risks of economic weakness. Why should market expectations be more important than mixed data in this case?
Tiger or kitten
It is easy to dismiss claims of hypothetical negative market reactions, or point out “bond market vigilantes” have not reacted to massive government fiscal deficits and historically loose monetary policy since 2008. This is the Paul Krugman view, for example. The bond market is a kitten, that must defer to the views of experts such as himself.
But we are at a historically dangerous point with bond markets. We are at the end of thirty years of generally falling interest rates, which of course raises the price of bonds. Rising yields means losses on bond market portfolios. That means there is more risk that people will dump them , driving yields up even further.
And this comes at a time when there is chronic oversupply of government debt, because of the stimulus programs and deficits of recent years. That hasn't led to a steep rise in yields in large part because QE means the Fed has been buying up a large proportion of the total US bond market.
Banks, especially in Europe, have also been stuffed to obesity levels with their government debt, so much so that a steep rise in yields will cause problems in the banking system.
Fortunately, inflation is not a worry for now (inflation is disastrous for fixed -rate bonds). But the Fed is so far away from normal interest rates that any sign of strong growth or inflation could make people dump bonds.
In other words, the bond market is more stretched than it has been in decades, perhaps ever. A historically vast bubble could pop at some point.
The bond markets are more a sleeping tiger than a kitten, and it could suddenly wake up with a very cranky sore head. The Fed just opened the cage door, and made it a very confused and angry beast.
The US is not Greece, or Italy. Solvency is not an issue. But markets often gap , and behave in very binary risk-on, risk-off ways, as I argued here. A snowball can turn into an avalanche. Greenspan liked to point out how markets adjusted 400bp over a few months in 1979.
The Fed actually can't do much about unemployment directly. The chain of the transmission mechanism is very long and tenuous, especially when credit is gummed up. But it affects bond markets instantaneously. The 10-year plunged 12 bp at 2pm yesterday. Equities and emerging markets soared, on signs of looser policy.
The chance of a major financial disaster also rose significantly yesterday. I had thought the Fed would be more sensitive to that.
That's why I thought even if the data was mixed, a reduction of $10 bn or so in tapering would take much of the risk of bond market disruption off the table for now. A difference of $10bn is far too small to make any perceptible difference to unemployment. But it would have made an enormous perceptual difference in bond markets, reducing the chance of sharp rises in yields which would do disproportionate damage to the real economy. And the Fed could then have waited several months before moving again, if it wished to respond to labor market worries.
Remember, markets gap. They ignore risks and then go slightly nuts later.
One other thing transfixing markets is Obama’s choice for the next Fed Chair, which is expected in the next few weeks. Larry Summers and Janet Yellen are the main contenders.
If it was me, I’d pick Yellen. I’ve met many central bankers over the years, and so I can say she is one of the most astute and skilled. She has led the FOMC’s thinking on communication, which is of course the Fed’s main tool for the next few years. She has years of practical experience in the Fed system. She has the kind of searching curiosity and intellectual sharpness that lead her to ask the right questions. And she has the gravitas and presence to deal with Congress and the markets.
But the betting seems to be running in favor of Summers, despite his long-time reputation for rubbing people the wrong way. It appears the President likes him, and appreciated his advice in the worst of the crisis.
Summers is notoriously brilliant, and would do a perfectly good job as Chairman – even if he provokes some internal turbulence and major revolts on the FOMC. The institution itself has continuity and stability and can handle a few tantrums.
I don’t think in practice there would be much difference between Yellen and Summers on monetary policy. Yellen has more of a dovish reputation, but I am convinced she would switch course immediately if she saw any serious risk of inflation. She is a dove with fangs.
That means the main differences would be on handling the financial system. And here is where there is a limit to what any Fed Chairman can do, and you can take that from Larry Summers himself.
Opening the world on Monday morning (or not)
So here’s a different take, in his own words. I was at a conference two years ago, run by the Economist, where Summers, Don Kohn and some other heavyweights simulated the decisions they’d take in another major financial crisis. It was fascinating and chilling. It’s all on video, and worth watching if you ever have an hour or two to devote to getitng yourself worried about the state of the world. It’s also a very good way to get a sense of how Summers behaves (on a good day.)
Here’s the upshot. They tried to prevent major financial collapse before the markets opened on a simulated Monday. And they ran out of time to do it. The new restrictions in Dodd-Frank got in the way of organizing a rescue in time. These problems would affect any Fed Chair, not to mention head of FDIC and Treasury and OCC.
What does this mean? Even the best Fed chair is only as good as the system. And there are deep potential problems in the system for next time.
No-one usually intends for crises to happen. Often it is the inconsequential, infrastructural thing that determine whether minor problems turn into catastrophes. Mobilization railway timetables in the First World War, rules of engagement for blockades in the Cuban Missile crisis, delayed decodings: these are the things that make the difference.
So we need to pay attention to the institutions and the systems, not just the individual at the top. The real problem may be excess complexity.
A stew of different factors – Chinese data, time for a pullback in Japan's soaring equity market, algorithmic amplification of initial moves – influenced the sudden outbreak of market volatility in the last day. But one if the main factors was market confusion over Bernanke's testimony.
The reason for confusion is there are two opposite factors at work here.
The first is the Fed is well aware that the equity market is talking itself into a massive rout when QE ends, and the bond market could adjust with brutal speed to any drop-off on Fed purchases as well.
Vaccination is one strategy to try to minimize the agony of catching a serious disease. Small, benign doses may strengthen resistance to the life-threatening fever you might otherwise catch later on. Hence the Fed talk of tapering, of reversability of moves, and of pragmatic adjustment to data. A little bit of talk now may prepare the market for eventual actual tightening as the recovery proceeds.
Early inoculation may also reduce the chance of eventual financial instability caused by people complacently believing the Fed is stuck with its current policy for months or years to come. A little two-way risk is a good thing to prevent asset bubbles developing.
Of course, some of my friends believe the market is too binary for such nuance to work effectively. Maybe that is right. But it doesn't mean the Fed is not going to try to reduce that binary, manic-depressive aspect of market behavior if it can. The message is the first withdrawal of stimulus is going to happen before long, and it does not entail the end of the world.
The second, and opposite factor is Fed worry about premature tightening killing the recovery. In fact, the most important element in the testimony was Bernanke's specific link of QE to mitigating deflation risk.
In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee's 2 percent longer-run objective.
Note he didn't use the euphemism of puppy “disinflation”, but a claim that the grown-up savage wolf of “incipient deflation” is kept from the door by current policy.
I talked about deflation here. The Fed will do virtually anything to stop deflation. That alone explains caution about premature tightening, regardless of any labor market thresholds. Even if there is a little more momentum in the domestic economy and a pick-up in the labor market, any sign of further falls in inflation (broadly defined) or unmoored inflation expectations would make the FOMC not just cautious but terrified.
Thankfully, the news in recent months is good in that department, which is why Fed officials can talk a little more about tapering.
So the FOMC has a difficult communication challenge: stop people doing stupid things because of expectations of prolonged low rates; prepare the way for tightening when the time is right by some tactical inoculation; but also reassure they will not undermine the real economy and anchored inflation expectations by tightening too soon. All parts of the message are necessary.
The most likely outcome is still a studied tiny slackening in QE purchases by late summer, perhaps couched as a technical experiment or one-off adjustment, in order to minimize the chances the market will panic and develop a serious fever.
But if the Fed is not sure the deflation monster is chained up, and the US economy is still fragile – and if Europe and China look weaker – then Bernanke and company are going to be cautious about any substantive withdrawal of monetary stimulus.
This BIS speech by Jaime Caruana last week is deservedly getting a lot of attention. He says we are approaching the limits of what current central bank policy can do, and that exiting from current policy could be very difficult.
The Fed and other central banks have been decisive in tackling the crisis so far, pumping massive doses of monetary meds into the patient. But (to put my words in his mouth) you can't live forever in the ER.
The BIS , founded as “the central bank's central bank” in Basel, Switzerland, has evolved into a uniquely valuable institution with its own distinctive house perspective. I visited Basel many times, and always came away impressed with both their keen economic originality and insight, and practical market and operational wisdom. It is a rare combination. These people are the best, and they are worth paying attention to.
The speech is a reiteration of many themes the BIS has been talking about for a decade or longer, including when they questioned policy in 2005-7.
Above all, he says, the central banks must be aware of their limits. QE cannot fix problems. Monetary policy can only buy time, at best, not fix fiscal or structural problems. (I've argued much the same here.)
If a medicine does not work as expected, it's not necessarily because the dosage was too low. Maybe instead the overall treatment, and the role of the medicine within it, should be reconsidered. Most likely something else is needed.
But instead, prolonged easy monetary policy
.. gives borrowers, financial institutions and policymakers an incentive to keep “kicking the can down the road”, delaying necessary repair and reform.
In other words, Congress is doing little or nothing useful, and the same applies even more so in Europe.
In the meantime, QE creates unwelcome side effects, such as undermining savings returns and missal locating resources. It leads to global spillovers. And it is a risk to the central banks themselves.
Let me insist here that results in the real economy will depend on the extent that needed repair and reforms are carried out. Results will depend to a large extent on factors that are not under central banks' control. A vicious circle can develop, with a widening gap between what central banks are expected to deliver and what they actually can deliver. This may ultimately undermine their credibility and, with it, their legitimacy and effectiveness
Structural fixes are too slow in most economies. But we are going to have to withdraw the drug of QE at some point, before the side-effects become dangerous.
And there could be serious withdrawal symptoms. Caruana strikes a highly worried note about the challenges of the exit from QE and low interest rates.
All this underscores the importance of being prepared for the eventual exit from the extraordinarily accommodative monetary conditions that have prevailed for the past several years. While central banks surely have all the tools available to technically engineer an exit, it cannot be taken for granted that it will be smooth. The global bond market crash of 1994 is a cautionary tale of the risks involved in exiting from a prolonged period of low interest rates.
At the same time, we also have to recognise that the situation today is rather different from back then in at least one critical dimension: central banks are much more transparent about their policy intentions now and their communication is much better. This should reduce the risk of major policy surprises. That said, the policy environment central banks have to grapple with today is also much more complex in some important dimensions. Record levels of debt have been issued at very low interest rates. Central banks, at least for now, are playing an important, if not dominant, role in key financial market segments. So, as interest rates rise and central banks pare back and eventually reverse large-scale asset purchases, financial markets will have much to digest.
This means a bond market crash is a distinct possibility. I worry about this. Recovery is on track in the US, but it could be bumpy.
Many economists still worry about premature withdrawal of QE, recalling an overeager Fed acted too soon in 1937.
That is why the Fed is taking baby steps – talking about tapering, emphasizing that it can go two ways to minimize the possibility of a massive shock from a first move, and talking about financial stability risks. You don't want to wait so long that the first move has to be a big one. Financial markets have to get used to the idea.
Warren Buffett was in fine form at the Berkshire Hathaway Annual Meeting in Omaha over the weekend:
In response to a question on the Federal Reserve’s massive quantitative easing program, Buffett said it will be “the shot heard around the world” when the central bank first indicates it will stop buying financial assets or start selling from their now enormous $3.4 trillion balance sheet. “we’re in uncharted territory … that’s a lot of securities.”
Because that liquidity has been supporting stock prices, people in the market will immediately reevaluate their positions.
Even so, he said, “the world won’t end” and the market will survive. He repeated his long-held “faith” in Fed chief Ben Bernanke and said “we have benefited significantly, and the country has benefited significantly” by the Fed’s actions.
Conceding the Fed’s buying program is a “huge experiment,” Buffett said, “This is like watching a good movie, and I do not know the end.”
If the economy is picking up, the Fed is going to want to wean the markets off QE. It wouldn’t be a surprise if the next meeting statement on June 19 or its minutes give a stronger verbal indication tapering is on the way in late summer.
I don’t believe liquidity is the only reason the stock market has risen. But some serious market turbulence is ironically going to be an inescapable part of recovery, because so many people do believe that.
Usually speeches and papers zip right by the market’s attention. Most economic speeches have a half life of the second or two it takes traders to read the headlines on Bloomberg. And that is already late and stale: the algorithms have already bought and sold several times in the first two hundred microseconds after it hits the wires.
But sometimes it’s worth absorbing things in more depth, to get a feel for the shape of the discussion. The Rethinking Macro Policy conference at the IMF Spring Meetings two weeks ago is one of those things.
If you are looking for conspiracies about the world economy – and plenty do – a high level discussion session at the Spring Meetings is one of the most likely places to find them. In the past the meetings have had to be ringed by police to prevent Occupy and their predecessors breaking in. Major riots sometimes happen at the Annual Meetings.
So what goes on behind these closed doors? See for yourself, on open video feed. The truth is most policy discussion is relatively open now, except in the case of short-run announcements or the need to protect specific sources.
You can be a fly on the wall, with the advantage that you can stop the video whenever you want (and I’ve sat through many very long economic conferences over the years). You can skip the downright tedious parts.
The upshot is a new humility. IMF Chief Economist Oliver Blanchard wrote an introductory paper with his colleagues , which is striking for its pessimism about obvious right answers. Even five years on from the crisis, they say, “the contours of a new macroeconomic policy consensus remain unclear.” There is no real chart: policymakers are “navigating by sight.”
George Akerlof (a Nobel winner) explains the state of the world economy like this in one session: the financial crisis is like a cat up a tree. Everyone has a different view of how we’ll get it down. “My view is the cat is going to fall, and I don’t know what to do about it,” he says. But at least policy reaction to the crisis has at least been better than predicting it in the first place, as we haven’t got ourselves into another great depression.
But is all the secret stuff conducted in the margins and corridors? There’s little that stays secret for long these days. For example, the Federal Reserve publishes its meeting minutes two weeks later and the full word-for-word transcripts after five years.
Of course, senior policymakers will frequently be guarded in press interviews, for fear of being at the wrong end of a “story”. But you will generally find they express clearly what they think in speeches, papers and other material.
The trick is to be able to understand the world from their point of view, as well as your point of view. That’s much more difficult than looking at words in isolation. The deep secrets of economic policy hide in plain sight, because people as a rule don’t take the time to notice them.