Reuters blog archive
from Anatole Kaletsky:
Can economists contribute anything useful to our understanding of politics, business and finance in the real world?
I raise this question having spent last weekend in Toronto at the annual conference of the Institute for New Economic Thinking, a foundation created in 2009 in response to the failure of modern economics in the global financial crisis (whose board I currently chair). Unfortunately, the question raised above is as troubling today as it was in November 2008, when Britain’s Queen Elizabeth famously stunned the head of the London School of Economics by asking faux naively, “But why did nobody foresee this [economic collapse]?”
As John Maynard Keynes observed in 1936, when he challenged the economic orthodoxies that were aggravating the Great Depression: “The ideas of economists, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
This remark is as relevant today as in 1936. Joseph E. Stiglitz, the Nobel laureate, asked rhetorically in Toronto: “Why are central banks and governments still trying to predict the effects of their policies with an economic model that is manifestly absurd?”
From financial forecasters to the International Monetary Fund, calls for the European Central Bank to do more to support the euro zone recovery are growing louder.
With inflation well below the ECB’s 2 percent target ceiling and continuing to fall, 20 of 53 economists in a Reuters Poll conducted last week said the bank was wrong to leave policy unchanged at recent meetings and should do more when it meets on Thursday.
Euro zone inflation has dipped again and some forecasters are hedging their bets on the policy response by saying the European Central Bank could either cut rates this week or sometime in the next two months.
That lack of conviction, although not a recent phenomenon, is driven by memory of the ECB's surprise cut in November after a similar drop in inflation and a nagging belief that things have not worsened enough in the interim to warrant another.
From Turkey, which hiked its overnight lending rate by an astonishing 425 basis points in an emergency meeting on Tuesday, to India which delivered a surprise repo rate hike a day earlier, central banks are increasingly looking to "shock and awe" markets into submission with their policy decisions.
Next time you ask an economist a question about the euro zone, be sure to enquire where their head office is based.
London? New York? Expect a pessimistic response on euro zone matters.
Frankfurt? Paris? Happier days are coming soon for the currency union.
So that's oversimplifying matters slightly - but as we've seen time over, institutions based outside the euro zone are likely to be gloomier about its prospects, and those based inside it are more likely to look on the bright side.
Here's some of the top reasons from a 1999 Reuters poll on why a housing bubble wouldn't form, which are re-appearing 14 years later.
The Bank of England will stop a bubble forming
2013: "If there's another bubble, the Bank of England and the Government of course have means by which we can anticipate that and ensure that that doesn't happen again." - Danny Alexander, chief secretary to the UK Treasury.
1999 Reuters poll: "Economists and property specialists say the Bank of England won't let another inflationary boom happen. The Bank has already said it will monitor house prices closely. 'It's unlikely to become inflationary unless the monetary policy stance becomes too loose and that's highly unlikely,' said economist Trevor Williams of Lloyds Bank TSB."
Now Britain's housing market is showing real signs of life, should the government abandon its "Help to Buy" scheme to boost access to the market for homebuyers?
Economists and property analysts polled by Reuters over the last week were split. Two weeks ago, a majority of economists put the chances of another UK housing bubble forming at 50 percent or greater, catalysed by the Help to Buy programme.
from The Great Debate:
Although the Fed announced months ago it is considering pulling back its purchase of assets, unemployment remains historically high. What, if anything, can the government do to get people back to work?
In order to determine the right policy prescription, first we must diagnose what’s causing unemployment. Is the high unemployment due to low demand from the recession, known as cyclical unemployment, or has the world changed and jobs are not coming back, known as structural unemployment? Most likely it’s both. It is impossible to know precisely how much new unemployment is structural and how much is cyclical. This uncertainty has sparked a contentious debate about the nature of unemployment that has been raging since the start of the recession, and lately seems to be hardening into absolutism. The cyclical camp fears that acknowledging an increase in structural unemployment will be used as an excuse to support tightening monetary policy, and gives the government a pass on fixing unemployment. But actually, saying all unemployment is cyclical is what lets the government off too easy. Structural unemployment can be helped with policy, but the solutions take more political will, creativity and leadership. We can lower the structural rate by changing tax incentives to encourage mobility, both job and location, and building a wealth cushion to finance productive job transitions.
Based on the latest U.S. Treasury flows data, it may be time to ditch the textbook theory that says less monetary stimulus means a stronger currency - at least for now.
The problem may just be that the theory doesn't fully account for the situation when your largest creditors - and they are very large - are trying to beat you to the market.
Optimism the Indian economy will soon recover, despite no sign that it is anywhere near doing so, has increasingly led forecasters to overestimate industrial production growth.
Incessant official revisions to the data, after initial forecasts are proved wrong, also mean investors and companies don't have a clear and timely view.