Opinion

Edward Hadas

Central bankers’ reward for failure

Edward Hadas
Aug 28, 2014 09:12 UTC

Economic systems that work well do not have many heroes. The elevated status of the world’s central bankers – seen in the close attention paid to their annual get-together last weekend in Jackson Hole, Wyoming – is a sign that the financial system works badly.

Most of the modern economy flourishes without much help from professional economists. That would have pleased John Maynard Keynes. The British economist thought his peers should be like dentists – “humble, competent people” who could deal effectively with specialised problems. Such technicians do in fact take care of the production and distribution of goods and services, the allocation of incomes, the protection of the environment and even the development of new products.

These practical, almost anonymous experts have been a huge success. The prosperity of developed economies is fantastic by any historic standard, and many goods and services are available to rich and poor alike. The system deals fairly easily with innovations, changes in taste, natural disasters, military action and pretty much every sort of disruption – except severe financial problems.

Of course, economic problems remain. In rich countries, the biggest by far is a shortage of good jobs. The recent positive German experience of falling unemployment suggests that the main solution is, as Keynes would have hoped, detailed and bureaucratic. The main tricks have been refinements in the terms and conditions of employment contracts and in the details of the tax and unemployment systems. In other countries, different adjustments are needed, perhaps more equal wages. But what is required is detailed work by economist-dentists.

For all that, most professional economists are still not much like dentists. They generally work with grand theories about such abstract concepts as equilibrium interest rates and economic cycles. They rely on idealised concepts like “the firm,” risk premiums and gross domestic product. Their simplifying equations are impressive, but not very useful.

Not all banks are alike

Edward Hadas
Jul 30, 2014 14:38 UTC

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Competition is fierce for the Bankers’ Bad Behaviour Award. Rate-rigging, client-fleecing, dishonest documentation, reckless trading and exorbitant pay were all widespread before the 2008 financial crisis, and faulty practices have proven remarkably persistent. It sounds like there is something wrong with all banks. The ethical problem, though, is not universal.

Many of today’s lenders do have deep and disconcerting similarities. Their culture has been shaped by a faulty ideology, the cult of the market. They believe that society gains from fierce competition among firms which aim only at maximising returns for shareholders. Leaders of such enterprises only pretend to care about the future for marketing purposes and think they have no ethical responsibilities beyond obeying the letter of the law.

Housing, the ultimate momentum trade

Edward Hadas
Jun 25, 2014 14:47 UTC

What will happen next in the housing market? The question comes up all the time in many countries, for an obvious reason: house prices jump around too fast for the good of the economy.

The price hyperactivity does not follow a uniform pattern around the world. Look at the indices of average prices for dwellings by nation, adjusted for inflation, compiled by the Bank for International Settlements. Since 2000, the real average price is up by 63 percent in the UK, by 49 percent in Switzerland and by 12 percent in the United States. The average Dutch price declined by 7 percent. In Germany, though, there has been so little house price action that BIS could only find data back to 2003. Since then, the average German price is down by a tiny 1 percent in real terms.

Basic economic indicators – GDP growth, employment levels and general price levels – can explain almost none of this variation. The patterns in the American and European economies over the last 13 years have been far more similar than the house price trends.

Bitcoin is a step back not forward

Edward Hadas
Nov 27, 2013 16:00 UTC

The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. However, the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

Has quantitative easing worked?

Edward Hadas
Sep 4, 2013 15:05 UTC

It is nearly five years since the U.S. Federal Reserve slid into quantitative easing, the deployment of artificially created money into the bond market. QE and a prolonged period of near-zero interest rates have been the highlights of post-crisis monetary policy. That era is far from over, but it has lasted long enough for a preliminary judgment of monetary policy – especially as the Fed says it is now preparing to “taper” its bond purchases. My verdict: QE could have been worse, and it should have been better.

We know that policymakers might have done a worse job, because that is what they did in 1929, the last time a cross-border credit boom ended in a cross-border credit bust. Today’s central bankers have done better than their professional ancestors. In the 1930s, central bankers in many countries presided over debilitating deflation, and failed to prevent banking crises. This time, prices have neither collapsed nor exploded, and Lehman Brothers was the only big financial institution to topple.

While monetary policy helped stabilise economic and financial conditions, government bank rescues, large fiscal deficits and the automatic benefits of welfare states all played more important roles. The central banks’ support of weak institutions, and, in the euro zone, of weak governments was more important than their monetary policy.

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