In his baccalaureate address at Princeton this year, the Fed chairman Ben Bernanke defined economics as “a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong.” He added, “About the future, not so much.” Put another way, economics is a science that can mean what economists want it to mean. As W.C. Fields replied when asked whether poker was a game of chance: “Not the way I play it.”
Within two weeks of proffering advice to new Princeton graduates trying to find a job in a hesitant economy, Bernanke may have wished he had taken his own counsel. After issuing a cautiously worded statement about the Fed members’ current thinking on quantitative easing, the chairman gave a press conference and, contrary to his predecessor Alan Greenspan, made the mistake of speaking in plain English.
“The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” he said. “We would continue to reduce the pace of purchases in measured steps through the first half of next year ending purchases around midyear.” Like most financial reporters, and almost every analyst, I have omitted the many conditions Bernanke carefully placed on such an eventuality. Bernanke’s loose tongue tripped mayhem in stock markets, interest rates, bond yields, and currency prices around the world.
Economics isn’t meant to work like this. There is a school of thought in economics that claims that stock prices and other market indicators are the repository of all wisdom. For those who believe that markets not only hold the truth but discount future events that are then reflected in today’s prices, Bernanke’s 700 brief words have highlighted three economic contradictions that govern our lives and take a good deal of ingenuity to untangle.
The first contradicton resembles a circular firing squad that even Quentin Tarantino could not have scripted. On hearing good news, markets usually rise. Yet hearing Bernanke’s catalogue of good news (that the Fed may revert to some form of normal in the money supply), markets in America sank. On hearing bad news, markets tend to drop. Yet the markets had to wait until the Department of Commerce revised gross domestic product downwards before they started to rise again. Markets, buoyed since 2008 by an addiction to the Fed’s cheap money policy, are slumping under the prospect of having the juice turned off. In fact Bernanke did not propose quantitative tightening for at least four years. Nonetheless, the market has prematurely plunged us into economic cold turkey, and it is profoundly unpleasant.