Opinion

Nicholas Wapshott

Fed the wrong line

Nicholas Wapshott
Jun 28, 2013 18:09 UTC

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.

Bernanke sets major challenges for his successor

Nicholas Wapshott
Jun 20, 2013 16:40 UTC

Now comes the hard part. Fed Chairman Ben Bernanke’s announcement that if the conditions are right he will wean the U.S. economy off quantitative easing within a year has already caused consternation in the stock market. Pumping money into the system by buying back government bonds at the rate of $85 billion a month has lately done little good, which is a persuasive reason to wind it down. But getting from here to there without incident is not going to be easy. It was simpler for Howard Hughes to land his gargantuan super-plane, the Spruce Goose.

Flooding the economy with easy money was meant to encourage businesses to borrow and invest. Instead, banks and businesses have ended up hoarding cash, waiting for a recovery to start before they take the plunge. Or the surplus money has been parked in stocks, lifting the market to an unprecedented, unsustainable high. That is what happens when you have a one-trick economic policy, dickering with the money supply and little else. As Keynes liked to say, you can’t get fat by buying a bigger belt. But stopping the flow of cheap money and hinting at an eventual increase in interest rates has consequences and they may be uncomfortable.

The first to get the jitters is the stock market. Even before Bernanke’s announcement, his previous hint that QE would be “tapered” sent a shiver through Wall Street. Now that he is turning off the juice for good, there is general trepidation. The eventual rise in interest rates is making the real estate market nervous, too, which is troublesome as home purchases are driving the still fragile recovery. On the other hand, there is no better time to buy a home. Mortgages will never be as cheap again, unless there is another slump-inducing financial meltdown, so now is the time to buy, or to refinance while interest rates are on the floor. And as the Fed withdraws from the government bonds market, yields are going to soar.

David Cameron takes on the tax havens

Nicholas Wapshott
Jun 19, 2013 15:48 UTC

There is nothing more likely to spark anger than an unfair tax regime. The American Revolution was founded on it. So the discovery that some of the largest and most successful companies in the world — among them Google, Apple, Amazon and Starbucks – have legally minimized the tax they pay, sometimes to as low as zero, in many nations in which they earn the lion’s share of their revenue is causing considerable irritation.

The result was evident at the G8 meeting in Northern Ireland, where Britain’s conservative government, chairing the conference of the world’s richest nations, put making corporation tax fairer at the top of its agenda, after the civil war in Syria. David Cameron, who like most conservatives believes in low taxes, is in a bind.

In an attempt to reduce public borrowing he is imposing high personal taxation on the Brits — lifting “value added” consumption tax to a record  20 percent — but finds that many of the most profitable companies operating in Britain are dodging taxes altogether. He thinks it is unfair. And so do his voters. He is under intense pressure to deliver a solution or he can expect to be turfed out of Downing Street.

Robert Fogel and the economics of good health

Nicholas Wapshott
Jun 13, 2013 21:30 UTC

Robert Fogel, who died this week, won a Nobel for economics by mining historical data and in the process shook up the study of history forever. Just as with cholesterol, it seems there is good data mining and bad data mining. Fogel’s was undoubtedly the good kind.

As a teenager when World War Two was ending, he switched from chemistry and physics to study economics at Cornell because he feared, as did others, that when military spending was withdrawn the economy might retrench and sink back into a reprise of the Great Depression. It didn’t turn out that way.

Governments in the Western world switched from spending money on arms to spending on hospitals and schools and the buoyancy kept another slump at bay until the economy was on its feet. Fascinated by figures, as an academic Fogel applied quantitative methods used in economics to test whether historians’ hunches about the cause and effect of events were correct. His findings led to immense controversy and, eventually, a Nobel Prize.

Buying into Big Brother

Nicholas Wapshott
Jun 12, 2013 16:09 UTC

Whatever high crimes and misdemeanors the National Security Agency leaker Edward Snowden may or may not have perpetrated, he has at least in one regard done us all a favor. He has reminded us that we are all victims of unwarranted and inexcusable invasions of privacy by companies who collect our data as they do business with us.

Some, like Google and Facebook, pose primarily as software companies when their main revenue source, and their main business, is to mine data and sell advertisers access to customers. We knew this already, of course, though it seems many of us would prefer to forget the true nature of the technology firms that have boomed in the last decade. Seduced by their dazzling baubles, we have bought in to Big Brother without truly understanding the true price we are paying and will continue to pay for access to their brave new world.

We may take pity on the idiot schoolboy who uses expletives on Twitter or posts a picture of himself holding a joint at a party only to discover when he looks for a job that a trawl by an HR department has made him unemployable. But even smart people — like the New York mayoral hopeful Anthony Weiner, who sent lewd pictures to strangers — can remember too late that in this wired world we are all being recorded all the time. Yet there is little legal protection from abuse by the companies who collate our personal data and store it for eternity.

The real scandal is jobs

Nicholas Wapshott
Jun 10, 2013 20:06 UTC

Job seekers stand in line to meet with prospective employers at a career fair in New York City, Oct. 24, 2012. REUTERS/Mike Segar

The number of American jobless remains dire.

The latest figures, released Friday, show employment increased by 175,000 in May — but the jobless rate nudged up from 7.5 percent to 7.6 percent. A typical response was the Financial Times, which slipped apparently unwitting ideological commentary into its otherwise bland report, saying the new jobs figure was “a number that will encourage the Fed to start slowing its $85 billion-a-month asset purchases.”

For some, every new indicator is a prompt to bring on more austerity.

A more appropriate response to these new figures is to say that 4.4 million long-term jobless, the 7.9 million with part-time work but looking for a full-time job, the 2.2 million who have taken themselves off the jobless rolls because they cannot find work, and 780,000 who have abandoned looking for work because they believe there is no job for them, is 15.3 million jobless too many.

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