The Other Shoe

My quick-witted friend, Josh May, is a close student of central bank policy in the US and abroad. More than once, he has opened my eyes to something that I was missing.

I told him recently that the side effects of years of super-easy money are not known yet, and that I am expecting the other shoe to drop, some day. This seems, to me, like a pretty safe bet.

He replied, “What if the guy upstairs only has one leg?”

I still think a central bank has two, but, hmmm...

Quote of the Day: Science is Not Advanced by Polling

But such exercises are futile: science is not advanced by polling. If it were, we would still be releasing phlogiston to burn logs and navigating the sky with geocentric maps.

E.O. Wilson, in this NYT piece from 2012.

Is monetary policy a science?

No, it's not. So says William White, in an interview earlier this year.

White is the formerly the head economist at the Bank for International Settlements, in Basel.

Read the whole thing, but here is a short excerpt:

What would help to improve monetary policy? 

I’ve become more and more convinced that the fundamental problem with the central banks – and for that matter with the broader economic community – is this insistence that the economy is a kind of machine that you can describe with many equations.

The reality is, that the economy is a complex adaptive system. Like a forest. The distinction between the monetarists and the Keynesians is nothing compared to this. The difference between all of these models and the kind of insights that you get from working with economies as complex adaptive systems are totally different. That is not yet accepted. 

How does a complex adaptive system function?

If you accept this complexity, then you have to accept a number of things that most central banks have not yet fully incorporated into their thinking. One of them is: these systems break down all the time. If the economy is the most complex adaptive system that mankind has ever created, it will break down on a regular basis. 

Historically it has broken down on a regular basis. And, like the boy scouts, we should be prepared for it. Fact of the matter is, when we went into this crisis, we were not prepared for it. And it’s not much better now. There was no bank insolvency regime, no deposit insurance, no memorandum of understanding – all these things that should have been in place, but they just weren’t.

Proving a Theory by Imagining It to be True

A highlight of the American Economic Association humor session, earlier this month in Boston, was a short talk by Zach Weinersmith. You may know his web cartoon, Saturday Morning Breakfast Cereal.

Weinersmith's talk is to economics what Spinal Tap is to heavy metal rock 'n' roll.

A couple of key quotes:

"I only have about five minutes, so I'm only going to propose one structural change to society." (at 1 min. 23 seconds)

"Having proven the theory both by stating it and by imagining it to be true, I want to move directly to policy implications." (at 6 min.57 seconds).

It's good, and you can watch the video here.

Full disclosure, I appeared earlier on the same bill, as Merle Hazard. I'm hoping no video surfaces of my bit. Hard to judge from the stage, but I do not think my five minutes went over too well. I had better keep my day job.

Zero Interest Rate: Like Quantum Physics

It might be, says William White, formerly the wise and prescient chief economist of the Bank for International Settlements.

When interest rates cannot go lower anymore, when they hit the Zero Lower Bound, monetary policy might work like quantum mechanics. Take this simple example from the world of physics: Classical Newtonian mechanics only work when the mass of a body is big enough. When the mass is too small, you are in quantum mechanics. These are completely different ways of looking at the world. The Zero Lower Bound might be the quantum mechanics of monetary policy. Things just do not operate in the same fashion. If you think things do operate the same way, you might make a very dangerous mistake.

This is from an interview with him last month, in the Swiss newspaper Finanz und Wirtschaft.