If only economics had the exactitude of mathematics or physics, we wouldn’t be in the muddle we are in today.
Specify the growth-inflation combination you want and a computer should have told you what liquidity and interest and exchange rates should be.
Alas, things are not so simple. Ask two economists and you will get three opinions on what governments and central banks should do.
In fact, former US President Harry Truman is supposed to have asked for a one-handed economist — so fond his economic advisers were of expressing their opinions as ‘on the one hand’ and ‘on the other’.
One cannot blame him if, in a moment of exasperation, he even ordered one of their hands cut off.
In medieval times, that might have well happened, so valueless are a lot of the prescriptions sloshing around.
True to pattern, there is no agreement on policy. Both in the US Fed and the Bank of England, there are wide divergences of views, with some seeking higher interest rates, some lower and the rest falling in the ‘no change’ camp. The last finally won the day in both institutions.
There is greater unanimity in the ECB, with almost all members in favour of raising rates.
But all EU governments are not so sure it is the right thing to do.
The market wonders if there could be replay of 1987, when the Fed was soft and the German Bundesbank hard on rates, prompting, in short order, a dollar and stock market crash.
And back then, there was no commodity bubble or crises in major global financial institutions to also worry about.
But is managing the present imbroglio only about getting monetary policy and interest rates right? Obviously not.
For, in recent months, the Fed, ECB and Bank of England have stepped in as lenders of last resort to distressed financial institutions, defined to include non-banks and against non-government debt as collateral. The hope was that illiquidity and risk premiums would soon disappear and the markets would soon clear and settle as before. That has been belied.
What next? The Fed has clearly reached the limits of softening.
Given the anaemic state of demand and credit markets, it is not as if it is accommodating inflation with loose monetary policy.
The current situation clearly shows crisis management is not the Fed’s responsibility alone. Recognising this, the US Congress and Senate are starting to take steps to mount a government-initiated rescue of delinquent homeowners and mortgages.
Of course, this is not all. Oil prices must cooperate.
It is not just a central bank story (as is made out to be) but a synthesis of monetary actions, government intervention and a return to normalcy in commodity markets which must see us through.
Specify the growth-inflation combination you want and a computer should have told you what liquidity and interest and exchange rates should be.
Alas, things are not so simple. Ask two economists and you will get three opinions on what governments and central banks should do.
In fact, former US President Harry Truman is supposed to have asked for a one-handed economist — so fond his economic advisers were of expressing their opinions as ‘on the one hand’ and ‘on the other’.
One cannot blame him if, in a moment of exasperation, he even ordered one of their hands cut off.
In medieval times, that might have well happened, so valueless are a lot of the prescriptions sloshing around.
True to pattern, there is no agreement on policy. Both in the US Fed and the Bank of England, there are wide divergences of views, with some seeking higher interest rates, some lower and the rest falling in the ‘no change’ camp. The last finally won the day in both institutions.
There is greater unanimity in the ECB, with almost all members in favour of raising rates.
But all EU governments are not so sure it is the right thing to do.
The market wonders if there could be replay of 1987, when the Fed was soft and the German Bundesbank hard on rates, prompting, in short order, a dollar and stock market crash.
And back then, there was no commodity bubble or crises in major global financial institutions to also worry about.
But is managing the present imbroglio only about getting monetary policy and interest rates right? Obviously not.
For, in recent months, the Fed, ECB and Bank of England have stepped in as lenders of last resort to distressed financial institutions, defined to include non-banks and against non-government debt as collateral. The hope was that illiquidity and risk premiums would soon disappear and the markets would soon clear and settle as before. That has been belied.
What next? The Fed has clearly reached the limits of softening.
Given the anaemic state of demand and credit markets, it is not as if it is accommodating inflation with loose monetary policy.
The current situation clearly shows crisis management is not the Fed’s responsibility alone. Recognising this, the US Congress and Senate are starting to take steps to mount a government-initiated rescue of delinquent homeowners and mortgages.
Of course, this is not all. Oil prices must cooperate.
It is not just a central bank story (as is made out to be) but a synthesis of monetary actions, government intervention and a return to normalcy in commodity markets which must see us through.
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