Economists: Born or trained
Although that is an interesting title, I’m not actually going to talk about anything interesting. Instead, Merry Christmas everyone – and here is a cartoon from Saturday Morning Breakfast Cereal (again):
(ht SMBC)
Archive for month: December, 2011
Crisis over before Christmas?
With bond yields collapsing in Europe the implied “bank run” on the periphery appears to be over. This is due to the ECB backstopping European banks for the next three years – in some sense they have taken on the lender of last resort role, just in a confusing, seemingly temporary, and poorly communicated way. Note: Whether this is really “happening” is still an open question – we won’t have confirmation of this, or its impact on CDS’s, until tomorrow at the earliest.
This in no way means that the fundamental issues in Europe are over – in fact, it makes focus on the structural problems in Europe an essential part of what people should now be doing.
However, if the bank run really is over, and credit markets really are unfreezing (something we will know in the next couple of days), it is a positive for the short-term for a little country like NZ. But lets not forget a few things:
- Japan, and now Europe, have shown us the vulnerability of public and private finances to changes in demographic structure – we ignore these issues at our peril, and with plenty of warning.
- Europe still has massive structural issues. These still need to be solved, or we will merely have another crisis down the line.
- If Europe isn’t going to sort itself out, hopefully the rest of the world will see the risk and reduce their implied exposure to Europe.
RBNZ December 2011 Bulletin
It’s good – and its pretty easy reading. You guys should give it a go.
My main focus was on the starting paper on consumption, which just gives a basic overview of how to view total consumption in New Zealand, and then uses this framework to understand some stylized facts regarding NZ in the past decade. I also agree heartily with the conclusion:
However as consumption as a share of income did nothing very unusual during an unprecedented housing boom, it is not obvious that there is a large role for house prices to play in explaining consumption behaviour during the period.
I like it because it supports my priors of course 😉 . Fundamentally, we can’t rely on some “wealth effect” that has driven us to buy “flat screen tv’s” to explain what has happened in NZ over the last decade – a point that was, at one point, being pushed too hard IMO. Debt has been built up, house sizes have increased, building costs/land prices have risen, non-house consumption goods have been cheap, financial markets have changed – there are a range of factors here that we need to tie together to make a convincing, and sensible, story of what has happened. And once we have a clear and consistent answer, only then can we try to understand whether it is/was “good” or “bad” and whether there is anything that should be done to improve outcomes.
Conditional policy
Today’s Fed statement about monetary policy followed the same pattern that we have seen from other central banks, such as the RBA and RBNZ.
Essentially, fundamental conditions remain a bit weak, and so there is a reason to keep policy stimulatory – however, this view is strongly conditional on the ECB/Europe not being bat sh*t crazy.
Should the ECB/Europe be bat sh*t crazy, these central banks will be ready to support their respective domestic economies.
It makes sense – you can’t have an organisation being BSC as a central forecast. However, the risk has to be taken into account – which is why so many other organisations are releasing “downside scenarios” alongside their primary forecasts (the RBNZ and Treasury have both done this in NZ).
Again, I stick to the following line. The current banking crisis needs to be sorted by the ECB – fiscal authorities need more discipline, and that is a structural issue, but that isn’t the marginal factor pushing things into trouble now.
The ECB is doing things – but they need to communicate them better. Improve that communication and markets can have more faith in the policies the ECB is already frikken implementing, increasing their effectiveness. By communicating so poorly they are taking on all the costs of their policies, and not receiving a large portion of the benefit. It is on the verge of nonsensical …
Wellington presentation on Saturday
I will be doing a presentation for the blogging community this Saturday in Wellington. We will meet out the front of 109 Featherston St (diagonally from Pita Pit) at 12pm.
During the presentation I’ll cover the follow:
- An overview of what’s going on in Europe, what we need to keep an eye out for, and how it will impact on New Zealand generally,
- A discussion of “rebalancing” in New Zealand,
- What’s going on with food prices and what it means for us,
- The growing problems in the labour market,
- A social “minimum income”.
During question time I will also be available to talk about anything … as long as its economics related.
I’d love to see you guys there to discuss these issues with me.
Neuroeconomics is exciting, and scary
Great article from Shiller on neuroeconomics. The more justification, and more positive side, of neuroeconomics is mentioned here:
Under Samuelson’s guidance, generations of economists have based their research not on any physical structure underlying thought and behavior, but only on the assumption of rationality.
As a result, Glimcher is skeptical of prevailing economic theory, and is seeking a physical basis for it in the brain. He wants to transform “soft” utility theory into “hard” utility theory by discovering the brain mechanisms that underlie it.
This is cool. Economists want to be reductionist, but we were unable to boil down our theory quite far enough and had to settle on some underlying assumptions of human nature – assumption that were based on “conducting experiments in our own heads”. Neuroeconomics provides a route for us to actually push the ontological envelope and create a more objective, mechanistic, way to describe the underlying elements of human action.
However, the risk is that we allow this view to cloud our thinking on choice – no matter how far neuroeconomics evolves we will never clearly decipher whether actions are the result of determinism or free will. By describing action in a deterministic way, we may treat human action as “too deterministic”, leading to a bias towards excessive control and meddling.