Markets are fabulously egalitarian. They make fools of all of us at some point. The last three years are a case study in this regard. Banks who were considered industry leaders were bought to their knees, sometimes just bought. Companies in the business of insurance were found to be insuring risks they didn't understand and couldn't hedge. Central bankers prescience lost its crystal ball and the great moderation has turned into the Great Recession. The foundations of modern finance have been shaken to the core.
If nothing the equanimity of the embarrassment to all of us who have sought to make predictions has taught us that we know less than we pretended to. The number of times many have felt Rooster, Feather duster, Rooster , Feather duster as the market has ebbed an flowed and short term fluctuations, because of impatience and uncertainty, have been extrapolated into medium and long term trends only to reverse within days or weeks.
So it was that we were a little surprised that on Friday night Chairman Bernanke launched a defense of economics after the crisis and the role central bankers and the economics profession played. To our mind the core message of his speech was effectively that the economics profession couldn't ever predict a bubble but centuries of economic study gave them the tools to deal with the crisis. So that's ok. Right? The second part of this is true and Bernanke specifically spoke of the lessons of Bagehot more than 100 years ago. But Bernanke also spoke of more analysis necessary on the study of financial instability.
We'd like to point him to the work of Hyman Minsky which to our reading has at its core solid economic analysis, has built on the lessons of Keynes and has behavioural insights before we knew that we needed any. We really were disappointed in this speech because it let too many people, both academic and commenteriat, off the hook. The unfortunate reality is that the outlook is still confused as the divergence between 2, 10 and 30 year Treasuries and the equity market shows. How can the equity market and Treasury traders both be right? They simply can't.
We may have learnt many lessons from the last few years and may have many more to learn but the equanimity of the market hasn't changed. Either US equity or interest rate traders are going to be disappointed eventually. The voting machine says equities are right but the weighing machine is with bonds. Rooster or feather duster?.
http://www.federalreserve.gov/newsevents/speech/bernanke20100924a.pdf
If nothing the equanimity of the embarrassment to all of us who have sought to make predictions has taught us that we know less than we pretended to. The number of times many have felt Rooster, Feather duster, Rooster , Feather duster as the market has ebbed an flowed and short term fluctuations, because of impatience and uncertainty, have been extrapolated into medium and long term trends only to reverse within days or weeks.
So it was that we were a little surprised that on Friday night Chairman Bernanke launched a defense of economics after the crisis and the role central bankers and the economics profession played. To our mind the core message of his speech was effectively that the economics profession couldn't ever predict a bubble but centuries of economic study gave them the tools to deal with the crisis. So that's ok. Right? The second part of this is true and Bernanke specifically spoke of the lessons of Bagehot more than 100 years ago. But Bernanke also spoke of more analysis necessary on the study of financial instability.
We'd like to point him to the work of Hyman Minsky which to our reading has at its core solid economic analysis, has built on the lessons of Keynes and has behavioural insights before we knew that we needed any. We really were disappointed in this speech because it let too many people, both academic and commenteriat, off the hook. The unfortunate reality is that the outlook is still confused as the divergence between 2, 10 and 30 year Treasuries and the equity market shows. How can the equity market and Treasury traders both be right? They simply can't.
We may have learnt many lessons from the last few years and may have many more to learn but the equanimity of the market hasn't changed. Either US equity or interest rate traders are going to be disappointed eventually. The voting machine says equities are right but the weighing machine is with bonds. Rooster or feather duster?.
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