Former US Federal Reserve Chairman and Nobel Prize-winning economist Ben Bernanke says central banks should provide alternative economic forecasts and hypothetical policy responses.
Speaking at the Reserve Bank of New Zealand’s monetary policy conference on Thursday, Bernanke said communications should put greater emphasis on uncertainty when providing guidance.
He said the US Federal Reserve had focused the public's attention on its “most likely” forecast, which suggested inflation was transitory.
“When the inflation proved not to be transitory, it hurt the Fed's credibility. And more seriously, the public was not well informed in advance about what the Fed's response would be once the baseline forecast proved wrong,” he said.
It would have been better for the policymakers to say the baseline forecast was transitory, but also explain other possible outcomes and the policy response those scenarios would trigger.
"Being more explicit about providing alternative economic scenarios and clarifying how policy would react in each case, could possibly have helped divert the 2013 taper tantrum,” he said.
The taper tantrum refers to the market turmoil that occurred under Bernanke when the US Federal Reserve signaled it might slow bond-buying, causing interest rates to spike and asset sell-offs.
Bernanke said providing the market with alternative economic scenarios and an approximate policy response would improve credibility and transparency.
U-turn tantrum
The RBNZ took its own credibility hit in May last year when it signaled interest rate hikes, only to launch an aggressive cutting cycle 12 weeks later. Analysts called it a “policy U-turn”, something Governor Adrian Orr fiercely denied.
Deputy Governor Christian Hawkesby attempted to explain it in an interview with Interest.co.nz, claiming the Monetary Policy Committee had discussed “big uncertainties” to the forecast.
He argued market commentators had focused too much on the forward projections and hadn’t paid enough attention to the discussion of risks.
“There's something quite peculiar that happens when someone sees a line on a chart, or they see a number in a table, it has this sense of being real and factual,” he said.
Hawkesby's argument was not very strong, as the official record of the meeting only discussed uncertainty in very broad terms and never contemplated rate cuts. Whatever other scenarios were considered behind closed doors were not shared with the public.
But after that meeting there was some talk about whether the bank should present its interest rate projections differently, with chief economist Paul Conway even raising the idea of different scenarios.
While there was no opportunity for Interest.co.nz to interview Bernanke, it seems like he would be sympathetic to the RBNZ publishing more than one set of forecasts and possible Official Cash Rate outcomes.
"I think it is important to pick just a few [alternative scenarios] and try to find ones that, for one reason or another, are relevant to the current situation. Part of this is just getting people to understand that we don't know, for the next three years, what the rate is going to be. We have different contingent strategies depending on what happens," he said in his speech
Hawkesby on Orr
The monetary policy conference was opened by Hawkesby, who was filling in for Adrian Orr who walked off the job without notice the day prior.
He said the former Governor of the Bank of England, Mervyn King, used to say that monetary policy could be compared to running a marathon in laps around a short athletics track.
“So it's a long journey, but my view is, if that if you want to step out of the track and take a break, then what better time to do it than when inflation is right at the middle of the target range, the economy is on the up, and the financial system is in great shape”.
“I'm delighted that Adrian's been able to finish on that high,” he said.
13 Comments
Clearly it would be good to have knowledge of contingency plans should certain circumstances eventuate.
I just question if the Reserve bank ever considers their predictions might be wrong and under what circumstances and if they do in fact have any contingency plans.
This appears an admission of the lack of ability/impact of central banks in the field of planning (credibility?) ...an admission that they are merely a reactive entity, and a not terribly competent one at that.
No I think its about communicating clearly that no one is in total control and that participants should understand that there is always uncertainty in future predictions
The issue is that if the central banks become 100% data dependent , so will markets and they will react wildly with data release at times. We are not playing Tiddlywinks
remove the word 'total' and you may be approaching realty
Clearly, Fitzgerald is yet another eCONomist, which is precisely what you would expect from someone who spent 9 years working for the City of London-based Bank of England, including a stint as Deputy Governor.
His background explains this utterly delusional comment... "I'm delighted that Adrian's been able to finish on that high.”
Please don't be under the illusion that any of the Western-centric central banks are independent. NZ dances to the tune of the BIS, just like its other 63 member/owner banks, apart from China which runs a public utility CB model. The Western status quo's entire policy has been very much about financialisation of economies - ie the rentier' system of unearned rent, ruling at the expense of the real economy.
This model drives the real economy into the clutches of the commercial banks that create more than 90% (usually ~97% of MS) when they create loans out of thin air and subsequently, the productive sector pays more and more of their income out as unearned rent.
The West lost the industrial capitalism model long ago, as it transitioned insidiously into financial capitalism, where credit is created for the FIRE (Finance Insurance Real Estate) economy, shrinking the real economy in the process, and loading the productive sector down with odious debt.
This is where the GDP figures become farcically misleading, and why the more financialised an economy becomes, the more misleading the official GDP numbers are. The FIRE sector garbage should be removed from the numbers altogether so that GDP only reflects the production of real goods and services.
If the FIRE sector was removed from the calculation, depending on how financialised an economy is, that could reduce the gross figure by up to 40-50% in highly financialised economies like the U$ and France, and perhaps around 20-25% in economies like NZ and Australia.
This would have the effect of providing a much more meaningful (read alarming) DEBT:GDP ratio, and explain much more vividly why NZ is technically insolvent, and effectively entering a global debt-death spiral along with the demise of ALL fiat currencies.
This was always inevitable after 1971 when all currencies became fiat - the petrodollar scam filled the gap for close to 50 years, but now that too is going up in smoke, as the global system moves into a multipolar reality. IMO, King Dollar will be the last ever national currency that doubles as a power-wielding global reserve currency.
That was likely another reason why Orr chose to flee the system, to move into a lucrative fatcat role and out of the limelight, as the broken global central banking system is exposed as another Emporer with no clothes - ugh... perish that mental image.
Maybe he could be employed by Otago Uni on a massive salary package alongside Mr Robertson - it's all unravelling as we speak, and King Donald's "move fast and break things" 'policy', as well as declaring a trade war on the entire planet, will undoubtedly hasten the demise of an already broken system.
This could well be 'Donald Dullard's' (DD) legacy to humanity - IOW, his #47 regime became a major catalyst in hastening the global financial system's move into a new BRICS/BRI-centric multipolar non-predatory reality - one where all members have a seat at the table with equal voting rights and where there is no power of veto for any country.
DD of course burbles on that he has already single-handedly slain the BRICS dragon, when he has no clue of who the member nations are, let alone that on a population basis, ~90% of the planet desperately wants to join up.
Cheers
Col
Hi Colin. Interested on your take on what would have occurred had London lost it's status as the financial capital of Europe had the UK not made concessions after Brexit.
I would imagine their GDP would woefully expose the impact of financialisation of their economy, albeit they still hold to the North Sea gas field for income from energy resources (another reason there would have been skullduggary if Scotland were to have voted out of the UK, as England would never let that go willingly). We already saw the impact of Russian gas stopping slowing on energy prices there and the flow on impact reverberating through their country, as did here with higher oil prices 2021.
Hi 'Interesting' - my short answer is, very little would have changed, mainly because the City of London is so rabidly Russiaphobic.
If the UK had remained in the resource-scarce EU, they would have still helped cheerlead the removal of the one factor that was at least partially hiding Europe's economic slide - ie, the extremely affordable and reliable Nordstream gas supply routed through the Baltic Sea, where they held long term contracts at a mere ~25% of the cost of what they now pay for imported LPG from the very country that sabotaged 3 of the 4 pipelines.
It's far too late now - Europe will end up with their own version of the US Rust Belt as their industry relocates to other parts of the globe.
This further evisceration of their real economy is thanks to the suicidal Davos/WEF inspired policies of the appointed, treasonous, and bought and paid for European Commission. IMO, nothing will save these Western European economies, short of swallowing their pride and applying to join BRICS.
However they would be right at the back of the queue of at least 40 applicants, and have to dramatically change their stripes and behaviour before their member application is even considered. In the mean time they will sef-destruct long before they even begin to build the poilitical architecture along with the societal will to turn their sights Eastward.
BRICS had a very bad experience with a certain rabid BRICS loathing lunatic in Argentina, and will be extremely reticent when it comes to allowing cynical countries habouring influential bad actors into the bloc.
Cheers
Col
Wow Colin... are you harbouring a grudge against this "...Fitzgerald" character or am I missing something?
No personal grudges, Rhumline - however in general I cannot abide the monopolistic global central banking industry cartel that preys on the working class and feeds the 0.001% who make up the global kleptocracy.
I'm making my call on hard evidence, and anyone who became Deputy Governor of "The Old Lady of Threadneedle Street", automatically rings alarm bells for me. There is simply no institution on Earth that is more blatantly establishment than the BOE.
Regards
Col
Making contingency planning transparent, just in case the RBNZ isn't infallible and things don't work out as expected?
Steady on: you'll be calling on politicians and the public service to provide transparent justifications of their decisions next!
my mom would have said its
Having a bob each way
Why listen to Bernanke?
His thesis was into the 'great depression' - a time when there were 2 billion planetary inhabitants, and much of the planet was still intact.
WTF has that got to do with today?
You might like to listen to Bernanke here, PDK - this is black comedy. I remember watching it at the time, and thinking that he had the demeanour of someone with an extremely guilty conscience.
Having saved the TBTF banking cartels, he had put the working class to the sword instead. That bubble should have been burst right there and then - instead we have multiple bubbles today, that are exponentially worse than the so-called GFC.
https://www.youtube.com/watch?v=n0NYBTkE1yQ
This was at a congressional hearing where Alan Grayson was grilling Bernanke about the $529 billion in liquidity swaps that were spigoted out to 14 Central banks around the world, including $9 billion to the little old RBNZ.
Grayson - The US dollar showed a 20% increase in the exchange rate at exactly the same time as the Fed was handing out half a trillion dollars to foreigners, do you think that's a coincidence?
BB - Yes.
Cheers
Col
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.