Thursday, August 30, 2012

Bill White, Skeptic

Bill White has a new paper out. He is formerly the chief economist of the Bank for International Settlements in Basel, and, perhaps because he is soft-spoken, an effective critic of central banking orthodoxy.

One passage in his paper emphasizes that central banks caused, in part, the problems they are busy trying to correct:
By mitigating the purging of malinvestments in successive cycles, monetary easing thus raised the likelihood of an eventual downturn that would be much more severe than a normal one. Moreover, the bursting of each of these successive bubbles led to an ever more aggressive monetary policy response. From a Keynesian perspective, this response seemed required to offset the effects of the ever growing “headwinds” associated with all the malinvestments noted above. In short, monetary policy has itself, over time, generated the set of circumstances in which aggressive monetary easing would be both more needed and also less effective. This conclusion seems even more justified when we turn to the implications of easy money for the financial sector. (p25)
He expresses some skepticism about economics generally. I love this:
The unexpected beginning of the financial and economic crisis, and its unexpected resistance to policy measures taken to date, leads to a simple conclusion. The variety of economic models used by modern academics and by policymakers give few insights as to how the economy really works. If we accept this ignorance as an undesirable reality, then it would also seem hard to deny the possibility that the policy actions taken in recent years might also have unintended consequences. Indeed, it must be noted that many pre War business cycle theorists focused their attention on precisely this possibility. (p14)
Too, I found it interesting that he thinks that the odds of rising inflation in the advanced economies are fairly low now. (p16)  [POSTSCRIPT: Re-reading this passage in White's paper, I think he is saying that the odds seem low, but may be higher than they appear.]

He is skeptical of the so-called "wealth effect":
Lower interest rates cannot generate "wealth," if an increase in wealth is appropriately defined as the capacity to have a higher future standard of living. (p12)
And then there is this barb, from John Kenneth Galbraith, whom White quotes:
Politics is not the art of the possible. It is choosing between the unpalatable and the disastrous. (p6)
White is one of the few people whose work you can read, or whose talks you can watch, and always be assured of learning something. He gave a talk on the roots of the Great Contraction that I posted last year.