Thursday, February 11, 2010
But Ben, A Bubble Has No National Boundaries...
But Ben, A Bubble Has No National Boundaries
Ben Bernanke is showing himself to be more of a Big-Government politician than a scientist. In his latest speech, he has tried to defend the actions of his predecessors by claiming that their easy-money monetary policy only holds five percent of the responsibility for the high real estate prices that ignited the boom-and-bust bubble that almost broke the back of the global economy.
According to his analysis, 30 percent of the responsibility goes to what he has been calling the "global savings glut." The other 65 percent, he says, belongs to the inferior standards of the US mortgage market. Therefore, his argument seems to be saying that if we cure the standards we cure the problem.
He attempts to prove his point by demonstrating through charts that other countries had even looser monetary policy than the US, and yet they did not show a worse real estate boom; therefore, he concludes, loose monetary policy does not cause bubbles.
This sounds convincing, coming as it does from the highest-placed economic academician in the land. But his logic is flawed.
There are two problems with his argument. First, you cannot isolate these particular variables as he has done. To do so is the equivalent of saying Michael Phelps eats a lot, and he is not obese, therefore a high-calorie diet does not cause obesity. (Michael Phelps is the Olympic medalist swimmer who purportedly eats around 8,000-10,000 calories a day. A scientist could probably prove that he also spends almost 8,000-10,000 calories a day in his sports activities.)
Second, although Bernanke seems to accept the wisdom that a nation's monetary looseness can create excess purchasing media that can then chase relatively fewer goods, he doesn't seem to admit that there is no economic law that restricts a purchasing media's use to its country of origin, at least not in an immediate temporal sense.
Although US dollars must ultimately come to roost back in the US, they may station themselves in any number of places for many years (to wit, China's Current Account Surplus, for example) before they find their way here; and while so stashed, they can be used as collateral for any number of ventures in the meantime, in any currency--say, for example, to buy Spanish pesetas to be invested in Spain's real estate boom.
By the same token, a loose yen, for example, can go on a bubble-blowing spending binge in the US through the carry trade (borrowing in yen to obtain dollar-denominated instruments, or even cash dollars).
Bernanke's effort is a perfect example of the econometrician's Achilles Heel: narrow-sightedness. Markets are fluid, complicated, convoluted, multifaceted mishmashes of changing signals and events. For his analysis to work it must include a variable for each relevant event, not just an isolated one or two.
I find it strange that high-powered government officials feel justified in using such flawed science to defend themselves, even if they were to claim they do it for some lofty cause like the preservation of market confidence.
Labels: Bernanke, econometrics, housing bubble, monetary policy