“Our models are just not that good”

It’s refreshing to see that the coolest central bank admits that crazy math does not count as good forecasting.

“The Bank of England will not be able to forecast the next financial crisis or recession, one of its top officials said on Tuesday. “Our models are just not that good,” Gertjan Vlieghe told MPs on the Treasury select committee. He added that there was not “one model which is right or wrong” and that people had “unrealistic expectations of what we’re going to get from economics in the next five years”. Mr Vlieghe said that not all of the difference between forecasts and what happens are “mistakes”. If people were expecting the economy to always conform to the Bank of England’s central predictions they were setting themselves up for “persistent disappointment”, he said. Economic forecasting was under the microscope at the committee meeting after the bank revised up its forecast for economic growth over the next three years. At the start of the year, chief economist Andy Haldane called the bank’s failure to forecast the 2008 financial crisis a “Michael Fish moment” after the weather forecaster’s infamous 1987 dismissal of a hurricane in England that duly arrived.”


From Adam Tooze:

“In the world of managed money the balance sheet of the central bank is the basic organizing matrix of the monetary and financial system. It is the basic indicator of the “state’s” monetary policy stance. But this can be “interpreted” only in relation to the wider ecology of “private money” and credit i.e. everything from overnight interbank lending to long-term capital markets.

In markets facing a discontinuity, a tug of war can develop between those betting that the change is necessary and “inevitable” and those who have invested in the current state of affairs and are likely to suffer losses in the event of the “inevitable” change. They may dig in their heels hoping that those betting against them will lose confidence and run out of funding, the pressure will ease and they can minimize their losses or even walk away with a profit.

This is nicely illustrated in the Big Short, where those who have recognized that house prices will fall, MBS will fail and CDS will trigger, struggle to sustain their correct and profitable positions whilst, for months on end, the market fails to fall. They rail against the continued idiocy of the backers of MBS, the momentum that sustains the false prices. They even allege that there is a conspiracy, to keep the crucial indices up. It makes for great drama. Will those who are shorting have the courage of their convictions? Will their financial backers hold up? Or will they be forced to liquidate their profitable and historically correct bets, before time?

The answer is here: https://www.adamtooze.com/2017/02/21/managed-money-speculation-interpretation/

What might a trade war between America and China look like?

Punitive American tariffs on China would leave everybody worse off

DONALD TRUMP vilified the Chinese government on the campaign trail, accusing it of manipulating China’s currency, stealing America’s intellectual property and “taking our jobs”. This hostility was not just posturing for the election season. In 2012 he had falsely accused the Chinese of inventing the concept of global warming—to make American manufacturing uncompetitive, he said. Tensions are high: Xi Jinping, the Chinese president, reminded global elites assembled at Davos that “no one will emerge as a winner in a trade war”. If America targets Chinese trade, China will hit back. So what might a trade war between the two economic powers play out?

There are two ways in which talk might translate to action. Mr Trump might try simply to enforce the rules of global trade in the court rooms of the World Trade Organisation (WTO). Since America has no bilateral trade deal with China, WTO rules define what is and is not allowed. Mr Trump might, with some justification, accuse China of boosting its economy with subsidies and flooding some American markets with cheap imports. He will find that the Obama administration had already initiated a number of legal cases against China at the WTO. His underlings have suggested that the Trump administration might go further, for example by launching cases against suspected Chinese dumpers, rather than leaving it to American industry. Crucially, however, while the Chinese would probably retaliate, perhaps suddenly finding health-and-safety problems with American food exports, this chain of events need not descend into a trade war. The rules of the WTO are designed specifically to handle this kind of dispute. If it finds that China is indeed not playing by the rules, then there are clear limits on how America can retaliate. If the system works as it should, any recriminations would be contained.

But a rules-based, WTO-sanctioned tit-for-tat is not what economists have in mind when they think of the worst-case scenario for trade between America and China. The big fear is that Mr Trump decides to bypass WTO rules, or ditch them altogether after a decision does not go his way. A 45% tariff on Chinese imports would effectively act as a tax on electronics and clothes made in China. If prices rise domestically then American shoppers will feel the pinch—particularly poorer ones. American companies relying on imported inputs from China would suffer too (some companies do not mind having their inputs subsidised by the Chinese government). A blanket tariff of 45% on Chinese imports would clearly violate WTO rules, and the Chinese would not wait for an official ruling to retaliate. A strategic move would be to curb Chinese imports of American soyabeans—this would rile the American ambassador to China, who comes from Iowa, a farming state.

There would be some winners from a trade war: in the short run the American government might well see more tax revenue, and some American companies would enjoy being sheltered from foreign competition. The biggest casualty may not even be the American consumer. After the second world war, rich countries coordinated to avoid a race towards higher tariffs, creating the General Agreement on Tariffs and Trade, which in 1995 grew into the WTO. By clubbing together they recognised the destruction of the 1930s, when countries erected trade barriers to protect their domestic economies but ended up harming themselves as a result. A trade war would mean abandoning an institution that recognises that countries are stronger when they work together.

What the Fed could have done to stop the crisis

In conversation with Institute President Rob Johnson, Sebastian Mallaby — Paul Volcker Senior Fellow at the Council on Foreign Relations and author of a new book on Alan Greenspan’s tenure as Chairman of the Federal Reserve — parses Greenspan’s legacy in context of the NASDAQ and sub-prime mortgage crises. Mallaby’s research shows that Greenspan knew more about the looming perils than people realize. “If he was the man who knew, why was he not the man who acted?” was the focal question of the book. One reason may be the limited tools available to the Fed.Watch at: