Do U.S. Policymakers Have a Clue About the Economy?

There is a long and glorious history of transatlantic cross-fertilization when it comes to television programs and other forms of entertainment. Staples of the US television landscape such as Sanford and Son (Steptoe and Son), American Idol (Pop Idol), and The Office (The Office) all started life on the British airwaves.

It appears as if US policymakers have seized on the idea, re-incarnating the popular UK radio show I'm Sorry, I Haven't a Clue.

How else are we to interpret Hank Paulson's admission that the TARP will not be used to purchase dodgy mortgage assets, the rationale for its passage way back in....last month?

Macro Man couldn't see any way to interpret this other than as an admission that they're making this up as they go along - not exactly a reassuring methodology for policymaking.

Meanwhile, it looks like we're about to embark on the unedifying spectacle of a land-grab for the remainder of the TARP cash. OK, the Treasury will spend some of the money on asset-backed turds (as opposed to mortgage-backed turds)....but Wednesday's post looks to be sadly accurate.

Strangely absent from the photo above is the president-elect and his new Treasury Secretary....the latter, of course, because he does not currently exist. Mr. Obama seems content to allow the current administration to bury itself until he takes office on January 20. Politically astute, of course, but not exactly an act of leadership. Obama will be conspicuous by his absence from the weekend G20 meeting, which is ostensibly set to discuss a coordinated response to the crisis and the framework for a new global financial architecture. Again, politically expedient.....but it sort of renders any near-term attempts at a policy prescription irrelevant.

Macro Man's moles in the media industry suggest that the BBC is in negotiations to license I'm Sorry... elsewhere in Europe as well - in Germany, for example, where the ECB is located. Yesterday morning, it was confirmed that Germany has entered the popular definition of a recession, as Q3 GDP growth came in at -0.5% q/q, considerably worse than expected.

The ECB, of course, hiked rates at the start of Q3, despite a severe downturn in leading indicators, evidence of significant financial distress, and a complete absence of domestically-generated inflation pressures in Europe. (Those commenters who spring to Trichet's defense and/or claim that interest rates are irrelevant should consider their views as already noted for the record.)

The BBC may also wish to create a celebrity version of I'm Sorry..., featuring the Bank of England. This is a trifle unfair, given that the BOE has (belatedly) realized that the circumstances have changed, and radically adjusted their policy orientation as a result.

Where they can come in for some criticism, however, is their failure to anticipate the requirement for substantially easier policy earlier. Mervyn King was pretty eloquent in the Bank's defense Wednesday, basically saying that "no one could have forecast this."

But this ignores the fact that a member of the MPC itself, David Blanchflower, did indeed forecast it. Mr. Blanchflower has been arguing for a number of months that the situation was dire, underlying inflation pressures were likely to recede, and that the Bank was grossly underestimating the likely pace of the slowdown. He voted for rate cuts in every single meeting this year. But one MPC member (the future star of the show), Tim Besley, voted for rate hikes as recently as August.

Is it any wonder that sterling has been pummeled, taking the pound to (gasp!) the cheap side of fair value against both the euro and the dollar, according to Macro Man's metrics? Wednesday saw the single largest rise in EUR/GBP since the advent of the single currency (helped on by Merv the Swerve's "blue horseshoe hates sterling" comment) , which necessitates dusting off the old GBP/DEM charts to get a flavour for how far things can go.

Technically, there isn't really anything between current levels and the old lows in GBP/DEM, equivalent to roughly 0.9000 in EUR/GBP. This winter's ski trip is shaping up as being eye-wateringly expensive.

Will sterling trade all the way to 0.90 against the euro, thus rendering the pound bum-clenchingly cheap? Having whiffed on sterling this year (short when it went nowhere, flat when it collapsed), Macro Man can only say "I'm sorry, I haven't a clue."

Comments

[john s. gordon:]

the clueless virus that originated in george dubya's brain in 2001 appears to be contagious. anybody have a vaccine?
> jack

2008 Nov 14 08:29 AM

[Jason Rines...:]

Oh god, more Bush derangement. Look, his first term was great. His second term was a coup. This man trusted but did not verify and the nation has paid a heavy price. But I would expect intelligent people here would not succumb to such simple blame-gaming for this economic catastrophe on the President. Our true issue is a 25 year economic experiment that failed. There were times to reign it in and retain a large portion of the benefits but that time has come and gone.

2008 Nov 14 11:53 AM

[Smarty_Pants:]

Recovery will be very difficult with our turd backed banking sector. The FED is injecting turd growth enhancers to little effect.

2008 Nov 14 12:33 PM

[Robert Nabloid:]

The "policy makers" are the problem. Of course they make it up as they go! People now cry to the government when they lose their job! So they want the government to do something, so the government does something - not that it works or makes any economic sense...

Perhaps debt and interest rates shouldn't be core objective - An economy financed on debt will ultimately fail. It is unsustainable. So anything to do with interest rates is just a futile effort to get people to take on extra debt to mask the true problem with the economy, competitiveness.

2008 Nov 14 05:28 PM

[Tony Petroski:]

Thank you for honestly noting that Obama is AWOL while the world awaits breathlessly for his blessing. It's easy to take potshots at the hapless politicians of the G-20 (I still think 40 heads are better than one--why not the G-40 and get Hugo Chavez into town?), but I think they are trying to do their duty while enjoying a trip to Washington.

Obama's silence is political expediency, or more likely, political necessity. Obama ran a two-year campaign and his every move was covered by our investigative journalists, and now that he is the most powerful man in the world, we still await the Obama Plan on the economy and the Obama Doctrine on foreign policy. Why? Because Obama is awaiting the Obama Plan. Still, we can look forward to Clinton-era retreads to lead into the "Change That We Can Believe In."

2008 Nov 14 10:27 PM

[carey_jim:]

U.S. policymakers have a clue but they can't use it to make a suggestion. Their jobs always depend on flattering the people in power.

I thought you already knew that?

2008 Nov 15 03:32 AM

[jepittman:]

In addressing your question it might be helpful to compare the policy responses to other crises. A similar banking crisis occured in 1929 and 1930. The policy responses then were to raise interest rates to defend the dollar, let the banks fend for themselves and reduce government spending to 'save' money. We all know the result. Today we have a full court press from the Federal Reserve to backstop the entire credit market, a rapid drop in interest rates resulting in a historic increase in money supply, direct liquidity injections for banks and other financial institutions, and a truly massive increase in federal spending immediately ahead. Finally the democrats see an opportunity to cast George Bush as Herbert Hoover and Barak Obama as Franklin D Roosevelt. To do so successfully they must stimulate the economy and restore prosperity. So judge for yourself how this plays out.

2008 Nov 15 09:54 AM

[tragicomix:]

Absolutely rue for Paulson, true for many others, but not quite so for the ECB.

Surely then markets did not have a clue when they pushing oil to $150/bbl and all other commodities sky high ... given that there was a whopper of a recession coming? If your argument is that Bernanke & Co were more prescient, then they were so farseeing that they cut interest rates so hard that it became that much easier to shove the liquidity onto commodities. And now the Fed does not have any room to cut. The effective fed rate is 0.3%, so what does it matter if he cuts the target rate to 0.5% or even 0.25% in December?

You also pass over the geniuses on Wall Street who manufactured this house of cards and their partners in DC who kept milimg the gift of mortgage ... or for that matter Chris Dodd who sure did not have a clue when he took subsidized mortgages thru "Friends of Angelo"

2008 Nov 15 05:35 PM

[tragicomix:]

Thinking over it, no, I do not think it is fair to say Hank Paulson is clueless. The truth probably is, he does not care – because he never believed that there was an effective way for Treasury or Fed or Congress to intervene and cut short the correction in the housing market which would otherwise take many years. So, if there was no way to deal with the mortgage problem, by extension same for the CDO and the rest of the stuff. The only thing that he/Fed could possibly do was to slash interest rates, which they did and then try and prevent big financial institutions from failing which would cause havoc in the financial system. However, that does not explain letting Lehman go and the botched first bailout of AIG.

Perhaps Paulson not only did not care and did not believe that the Treasury had a role, but was also cavalier in taking decisions. Or perhaps he thought he was very clever in throwing Lehman to the wolves – red meat for those who wanted to see blood on Wall Street.

2008 Nov 15 05:55 PM