Monday, 27 July 2009

Taking Count

In academia - unlike in my previous profession - one might occasionally be asked to check out his own previous forecasts. So here it is: a qualitative revisiting my global economics forecasts of the past two years.

One. About the nature of the current crisis. The argument originally put forward was that the current crisis is that of models and not that of over-hype or under-regulation, as suggested by most commentators. In particular, the observation went, the underlying problem was not that risk was ‘excessive’ or that ‘shameless finance professionals sent the world to the brink’ and not even that ‘corrupt politicians deregulated the banking sector to the extent that the world turned into a gold rush town’.

The argument was that instead of risk being badly structured and managed, the root cause of the crisis had been the improper valuation of risk. Which, in turn, was due to the lack of adequate economic models. The global economy had bloomed into something entirely new, while the economic modelling and forecasting profession still treated the national economies as the unit of analysis.

The evidence came in (a) observing that such an uncertainty about global processes increased in several other areas as well (global c/a imbalances, emerging markets), before the crisis took the particular manifestation it did; and (b) demonstrating how the IMF, albeit keeps pretending otherwise, has no clue as to what will happen next (which is bad news as they do have the best global economic forecasting system to date).

The forecast was then that there surely will be a new breed of models, or at least a call for them, that would explicitly make the global economy its primary subject matter. Furthermore, the suggestion had gone that this new, global economics, will be as different from macroeconomics, as Keynes’s innovation seemed compared to the microeconomic mainstream of his day.

This forecast failed totally. The consensus of the economics profession - after some early hesitation - has become that all what we had seen is originating in the US banking sector, and is primarily a regulatory failure, although with systemic consequences. Furthermore, there seems no global Keynes in sight. At least I have not seen any breakthroughs that would offer a whole new theory passing as global economics. And those who have called on the economics profession to generate new ideas, stayed - disturbingly - in the language and theoretical framework of macroeconomics, or even worse, the engineering science of economy repair and management...

(And certainly, my hopes that my global models based on networks would bring one of the new insights, I am sad to report, were also unfounded. The network dynamics - I think now - does seem to reveal some structural properties, but will - at best - offer only a refinement to a macroeconomics based global view, rather than a completely new one.)

Two. About the global policy institutions emerging. The argument on this one was really a consequence of the above. If there is a global economy out there which contains all the national economies, but which at the same time, is really an entity in itself, then no policy could work unless it was on that, global level.

The rest is fairly straightforward. National level economies will have only a limited reaction to the national level policy mix. National level regulation will not work, as they have not in the years before the crisis broke (and on this point I agree with those advocating that there was something wrong with the regulation of finance); national level monetary policy will be very limited in its extent; and national level fiscal policy will have long term negative consequences - although might work in the short run. My forecast was that all of this will result in the emergence of a whole new set of global economic policy institutions. An effective global regulatory framework, with enforcement ability, not just information, a cooperation among central banks so strong that in itself could be regarded as a global monetary authority, and global fiscal policy of some sorts - perhaps Maastricht like limits and some global emergency intervention authority (an extended IMF like role).

And thus another failed forecast had been revealed. The worry that instead of going global, super-costly protectionist measures will be implemented on national level is becoming the reality. Early, and way too weak attempts towards a global regulatory framework seem to be falling through. Fiscal policy never really was meant to be harmonised (although there were lots of talk about it, mostly after summits, followed by a renewed set of rather local fiscal action). And early harmonisation of monetary policy is turning into a currency feud, especially between the Fed and the ECB.

One should learn from his mistakes. But a habit is habit. I still agree with my original analysis, as well as the forecast that came out of it. Despite the occasional talk about green shoots (the latest is the ADB’s forecast for Asian growth returning to 6% next year, published yesterday), I can’t see any apart from wishful thinking, and I cannot see how the current policy mess will be sorted out following the current trajectory.

The trouble is that if the above argument happens to be right, then the times coming will be much worse than what we have seen so far. High global inflation, low growth, jerky policy moves (probably around taxation and desperate ‘policy innovation’), and plenty of protectionism. Apart from being a tough time, the Earth might not even be such a safe place to be in.


  1. Your argument about the need for global institutions, in economic policy at least, are convincing. However, there is no political will in the world towards the formation of such a framework. Maybe giving up the chase for an impossible target would be the first step towards a lasting new international economic policy framework?

  2. just keep it optimistic, tamas

  3. Have you seen yesterday's comments about the G 20 meeting? It seems that all the finance ministers of the world have now decided to suddenly really co-operate in earnest. The funny thing is that when fiscal policy harmonisation was really needed, during last winter, then everybody talked about co-operation, and then just had gone home and pretended nothing was said. All the policy that was implemented in reality was focusing solely on the domestic emergencies. And now, when they are realising how difficult it is going to be to deal with their actions in the long run, they might actually really cooperate. So although there was no real global framework at the trough of the crisis, something positive might be emerging on the way out.

  4. Here is a gold and emerging market currencies graph.