Tuesday, February 05, 2008

Ben and King|Moral Hazards or Effects of Globalization

a fellow student in
class...from class has provided the following views of monetary policies from both sides of the pond. The first is from the Economist that talks about Ben Bernanke and his recent decisions: Aggressive activism
The second article is from the Wall Street Journal: Bank of England Chief Changes Tack in Crisis

a fellow student in
class
then posed the following questions:
POLL:
1. Do you think now that the Federal Reserve activist response is the most
appropriate (and briefly why)? – No. I absolutely agree with Wayne Robert’s
points regarding issues of moral hazard raised by the Fed’s actions.

or 2. Do you think the Bank of England cautious response is appropriate (and
briefly why)? – I do think that the BoE response was more appropriate, although
it would be difficult to compare the two as the BoE action was Ex-Post, whereas
the Fed’s actions were Ex-ante.

In the purest form, Policy makers should be concerned only with the long-run
rate of growth of the economy, rather than react to immediate shocks. However,
as history have shown, they are also quick to intervene in the face of
extraordinary events, such as LTCM (Fed-arranged bailout).

It appears that a delicate balancing act of maintaining the safety & soundness
of the financial system is also part of the Fed’s “job description”.

Kind Regards,
-a fellow student in
class...
Let me first say that I am more of a structuralist. As such what we expect to work in one economy may be completely different in another economy. Now if the US and UK are identical then it would be reasonable that they would have nearly identical monetary policies, but they are not (IMO). Thus I expect that we would treat things not equal to the degree of their differences.

I am not even sure if it is fair to compare both situations or to even conclude that one was ex-post and one was ex-ante. For that matter it seems both were ex-post, it was just different signals that triggered the response.

One thing that seems to be different is the aspects of how financial globalization has affected the collections of economies in the world. Bernanke discuses some of these issues at Globalization and Monetary Policy and some response from me at Articles of Interest.

I am not sure if Bernanke had any clues about the following coming but this seems to be a real serious problem that deserved the types of responses that Ben tried. January 2008 Non-Manufacturing ISM Report On Business® did state:
The January 2008 Non-Manufacturing ISM Report On Business® is being released early today due to a possible breach of information. This early release time is for today's Report only.
for all Divergent Thinkers out there (lol). And for the numbers:
Business Activity Index at 41.9%
New Orders Index at 43.5%
Employment Index at 43.9%
Anything below 50% is considered contraction in the market and it was noted that:
Business activity in the non-manufacturing sector contracted in January for the first time in 58 months, say the nation's purchasing and supply executives in the latest Non-Manufacturing ISM Report On Business®.

The report was issued today by Anthony Nieves, C.P.M., CFPM, chair of the Institute for Supply Management™ Non-Manufacturing Business Survey Committee; and senior vice president — supply management for Hilton Hotels Corporation. "The new NMI (Non-Manufacturing Index) at 44.6 percent indicates contraction within the non-manufacturing sector for January 2008. Non-manufacturing business activity contracted for the first time since March 2003," Nieves said. He added, "The New Orders Index contracted to 43.5 percent, the lowest since October 2001. The Employment Index contracted to 43.9 percent, the lowest since February 2002. (And for a good summary of the numbers: U.S. ISM services-sector index plunges in January.)
As far as a fellow student in
class
's two questions, I still feel that I do not have enough information to give a definitive answer as well as the fact that I do not believe I have the same quality or quantity of information that Ben and Mervyn have.

Links:
U.S. ISM services-sector index plunges in January

ISM Services Index Fell More Than Forecast in January (Update3)

Going back to a fellow student in
class
's comments:
It appears that a delicate balancing act of maintaining the safety & soundness of the financial system is also part of the Fed’s “job description”.
Unlike other sectors banking can easily cause contagions to spread through the economy and destroy it. So I would say yes, preventing runs on banks and maintaining the soundness of the financial systems (not equity markets) is a job of the Fed. Of course even if we are not sure how, equity markets tend to be a leading indicator of the overall health of an economy and as such it should be taken as another indicator in their analysis. Of course the ISM report has a larger bearing IMHO.

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