Monday, June 17, 2013

John Mauldin is Getting Close

John Mauldin always provides interesting insight.  I say this not because I always agree – he looks to government and policy makers far too often as being capable of solving economic problems – but because he talks to many connected people.   He is also at least familiar with Austrian economics, and while not a full-fledged supporter he is at least sympathetic to the views.

Something seems to have kicked him out of his relative complacency toward our economic overlords – I read him fairly regularly, and do not recall such a critique previously.  His most recent “Thoughts From the Frontline” is entitled “Economists are (Still) Clueless.”

If you've suspected all along that economists are useless at the job of forecasting, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions.  But forget forecasting. What's worse is that they fail miserably even at understanding where the economy is today.  In one of the broadest studies of whether economists can predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, "The record of failure to predict recessions is virtually unblemished."  He found this to be true not only for official organizations like the IMF, the World Bank, and government agencies but for private forecasters as well. They're all terrible.  Loungani concluded that the "inability to predict recessions is a ubiquitous feature of growth forecasts."  Most economists were not even able to recognize recessions once they had already started.

In plain English, economists don't have a clue about the future.

Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base.  However, given their record at forecasting, how will they know?  The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn't even recognize them after they had already begun.

Trusting central bankers now is a big bet that (1) they'll know what to do, (2) they'll know when to do it.  Sadly, given the track record, that is not a good wager.

I have previously written such comments here, here, and here.

Mauldin goes on to a brief example from the recently released minutes of the Federal Reserve minutes from 2007.  At the time after various shocks, including Bear Stearns and Northern Rock, had already become publicly visible, yet no recession or even significant downturn was suggested.  I cover the details of the Federal Reserve meetings throughout 2007 in my post “They Didn’t See it Coming.”

As Nate Silver has pointed out, the worst thing about the bad predictions isn't that they were awful; it's that the economists in question were so confident in them.

No.  The worst thing is that these horrendous forecasts are used to decide policy that completely impacts and distorts the economy.  Economic forecasts are the basis of (or at least provide the political cover for) central planning, and the worst tool for central planning is central banking.

I want to hope that Mauldin makes an unequivocal statement about this form of central banking.

So, we have cataloged the incredible failures of economists to predict the future or even to understand the present.  Now think of the vast powers Fed economists have to print money and move interest rates.  When you contemplate the consummate skill that would actually be required to manage post-Great Recession policies, you realize they're really just flying blind.  If that reality doesn't scare the living daylights out of you, you're not paying attention.

John – come out and say it.  Central banking is central planning, and the planners are incompetent.  If they are “flying blind,” as you put it, why have them in a position of control at all?  Don’t just let this “scare the living daylights out of you.”  Say it is a practice that must come to an end.  After this, there is only one possible conclusion – let the markets decide the factors of money and credit.

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