When we last left Basel, we were ducking truth bombs and parsing language. The first three parts of this comical stagecoach can be found here, here and here. Since you’re jumping in at the end, take the time to catch up.
For those caught up, here’s another comical stagecoach.
If there were an open vote taken of the global Jewry for King of the Jews, Mel Brooks is my slam dunk choice. He’d wear the crown with honor.
Before I start making Spaceballs references, let’s get back to the 2010/11 Annual Report from the Bank for International Settlements. Buckle up for some reading you’ll never get around to.
Inflation is the arch nemesis of central bankers. They’d rather amputate toes than experience rising inflation. I keed, I keed. Nobody prefers an amputation. Still, central banks in general dislike inflation:
…central banks must remain highly alert to a buildup of inflationary pressures. They should do so even if the evidence may seem at odds with conventional estimates of domestic economic slack and domestic wage developments.
Credit where credit’s due: this is a warning. It is not some bit of advice.
Don’t see how this will play in the U.S. We’ve got plenty of domestic slack. This much is true. Just today, the Commerce Department reported a 0.6 percent drop in construction. On the heels of the ‘human capital’ truth bomb lobbed by the BIS, I’d anticipate that number getting worse. So-called conventional estimates will be downwardly revised as time proceeds. As for domestic wages, well, aren’t wages flat for the bulk of the last decade? How does a central bank grapple with inflation in an economy experiencing prices rising across commodities? Prices are rising as wages stay flat. Meaning?
There’s a hitch in trying to stifle inflation:
How much tighter does monetary policy need to be to keep inflation in check? Estimated Taylor rules, which link the level of policy rates to inflation and the output gap, indicate that policy rates are too low.
I know, I know…..isn’t the output gap a fictional figure? Yes. Not to economists, who employ it for things such as the Taylor Rule. Maybe Michael Bay thinks his explosions are real. I’d think he’s brighter than that, but who knows. The man did cut his teeth in the advertising business. What exactly is the Taylor rule, then?
Glad you asked. See that, how I presumed you asked about the Taylor rule? Quite presumptuous. The Taylor rule, it turns out, is one more fancy semantic rhetorical trick. It’s the compartmentalizing of language. You see this most vividly in, of all places, baseball.
BABIP. VORP. SKRIZZLE. That would be batting average of balls in play, value over replacement player and a neologism for scrilla. Droves of baseball fans speak like this now. “Well, Troy Tulowitzki has a 17.8 VORP. He’s worth all the skrizzle the Rockies paid.”
As time chugs along, people delve deeper into topics, creating new and more contrived phrases and anagrams along the way. I mean, isn’t that the basic premise of cryptojournalism? Cryptojournalism? Only in a world of Taylor rules and VORP.
What is the Taylor rule, then? Bless you, the Federal Reserve, for providing this awesome explanation of Taylor rules. The Federal Reserve explains it a couple of ways, initially stating:
Taylor rules are simple monetary policy rules that prescribe how a central bank should adjust its interest rate policy instrument in a systematic manner in response to developments in inflation and macroeconomic activity. They provide a useful framework for the analysis of historical policy and for the econometric evaluation of specifc alternative strategies that a central bank can use as the basis for its interest rate decisions.
The Fed reiterates in closing, “Taylor rules offer a simple and transparent framework with which to organize the discussion of systematic monetary policy.” Simple and transparent, sounds great.
Ever so gracious, they provide a simple and transparent explanation of the classic Taylor rule. This is discovered on the heels of the decision to adjust interest rates based on inflation and economic activity. Take a look for yourself.
In time, a generalized Taylor rule was crafted. Bring your A game for this one, suckers.
When someone with an MBA in economics stumbles on this page, I hope they can put all that in layman’s terms in the comments.
Here’s the beauty of the Taylor rule. It proves to be essentially useless. Seems that internationalist bankers have an especially wry sense of humor.
“Taylor rules have proven valuable for historical policy analysis.”
“However, interpretations of historical policy based on information that was unavailable to policymakers when policy decisions were made is of questionable value.”
“Policy prescriptions from a fixed rule are distorted as the inputs to the rule are revised from those originally available to policymakers, and therefore counterfactual comparisons of alternative policy rules can be misleading when they are based on revised data.”
“Shit! If only we’d known!”
Sounds like the plight of America’s greatest hero: Captain Hindsight. The hero for the modern age could do no wrong. Until he second guessed himself one time too many.
Indecision clouded his vision. Exactly like Faith No More.
Jack Brolin always had a knack for hindsight. When his gift became a curse, the bottom fell fast and hard.
Counterfactual comparisons can be misleading? So are you telling me the X-Men didn’t defuse the Cuban Missile Crisis? Spoiler alerts aside, if you were so inclined (I am) to, you could say the Taylor rule, in some instances, do nothing more than distort the market with shoulda, woulda, coulda’s?
Feeble analogies aside, this compartmentalizing of speech we see developing is, to use an industry term, trickeration. Case in point:
In the near term, the recovery of risk-taking and innovation across various dimensions will pose an important challenge for authorities as they consider whether and how to deploy the tools at their disposal to address potential threats to financial stability.
Dimensions, eh? Didn’t realize I’d have to tap MC Escher and Stephen Hawking for assistance in the money market. Much as I hate it, I sort of love it. Hinging on that one word, dimensions, are countless ways to spin an argument or make a point. Flexible language as a cornerstone of an industry which relies heavily on the theory of hedging makes perfect sense.
Another truth bomb. Really, more a truth BB.
…risk can be transmitted through unexpected channels…
Let’s put a misconception to rest right now. You’re not going to catch crotch turkeys off a toilet seat. That’s a myth.
Financial disarray is more likely to occur on the can. Mmmmmm, hyperbole, you are manna from the Gods. The game has been cat and mouse since humans verbalized words for ‘cat’ and ‘mouse’ and figured how to analogize.
Read this. Then tell me if you think a cross-border bank resolution regime sounds like a fancy word for toll booth:
Outstanding issues include dealing with systemically important institutions, designing more effective cross-border bank resolution regimes, and addressing the risks relating to shadow banking activities. Meeting these challenges will be the focus of the next phase of global regulatory reform.
Also on the menu: a delectably smooth camembert, a wild duck foie gras and sumptuous organic strawberries and fresh rhubarb.
In case you missed the memo on planetary integration:
….many of the analytical questions that concern policymakers can be answered with institution-level data collected on a globally consolidated basis.
“Yes, let me try the rhubarb and strawberries, and could you please bring me a glass of cucumber water?”
Institution-level data collection on a global basis sounds like it would be a lot of bureaucratic legwork. What exactly are policymakers and their data mining teams supposed to be looking for? How much access are we talking about?
ability to monitor leverage ratios…consistently across different parts of the financial system would represent a big step forward in tracking systemic risk. It would require, at a minimum, internationally comparable measures of total assets and equity for individual financial institutions. Importantly, the measure of total assets would have to include all off-balance sheet positions that could affect a bank’s capital.
That’s quite a bit of access. Were regulators to begin peering off-balance sheet, there is little good they’ll find. You do not keep good assets off-balance sheets, do you? Then again, counter-intuitive semantics, the simple and transparent Taylor rule and the like, are par for the course.
In ‘a’ perfect world central banks, there would be this degree of access. I love punchlines:
In practice, any such attempt would be ruled out by the amount of data required, the cost of collection, and the confidentiality issues it would raise.
Great, glad we got that cleared up. It is tricky to discern why there is such talk of opening the books followed by the blunt declaration it’s not possible. Chalk it up to thinking idealistically while being realistic.
It turns out that is not pragmatism. Dexterously ambivalent is more like it:
The task is to find a data mix that will give policy analysts a detailed enough picture of key institutions and their activities.
Can’t get a detailed picture? Well, you’re going to settle for detailed enough. When the next crisis happens to have evaded diligent, well-meaning regulators and policymakers, that’s when the dreams of fuller access pushes to the fore. Disguise the limit! Err, that should say the skies the limit! Classic treacherous tactic: always shoot for the moon in hard negotiations. You may get it, but when you don’t it leaves a wide berth around which to work.
While I wanted to leave this alone, things do not take place in a void:
Given the confidentiality issues, much of this detailed information will have to remain in the hands of supervisory teams charged with systemic risk analysis.
Hacker’s f’n dream, right there. That’s the whole spiel. Everyone should be very wary of so much information being collected into so few hands. If the IMF is prone to hackers, who’s secure?
You’ve been a wonderful audience, thanks again for coming. And if you’re celebrating Independence Day this weekend, remember the Founding Fathers. They wanted people to independ on themselves. Independ on yourself, and you’ll be aces.