×

Guess What? Central Bankers Get it Wrong too…

Ok, now we've got that emergency rate cut from the Fed AND the full 75 bp the markets wanted...

And where does that leave us now? Are our troubles over now? Are the causes of the malady getting cured? - You wish! But we'll keep that for another blog, shall we?

No sooner had news of the emergency rate cut by the Fed hit the markets, the wolves were baying for more (monetary) blood ... another 25 pb cut by the Fed at the regular policy meeting next week .... and for swift rate cuts from the ECB, preferably also in an emergency between-regular-meetings move. .... WHAT EVER next?!?!?!?!

Have I missed something here? Are we on the brink of the abyss? Is the global economy in free fall minus any parachutes? Cut rates if you must, but for heaven's sake, do you have to stoke the engine of the panic train?

And now for the most sophisticated argument for a swift ECB rate cut: Isn't there the danger that the ECB will get it wrong? Will the ECB misjudge the economic growth prospects? ... Ah, well ... sure they might. The ECB got it wrong before. But, hey, are you suggesting the Fed got it right?!?!?! - Surely not. The Fed certainly got it wrong in the first place with all that easy money for too long; then they got it wrong by completely underestimating the liquidity squeeze last summer and now ... well, we shall see.

But that's not even the point I am trying to make here. Not another of those Fed vs. ECB diatribes at all. No, this is about central banks and central bank projections, forecasts, evaluations in general. Because - here's the punch line: Central bankers get it wrong, too ... In fact, all the bloody time.

And why now? Every other economist - good, bad or indifferent - invariably gets it wrong, because of some imponderability or other in this complicated, fickle, unpredictable tapestry of economic, political and financial scenarios. Or can you point to me an economist - any economist, strategist, analyst, central bank watcher - who, let's say a year ago, predicted what happened in the markets over the past twelve months? If you can - let me have his name and number; I would sure like to interview him or her next time around! We've talked about it before: statistically speaking, a more than 50% success rate with predictions puts you right on top of the "best of" league among forecasters. Need I say more?

So why should the central bank forecasters get it right, if nobody else does? They might have a few more statistics to play around with, but at the end of the day, they are only in the same old probability game as everybody else is. And probabilities are just that - probable, but by no mean certain.

So central bankers get it wrong like everybody else - live with it!

Ha! But what about the markets? - They are the giga counter for economic developments and the forward-looking indicator of all. The market always knows best. - Yeah, right! Are we talking about the same market that has been talking consolidation for two years and raced from record high to record high all the same? The same market that has been bouncing around like a yo-yo for months on end? - Ah, yes.

Besides - THE MARKET ... let's be quite clear here: THE MARKET, that's hardly an independent, non-profit-oriented supranational charity now, is it? When we talk about THE MARKET, we're after all talking about a plethora of differing self-interests here. Salesmen out to sell their products, financial engineers out there with profit-maximizing schemes, fund managers out chasing the best return. If they bay for cheaper money, they hardly do so for the benefit of the embattled US consumer or for the sake of economic growth; they do it because it improves their bottom line. Quite legitimate, of course. But let's not pretend they KNOW something the Fed doesn't know.

So, where does that leave us here? - Economists get it wrong, so do strategists, analysts, traders and THE MARKETS. Central bankers get it wrong, too. So - WHO, you may ask, gets it right?!?! ... Ah, what do you think? - The historians, of course. You may read up all you desire about the crash of 1987, for example.

In case you forgot all about Black Monday 1987 (or are too young to remember!):

In financial markets, Black Monday is the name given to Monday, October 19, 1987, when the Dow Jones Industrial Average (DJIA) dropped by 508 points to 1739 (22.6%), and on which similar enormous drops occurred across the world. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover. (The terms Black Monday and Black Tuesday are also applied to October 28 and 29, 1929, which occurred after Black Thursday on October 24, which started the Stock Market Crash of 1929.)

Questions? Comments? Send an email!