THINK ASIAN BY ANDREW SHENG
General Douglas McArthur famously said that old soldiers never die, they just fade away.
Central bankers are the generals of monetary policy, because they fight currency wars, combat inflation and defend financial stability. Retired central bankers do not fade away. Like Greenspan, they can write best selling memoirs and retire very comfortably.
It is understandable that people are complacent or are too cautious. No one likes to disturb the status quo. Almost all of us would like to wait till the next piece of information comes in to confirm our hypothesis.
The academic profession and government bureaucracies had become so specialised and fragmented that they could not see the wood from the trees. No one is looking at the earth from 30,000 ft up and asking why it does not add up. ~ Californian Prof Frithof Capra, the Turning Point
Most businesses are coordinated and done horizontally, between different departments and arms of a business or government. Coordination of different parts of government or business, with different agendas and interests, is the most complex task of modern governance. ~ A famous Harvard professor of business strategy.
What most economists and central bankers forget is that markets are all about human behaviour and such behaviour is reflexive.
Human beings do not stand still – they observe each other, anticipate or predict their competitors’ behaviour and act accordingly. The market is always watching how the government policy is implemented – they make money from regulatory and tax arbitrage.
Once they can predict how central bankers or policy makers behave, the policies begin to lose their effectiveness.
"The ruler must be silent and observant, not allowing the public to predict what he will do. If the policy is predictable, it will be negated." ~ Han Feizu
This is like a tennis player. If your opponent knows that you always like to play backhands to a certain corner, he can read you and exploit this weakness.
Goodhart’s Law - every monetary target loses its efficacy, because the market immediately changes its behaviour to negate that policy target.
As Donald Kohn admits, the trouble with the recent generation of central bankers is that they think that they know how the market functions. The fashionable thinking is that they must stick to clear monetary targeting or rules of behaviour, such as Taylor’s Rule.
Taylor’s Rule - If the market can read central bank behaviour, they can adapt and change their behaviour very quickly. For example, if there is too tight regulation, then the market moves more business either offshore where there is less regulation or they move into shadow banking, where regulators cannot see what is going on.
Monetary policy has implications on financial regulation and vice versa.
