Hot money galore: Why prophets of economic doom are wrong

Virtually every one of the scare-mongering end-of-the-world predictions in recent years from the prophets of economic doom have turned out to be false. Perhaps it's time for them to shut up.

Vembu June 28, 2013 15:32:53 IST
Hot money galore: Why prophets of economic doom are wrong

Anyone who's driven an automobile with a particularly opinionated back-seat driver who keeps up a steady litany of unsolicited advice will know how infuriating the non-stop natter can be. Back-seat drivers presume to know, rather better than the person at the wheel, precisely when to engage the gears, step on the accelerator or slam the brakes. And they're almost always convinced that the real driver is doing the wrong thing at all times.

Economic policymakers too bear a similar cross: they suffer the infliction of an army of economic commentators who keep up a non-stop narrative on precisely how those at the wheel are slipping up. And particularly in times of economic turmoil, of the sort that the world - and India - have seen, more so since the global financial crisis of 2008, it may appear to policymakers that the cacophonous chorus from the "back-seat drivers" is drowning out all sober reflection on policy.

Hot money galore Why prophets of economic doom are wrong

Virtually every one of the scare-mongering end-of-the-world predictions in recent years from the prophets of economic doom have turned out to be false. Perhaps it's time for them to shut up. Reuters

As the Chief Economic Adviser to the Finance Minister, Raghuram Rajan has himself borne with great fortitude an outpouring of what passes for economic wisdom and advice from op-ed commentators in newspapers and from television talking heads who presume to know more than he does about the minutiae of policymaking. It must surely occasion much frustration in him, but then there's probably frustration of a higher magnitude from seeing the government that he ostensibly advices not act on the advice that he proffers. Far too often have we seen Rajan bat for the government, when it faces criticism for its macroeconomic mismanagement, and resort to intellectual acrobatics in his defence of the indefensible.

But every once in a while, evidently, Raghuram Rajan tires of being on the receiving end of advice and so likes to slip into the back seat and do some proxy driving from that perch. In his most recent column for Project Syndicate, for instance, Rajan dwells on the economic orthodoxy that Western economies inflicted on emerging economies when the latter were faced crises in the past. He then contrast this with what happened in 2008 when the crisis hit home for Western economies. They were, he recalls, "much less willing to accept that pain was necessary... The (US) Fed... proposed creative solutions that few in policy circles, including the usually conservative multilateral institutions, questioned."

The context in which Rajan serves up this criticism is the recent decision by the US Fed to gradually wind down its Quantitative Easing program, which has roiled global markets. Rajan reasons that the three rounds of quantitative easing may have achieved far less than US policymakers expected of it. The readiness with which central banks embraced such innovation can, he reckons, only be explained as their inevitable entanglement in politics: having spent billions rescuing private banks, how could they not have been seen to be doing nothing when Main Street felt the economic pain?

Rajan's point is nuanced, and is well-reasoned, but his criticism of the US Fed's unconventional monetary policy of the past few years may perhaps be a trifle unmerited. Other, less-informed commentators too have been echoing the same point, but with much less finesse and rather more hysterics. But as other astute analysts like Martin Wolf and Paul Krugman noted back in 2010, the Fed was right to turn on the liquidity tap in response to the compelling economic circumstances of those times.

As Wolf pointed out recently, central banks, including the Fed, "are doing the right thing. If they had not acted as they have over the past six years, we would surely have suffered a second Great Depression. Avoiding such a meltdown and then helping economies recover is the job of central banks." Under Ben Bernanke, the US Fed has, he adds, "done the right thing in trying to bring the US and world economies through the crisis. It deserves praise."

Nearer home, Ajay Shah too makes much the same point. "Quantitative easing at the zero interest rate lower bound is a messy world, when compared with the clean operation of inflation targeting under normal times," he writes. "I felt that Bernankeand the Fed are doing a good job of navigating this messy landscape."

Quite unlike Rajan's nuanced criticism, much of the shrill denunciation of central banks in recent years has come from economic charlatans who were merely talking up their portfolio by resorting to the most vile scaremongering about the impact of the Fed's unconventional monetary policy. Many of them are incorrigible gold bugs who seem not to have reconciled themselves to the sharp climb-down in gold prices in recent weeks, and particularly since Bernanke's flagging of a winding down of Quantitative Easing programs.

That promised exit from the QE program may not happen soon - or even easily. And, of course, gold prices could still rise if US economic data turns for the worse and the Fed is forced to put off its unwinding of the QE. But the fact that just the mere mention of the possibility of a wind-down of QE has pricked the gold bubbleand brought prices back to earth should have had a sobering impact on these economic Cassandras. But they're still at it, tom-tomming the next Armageddon scenario.

Virtually every one of the charlatans' scare-mongering end-of-the-world predictions over the past few years have turned out to be false. And their bets on gold as the ultimate safe haven have recoiled spectacularly on them. Perhaps there's a case for them now to maintain a bit of radio silence in the back seat.

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