Monday, August 25, 2008

Fireworks at Jackson Hole

Stanley Fischer, a former IMF Deputy Managing Director and now Bank of Israel governor, made a dramatic gesture at the US Federal Reserve's annual symposium in Jackson Hole, after a hard-hitting speech by Professor Willem Buiter of the London School of Economics. Buiter is a widely respected economist and author of regular FT columns with headlines such as Blockade the Tax Havens. "I asked the organizers for some technical assistance in dealing with this discussion,'' Fischer said, holding up a fire extinguisher.

The controversy was surprising given that Buiter had, once again, been stating the rather obvious. Bloomberg put it like this:

Former Bank of England policy maker Willem Buiter sparked the biggest debate at the Federal Reserve's annual mountainside symposium, saying the central bank pays too much heed to the concerns of financial institutions. "The Fed listens to Wall Street and believes what it hears,'' Buiter said. "This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.''

Buiter had been saying this kind of thing for some time; in a recent paper he described the problem as

"excess sensitivity of the Fed to Wall Street concerns, reflecting (cognitive) regulatory capture of the Fed by Wall Street"

One widely read blogger called "Naked Capitalism" pointed to the Wall Street Journal's economics blog, which said:

"Mr. Buiter slams the Federal Reserve, European Central Bank and Bank of England for what he says was a mishandling of the financial crisis and monetary policy over the past year. He gives the worst marks to the Fed, saying it’s too close to Wall Street and financial markets — responding to their needs to the detriment of the wider economy."

The WSJournal blog went on to opine that "Few participants at the Jackson Hole event appeared to support Mr. Buiter’s view." Many of the comments underneath the blog were vitriolic about Buiter. Try this one:

"Absolutely f…king shocking, this dude must be on drugs and a traitor (though he is English)"

But another commentator on the blog had a more appropriate response to Buiter's critics, including the economist Alan Blinder:

"Did Blinder or anyone else systematically address Buiter’s points?"

And Naked Capitalism went on to say this:

"Even though Buiter is Dutch by descent and dislikes the idea of national identity, his writing style often echos the cut and thrust of Parliamentary debates, a posture that is also well received in English academe and drawing rooms but not well received in the US. So his bluntness is over-the-top by US standards. Buiter has taken a bold position, The Fed needs to be able to explain why what is good for Wall Street is also good for the economy as a whole. The sort of questions that Buiter is raising are notably absent from the media and US-based first rank economists. The Bloomberg story may not give a full enough account to be certain, but the responses to Buiter's charges do not seem persuasive. They amount to disputes over analytical methods and assertions that everything is working fine."

What Buiter was saying, in essence, was that Wall street has too much influence on policy-makers. What's wrong with saying that? It is widely known. It's a bit like all the fuss that was raised when Alan Greenspan said: “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil."

All this follows comments by a former IMF chief economist, Ken Rogoff, that there is currently an "excess supply of financial services." We'll see where this economic downturn goes. But it seems all too likely that the Icarus-like titans of finance may have been flying too close to the sun.

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