Julien Noizet of Spontaneous Finance is back to blogging after a break. He questions the government/central bank intervention in financial matters.
In his recent post, he asks the question: Are we all macroprudentialists?
The title of this post (and a reference to Milton Friedman’s famous quote) is also the headline of a recent speech by Klaas Knot, President of the Netherlands Bank, and to which he answers:
In the spirit of Pentti’s thinking my answer is: Yes – as long as we stay eclectic, pragmatic and flexible. And we take the interactions of monetary and macroprudential policies into account, and coordinate the two policies.
While there is some truth to the second half of his answer – that monetary and macropru do interact, I find myself very uncomfortable with its first half: if we are all macroprudentialists now, we are heading for disaster.
As highlighted on this blog a number of times:
- There is barely any evidence that macropru has any effect (see also here and here) but on the other hand it ‘leaks’ and does have distortive impacts on the allocation of credit in the economy.
- It cannot counteract the effect of monetary policy.
- It opens the door to ‘bureaucratic tyranny’ (as John Cochrane said) and assumes away all Public Choice issues.
- It assumes omniscient regulators and rejects the conclusions of the socialist calculation debate or the insights of Hayek’s concept of knowledge dispersion.
But as research pieces presented last September at the BIS/Central Bank of Turkey seminar on macroprudential regulation demonstrate, group think is widespread: economic researchers include many, many important and explicit caveits and limitations within the core text of their papers; yet seem to suddenly ‘forget’ them once it is time to write both the abstract and the conclusion of the same papers.
Out of 19 papers, only one refers to some of the issues listed above and questions some the fundamentals behind macropru reasoning (Bálint Horváth and Wolf Wagner’s Macroprudential policies and the Lucas Critique, an interesting read). Many others, on the other hand, question the very fundamentals of a market economy: every agent fails to ‘internalise’ the damages that his/her actions have on the market and economy as a whole. Therefore, an external regulator needs to intervene in order to control the agent’s actions and stabilise the overall economy.
This is absurd. The same reasoning could be applied to any good: an agent overproducing a certain good fails to ‘internalise’ the damages it causes to the market and his industry. As a result, this industry needs a central planner to organise it in the most efficient way. We know the fallacy of this logic. Yet it prevails in today’s macropru theoretical justifications.
This view is so much in minority..