William White: "The facts are so obvious"

Caroline Baum at Bloomberg files this report on the glaring common sense deficiency regarding the destructive nature of asset bubbles that seems to plague most central bankers around the world, calling on Austrian-leaning William White, recently retired from the Bank for International Settlements, to try to teach his Keynesian cohorts a thing or two about their well intended, but haplessly ineffective laser focus on consumer price inflation.

“The most calamitous downturns were not preceded by any degree of inflation,” White said in a telephone interview yesterday. “There was no inflation in 1873-74, in the 1920s, in the 1980s in Japan and in the 1990s in Southeast Asia.”

All these extended credit cycles ended badly. The U.S. economy contracted for 65 months, a record, from 1873 to 1879.

The bursting of the housing bubble and the deepening financial and economic crisis should be sobering to those who resist the idea that asset bubbles, when they burst, can be as destabilizing as inflation, which is the reason central bankers adopted inflation targets.

Well put.

William White has been something of a role model around here over the years, his name gracing these pages on at least three occasions, for some reason always in June:

• June 2006 - Catch the Swamp Fever!
• June 2007 - Austrian economics in the WSJ
• June 2008 - BIS Chief Economist William White channels his inner-Austrian

He has been like a bright beacon in an otherwise dimly lit world of Keynesian economists who are, perhaps now, just beginning to realize what was meant when the 20th century's most famous economist uttered, "In the long run, we're all dead".

Caroline continues:

No one is suggesting central bankers target asset prices (Dow 13,000?). Nor is the issue bubble detection or identification, which implies policy makers know the appropriate level for asset prices and inspires visions of Sherlock Holmes-like characters looking under rocks in the hopes of making a discovery.

Economics is a social science. Econometric models spit out results that lack the accuracy of chemistry experiments and the precision of mathematical equations.

Central bankers are forced to deal in the realm of the touchy-feely all the time. If their work could be reduced to an equation, we wouldn’t a) need them or b) find ourselves in the mess we’re in now. So why is it so hard for policy makers to grasp what White and his BIS colleagues have been saying for a decade?

“Targeting asset prices is not at all what we’ve been suggesting,” White said. “Asset prices are a symptom. The underlying problem is excess credit growth.”

A few years ago, excess credit growth went by the name of "financial innovation" and was lauded by most practitioners of the dismal science when they weren't trying to explain why a zero saving rate was completely understandable in a world of rising asset prices and an enormous "savings glut".

Central bankers should realize that a lack of action during the credit upswing may impose greater costs to society.

“The facts are so obvious,” White said. “You don’t need to be a rocket scientist. Even an economist, when he sees something happen, will admit it is possible.”

Being an engineer for twenty-some years, the inner-workings of a Keynesian economist's brain, even the ones who win Nobel Prizes and ascend to the loftiest positions in the world, will forever be impenetrable to me.