What Central Bankers Say When They Mean ‘Awful’: | Caroline Baum

Uncertainty plays a key role in central bankers’ policy deliberations. The Federal Reserve says there’s "considerable uncertainty" about the strength of the recovery.

In the Euro zone, "uncertainty remains high," European Central Bank President Jean-Claude Trichet said at a September 3 press conference. He went on to qualify the degree of high-ness, calling it "high," "very high" and "higher than usual" in the SPAce of a half-hour. Trichet further categorized uncertainty as "ongoing" and "a major factor" in the outlook.

The uncertainty principle isn’t confined to central banking. It has infected academia, too.

"There’s too much uncertainty out there," MIT labour economist Thomas Kochan told the New York Times , explaining his doubts about an imminent increase in job openings.

The ghost of uncertainty haunts financial markets. Analysts remind us all the time how much markets hate uncertainty. (They hate it a lot more when prices are falling. Rising prices don’t breed uncertainty.)

Stock investors make decisions to buy and sell in the face of uncertainty over corporate earnings. Businessmen contend with chronic uncertainty over what and how much to produce. Consumers deal with uncertainty when they choose between an adjustable and 30-year, fixed-rate mortgage.

Outside the world of finance, uncertainty is rampant. Golfers, airline travelers and wedding planners are prisoners of weather uncertainty.

Euphemistically Uncertain

Funny how uncertainty seems to vanish when the haze lifts. When the sun is shining, the economy is ginning and the markets are rising, policy makers don’t talk about uncertainty.

And that’s the point. The future is always uncertain.

It was uncertain when folks were piling into Asia’s emerging markets in the mid-1990s.

It was uncertain when they were buying Internet and technology Stocks in the late 1990s.

And it was uncertain when they were flipping condos in 2005.

Uncertainty as a policy or planning variable is a lot more prevalent in bad times. Which leads me to believe uncertainty is a euphemism for something else: pessimism.

When central bankers say the outlook is uncertain, they mean they see heavy storm clouds overhead. The banking system is still on life support. The consumer is buried under a mountain of debt. The states are in bad shape; the federal government, even worse.

Crap for Scrap

Yet unlike central bankers, who are victims of uncertainty, their fiscal counterparts are brimming with confidence over their initiatives and assuredness over the outcome.

Take the so-called cash for clunkers, a two-month program offering rebates of as much as $US4500 to consumers who traded in their gas-guzzlers for new, more fuel-efficient cars. Transportation Secretary Ray LaHood called it "a wildly successful program". President Barack Obama said it has been "successful beyond anyone’s imagination".

Never mind that the federal government grossly overpaid for the environmental benefit of turning crap to scrap. After a spike to 14.1 million in August, US auto sales slumped to 9.2 million at a seasonally adjusted rate in September. That’s close to the 28-year low of 9.1 million in February.

Then there’s the $US787 billion fiscal stimulus program, which saved or created 1 million jobs through August, according to the White House Council of Economic Advisers.

Woulda, Shoulda, Coulda

Since the American Reinvestment and Recovery Act was passed in February, the US has shed 2.7 million non-farm jobs, and the unemployment rate has jumped to 9.8 per cent from 8.1 per cent. The CEA says -- with absolute certainty, it should be noted -- that the labour market would have been worse without the stimulus. There is no real-world way to test such assertions.

The chairman of the CEA, Christina Romer, wasn’t always such a devotee of fiscal stimulus. In her former life as an economic historian, she examined "What Ended the Great Depression?" in a 1991 working paper for the National Bureau of Economic Research. Romer found that "monetary changes" in the period 1933-1937 and 1939-1942 were "crucially important to the recovery, while fiscal policy had very little effect".

Why uncertainty afflicts economists at the central bank and not those that work for the administration, I can’t say. I doubt all that euphemistic uncertainty is doing the public any good.

Uncertain Uncertainty

So here’s my advice to central bankers. Get with the confidence game, I mean, program. Hold your heads up, stick out those chests, and put some swagger in your step. Talk with some of that old fiscal-policy assurance.

If that isn’t your style, try taking a leaf out of former Defense Secretary Donald Rumsfeld’s book. Rumsfeld liked to differentiate among "known knowns" (things we know we know), "known unknowns" (things we know we don’t know) and "unknown unknowns" (things we don’t know we don’t know). It’s the third one that gets you every time, Rumsfeld said.

So, central bankers, emphasise garden variety uncertainty - - certain uncertainty -- if you must, but lay off uncertain uncertainty unless things get really bad.

Bloomberg

Source: theage.com.au