Regime uncertainty undermines confidence
The reigning policy regime is deeply distrusted
Despite the recovery, business remains beset by uncertainty. While governments are anxious to declare victory and move on, an increasing number of serious commentators doubt whether enough has been done to prevent a recurrence of the financial crisis. The stance of public policy has failed to generate confidence – whether one turns to the US, Europe or Japan. Prospects in the emerging world remain equally clouded.
Russ Koesterich, global chief investment strategist at BlackRock, has drawn attention to interesting work by a group of economists from Stanford and Chicago showing the role that persistent uncertainty over public policy can play. Policy uncertainty “seems to undermine economic activity through the mechanism of lower business and consumer confidence”. With reference to the US, he points to uncertainty over the implementation of Dodd-Frank, in particular the Volcker Rule, and the Affordable Care Act.
I would suggest that the sources of uncertainty over policy go much deeper than this, and affect the mood of business and consumers globally.
This is a time of profound distrust of the policy regime itself – not just particular policies but rather the entire set of tools of economic, monetary and regulatory policy that governments and central banks have relied on for the past two generations.
More regulation and higher capital for banks, measures to improve the resolvability of major banks, central clearing of derivatives, structural reforms, a clampdown on shadow banking and the rest of the Basel litany of measures – they all fail the acid test of producing a policy regime that carries the confidence of the business world and of households
Business leaders and investors can smell the fear, the desperation in the air. Political leaders goad their central bankers to pull out all the stops. “You will independently decide to print money without limit!” they insist. Influential economists join in: “ There is no inflation! The threat is of deflation!”
Any fool can see that governments are just doubling up on the same formula as they have used every crisis of the past 60 years. Any fool can see that markets are floating on a sea of central bank liquidity and artificially low interest rates, and that massive distortions in investment and the financial sector handicap long-term growth – all for the sake of getting a spurt in the short term and that all-important “feel good” factor beloved of politicians facing re-election.
That is the true source of the policy uncertainty gripping business: it is angst before a change in the rules of the game.
Why hasn’t the crisis produced such a regime change? One must come sooner or later – as the current regime so obviously fails to create the trust without which neither finance nor other kinds of enterprise can function.
Some say it is because the measures taken have done just enough – not enough to procure a sound recovery but enough to take the political heat off the demand for more radical action. I feel that main reason is the lack of consensus among economists on a viable alternative. So the main order of business is to fill that intellectual vacuum.
