Government officials are not omniscient

Pyrmonter sent me a link to a magnificent Alex cartoon.


This captures a sentiment that we see a lot in economic commentary – the view that the monetary authority (and sometimes the Treasury too) is somehow omniscient. That these economic agencies have superior access to information (maybe) and analysis (certainly not) and so have a deeper insight into the economy and economic prospects than anyone else.

This view is so widespread that Roger Congleton (ungated version) blames the authorities for exacerbating the 2008 crisis in the US:

An enormous “all-or-nothing” offer of the Niskanen (1971) variety was presented to Congress, in which there was a strong presumption that the Secretary of the Treasury and the Chairman of the Federal Reserve knew more than the general public, Congress, or outside experts (as in Breton and Wintrobe 1975). The “experts” presumably had access to data that no one else had and used that information to sound alarms that the world economy was about to collapse.

There is some evidence that the “Great Depression” rhetoric used to secure passage of the bailout bill exacerbated the credit problem and the recession. Because individual investors and firms naturally assume that Treasury experts have the very best data, the risk of another Great Depression apparently was “new news” to many of them.

This entry was posted in Economics and economy, Finance, Financial Services. Bookmark the permalink.

4 Responses to Government officials are not omniscient

  1. Lem

    The Fed aren’t omniscient, but they sure know what is going to happen to their interest bill on the trillions of debt they have if they put interest rates up. They’re caught in an inescapable trap. Even if when they do come for everything their citizens own privately.

    Sell everything!

  2. Andrew

    There is some argument for that – credit spreads dramatically worsened after 2008’s TARP – even Australian banks that had only minimal actual impairments traded out to junk bond levels while earning $4bn pa and getting a very strong implied guarantee at senior level. Could that be due to negative commentary about credit? Interesting theory – but the counter argument is that govt-guaranteed debt ALSO traded almost 300bp wider than govt bonds. There’s no obvious explanation other than irrational selling because of forced and non price aware investor redemptions.

  3. Boambee John

    Speaking from experience, any government official who gets things right even 50% of the time is in the top decile.

    PS: I was one for over 30 years.

  4. PoliticoNT

    In line with what Sinclair is raising but on a different policy/advice issue, I’m about half way through reading Industry’s regulatory impact statement on Australian Industry Participation. This would have been the version of Industry under Carr, so DIISTRE or whatever it was then known as. It’s relevant to me as my jurisdiction’s industry participation policy was raised as a result of the CMWLTH’s, but we’ve put ours under review.

    While the ‘statement’ gives off a deep sense of considered expertise it is pure bullshit. One waffling page of confected baloney after another. My favourite moment so far has been the bit where it notes that passing AIP legislation is a good thing because that means AIP policy will be applied across all jurisdictions.

    Fuck me.

Comments are closed.