Home > Bank of England > From “Too Much Uncertainty” to “Not Enough Uncertainty”?

From “Too Much Uncertainty” to “Not Enough Uncertainty”?

Way waaaaay back in the dark days of 2012, which was, ooh, decades ago, Mervyn King used to complain about uncertainty.  “Uncertainty” was King’s “excuse” for really bad stuff happening which wise central bankers can’t do anything about.  Like real GDP going the wrong way.  This is my favourite collection of Merv quotes from his infamous “black clouds” speech:

… a large black cloud of uncertainty hanging over not only the euro area but our economy too …
… Complete uncertainty means that the risks to prospective investments … are simply impossible to quantify …
… the black cloud of uncertainty and higher bank funding costs …
… The paralysing effect of uncertainty, with consumers and businesses holding back from commitments to spending …
… the black cloud of uncertainty has created extreme private sector risk aversion …
… private sector spending is depressed by extreme uncertainty …
… during the present period of heightened uncertainty …

Fast forward to 2014, and this is the “new normal” for central banking, as expressed by Charlie Bean:

Another reason the exit [from the ZLB] may be bumpy stems from the starting point. Implied volatilities in many financial markets have been at historically low levels for some time now (Chart 7). Together with low safe interest rates in the advanced economies, that has underpinned a renewed search for yield and encouraged carry trades. Taken in isolation, this is eerily reminiscent of what happened in the run-up to the crisis. Episodes like the ‘taper tantrum’, which produced a short-lived bout of volatility but no major disruption may also be contributing to a sense of complacency and an underestimation of market risk by investors.

It is inevitable that at some stage market perceptions of uncertainty will revert to more normal levels. That is likely to be associated with falls in risky asset prices and could be prompted by developments in the Ukraine, the fault lines in the Chinese financial sector, monetary policy exit in the advanced economies, or something else. But it will surely come at some point.

In 2014 wise central bankers are now worried that there is not enough uncertainty – there may be that dreaded “search for yield” – or, as those cheeky capitalists like to call it, “higher investment”.  This is a bad thing, because, well, there might be “bubbles” even if we can’t define what a bubble is or identify one until after the fact.  And we’ll apply the usual post hoc ergo propter hoc fallacy, because there are things which went up in 2007 which also went down in 2008, ergo those things caused the recession in 2008.  Even though central banks’ own models tell us that financial crises and recessions have a single common cause: bad monetary policy.

We can be sure of only one thing: whatever happens, central bankers will be quick to tell us it wasn’t their fault.

 

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Categories: Bank of England

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