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"Outing" The Over-Confidence Of Our Central Bank Overlords
Submitted by Tim Price via SovereignMan.com,
Leon Walras, one of the original economists and idiots who adapted most of his theories from the world of physics, once posited the fancy-sounding General Equilibrium Theory to explain market behavior.
Investor George Soros advocates an alternative theory which he terms ‘reflexivity’:
“[F]inancial markets can create inaccurate expectations and then change reality to accord with them. This is the opposite of the process described in textbooks and built into economic models, which always assume that financial expectations adapt to reality, not the other way round.”
Walras spent his last years lonely, bitter and afflicted by dementia. George Soros is a billionaire.
Draw your own conclusions as to which of these theories is more likely to be correct.
“Inaccurate expectations” sounds like a pretty accurate way of describing investors’ reaction to Mario Draghi’s speech at the Economic Club of New York last week.
After his speech, several European stock markets fell by over 3.5%.
And Mr Draghi’s deputy told CNBC the following day that this happened because investors are stupid whereas central bankers are highly intelligent:
“The markets got it wrong in forming their expectations. They did indeed have higher expectations than were there and that’s why they reacted like they reacted but that was not our intention.”
Mr Draghi on Friday also went on a damage limitation exercise, announcing that the ECB had “the power to act, the determination to act and the commitment to act.”
He is certainly acting.
He added,
“There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate.”
It is not clear whether the Great and Powerful Oz was standing behind a curtain while he said this.
This attitude of ‘father knows best’ is not unique for the unaccountable bureaucrats of central banks.
It was vividly displayed after the Panic of 1907 by the US Senator Robert Latham Owen, one of the primary founders of the Federal Reserve, who had a spectacular career of failures in banking:
“It is the duty of the United States to protect the commercial life of its citizens against this senseless, unreasoning, destructive fear that seizes the depositor when he has been sufficiently hypnotized by the metropolitan press with its indiscreet suggestions.”
Former Fed chairman Ben Bernanke once confessed that he too, like Mario Draghi and Vítor Constâncio, was sometimes too intelligent for us:
“That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can’t do that because the markets do not understand hypotheticals.”
It is always tragic when we filthy peasants stop banging rocks together momentarily to listen to the awe-inspiring intellects at the central banks, only to misunderstand them.
Perhaps the real problem is one of overconfidence. Not our overconfidence. Theirs.
How much confidence did Ben Bernanke declare in a 2010 interview with 60 Minutes in the Fed’s ability to control inflation? Without hesitation: 100%.
Mario Draghi claims “with confidence – and without any complacency – that we will secure the return of inflation to 2% without undue delay”.
Oh! Well he’s confident! That settles it, then. End of discussion.
Except that, if he’s so confident, why hasn’t inflation in the euro zone returned to that 2% level?
Why, for that matter, is a central banker determinedly fuelling price inflation in the first place?
But of course we lack the intellect to even to raise these questions.
Fortunately, Professors Edward Russo and Paul Schoemaker devised a simple self-test for overconfidence back in 1989.
They posed 10 questions and asked respondents to put down answers with a 90% confidence range. You can conduct this test yourself.
So for question #1, answer “I am 90% confident that MLK’s age was somewhere between X and Y years of age when he died.”
So please give a low/high 90% confidence interval:
1. Martin Luther King’s age at death
2. Length of the Nile River
3. Number of countries that are members of OPEC
4. Number of books in the Old Testament
5. Diameter of the moon in miles
6. Weight of an empty Boeing 747 in pounds
7. Year in which Mozart was born
8. Gestation period, in days, of an African elephant
9. Air distance from London to Tokyo
10. Deepest known point in the ocean, in feet
(The answers appear at the end of this commentary.)
Plous (1991) went on to test confidence in two separate groups of experts-- weathermen and doctors.
Each group was given information relevant to their own discipline: weathermen were provided with weather patterns and asked to predict the weather; doctors were given case notes and asked to diagnose the patient.
The weather forecasters did remarkably well. Doctors, on the other hand, performed disastrously. While they were 90% sure they were correct, they were right less than 15% of the time.
The evidence suggests that central bankers may be much closer to doctors than weathermen, at least with respect to their overconfidence (no offense to physicians).
It’s time to face facts. After seven years and $14 trillion, Quantitative Easing simply hasn’t worked.
QE has distorted the prices of all financial assets, fuelled growing social inequality, and enriched many within the financial sector at the expense of everyone else.
The one thing it was meant to forestall (deflation) is increasingly visible throughout the system.
Confidence in central bankers is now hanging by a thread. Mario Draghi (and his fellow Goldman Sachs alum Mark Carney at the Bank of England, for that matter) might want to adopt a little humility before that thread snaps completely.
* * *
Answers to questions above: 39 years; 4187 miles; 13 countries; 39 books; 2160 miles; 390,000 pounds; 1756; 645 days; 5959 miles; 36,198 feet.
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This can and will go on a lot longer than most of the lives for people alive today.
Hedge accordingly.
Until oil production bankrupts the economy.
These so called "Central Bankers" are no more than Central Government protected criminals. THE INTERNATIONAL SOCIALIST BANKING MAFIA MUST BE DESTROYED.
I don't think so Laws, when the herd stampedes, there's not really very much the cowboys can do. 10% are yukking it up, but 90% are unhappy and scared. These are not good percentages. It won't take much "real" economic strain to set the 90% off.
Spoctor Din
Sure sure. I simply don't see where the fuck everyone is going to run to exactly. Thanks to the internet and fredom of information in this electronic age it is pretty easy to see exactly who really benefitted from QE. Life for most is hard, period. That will not change any time soon, so as far as I am concerned if bankers and financiers want to commit suicide, it say let them.
https://www.youtube.com/watch?v=0CFuCYNx-1g
Cuz yea.
It’s time to face facts. After seven years and $14 trillion, Quantitative Easing simply hasn’t worked.
QE has distorted the prices of all financial assets, fuelled growing social inequality, and enriched many within the financial sector at the expense of everyone else...
The first two sentences claim it didn't work while the final sentence explained that it worked exactly as intended.
Which renders the entire idea of "over-confidence" moot.
exactly. besides, they have every reason to be confident. even when they're wrong they can just throw money at their friends if it goes awry.
Central Bankers are confident employers can keep paying their employees to do nothing!
...the markets do not understand hypotheticals.
there are no markets anymore. the bernank made sure of that. the algos understand perfectly. the fed never wants the market to go down ever again no matter what they say on a day to day basis. btfd didn't materialize for no reason.
until congress & the new president have the balls/votes to take the F5 key away from the fed, the market will only correct so-much. obama & the keynsians have got to keep the illusion that things are fucking awesome in the economy otherwise there will definitely be a change of president (repub wins). obama won his first election IMO for 2 reasons: 1. the stock market was cratering 2. palin was a fucking ditz everytime she openned her mouth. obama knows this & he knows the charade has to be up-kept to ensure she has the best shot at beating a repub. again, thats only 1 component but its a pretty important one IMO when you are fighting for north of 50% of the independent vote.
' Investor George Soros advocates . . . . '
Investor ( colour revolutions ) in overthrowing Governments via various nefarious NGO's, George Soros advocates . . . .
After watching Mario and Yellen speak last week it proved to me these people have no idea what is going on. They just talk in circles leaving escape clauses to every prediction and answer. Hard to believe that these two hold the key to the monetary health of so many people. I bet only a small per cent of the populations could even tell you who they are or even what central banks are. If these two are the best hope to save the world monetary systems. i'm scared we are doomed to a very hard landing.
Hypothetically speaking .... is Bernanke still on his World tour named "Victory Lap" and collecting $250k per appearance?
One doesn't hear much from the Media regarding that tour. I told him he needed Bono to accompany him.
They present it as science and engineering of economies based on science.
Can't be, it is correlation data, in the same class as history, and even if it were cause-and-effect data, there is no technology that allows control of open, evolving, complex systems.
We can do that for the human body, the only such we have serious control over, because we have 7B copies of a naturally-evolved system which was doing its' own homeostatic control in increasing precision for a couple billion years of evolution. Expensive process, layering bottom-up controls like. It is called a subsumption architecture in CS/Robotics.
Also 30 allied-health sciences using animal models for experimental data, and 150 years of increasingly-scientific medicine. They aren't there yet, IMHO, latest series of 1000 autopsies of deaths in a major teaching hospital said that 15% of deaths were for reasons not diagnosed before death.
Waving your hands and speaking in politically-persuasive terms is NOT a control system in any sense of control system my profession understands.
https://thinkpatriot.wordpress.com/2015/05/29/straight-from-the-horses-ass/
My bit for QA on the political system, another bug report :
AND 9/11 was a false flag operation by the US government under the control of Israeli-Necons and has been used to justify the hatred of Muslims and the 14-years of chaos that protects the Israeli-Neocons from hanging for their crimes.
https://thinkpatriot.wordpress.com/2015/12/03/911-is-the-weak-spot/
In 1929, Wall Street crashed and the wealthy lost money.
The wealthy elites who had lost money imposed stringent regulations on bankers.
In 2008, Wall Street crashed but the wealthy are still making money.
The wealthy elites who are still making money have not imposed stringent regulations on bankers.
Who says Central Bank policies haven’t worked?
Certainly not the bankers.
They have gained another seven years (so far) to carry on with their wild excess, enough to set a banker up for a lifetime.
I have no confidence that the Federal Reserve will do anything good for the American People. The Federal Reserve is solely concerned with making the rich richer at the expense of the American People. I hold the political parasites totally responsible for that, too.