Central bankers are in the news again. As the world's financial markets shudder and fall, analysts all over the world are struggling to find an explanation -- not least in order to be able to give answers to the general public, who, understandably, get worried when the assets they were advised to invest in begin to lose value.
But there is a hardly a published comment on the present market nervousness that does not refer one way or another to a recent pronouncement by a central banker. And there is no shortage of such pronouncements.
The world has moved a long way since the far off days of the mid 1970s when one commentator christened the Bank of England "the tomb of the unknown governor" on account of the rarity of speeches by the governor at the time, Gordon Richardson (in due course, Richardson made up for lost time).
The most celebrated dictum of central bankers was probably that of William McChesney Martin, chairman of the US Federal Reserve for a record stretch in the 1950s and 1960s, who believed it was the duty of the central banker "to remove the punchbowl before the party gets going."
The recently retired Alan Greenspan will forever be remembered for worrying publicly about the possibility of "irrational exuberance" in the stock market way back in 1996 -- a warning, by the way, that the markets ignored by becoming ever more exuberant during the happier phases of the dot.com boom.
That experience taught Greenspan a lesson and he embarked on a policy of dedicated opacity in many a subsequent public statement, famously telling a senator that if he thought his meaning was clear he (Greenspan) must have been misunderstood.
Problem predictions
Greenspan became master of the delphic utterance and, among other things, did not like to be tied down to specific inflation targets, which are all the rage in the UK and the eurozone.
By contrast his successor Ben Bernanke arrived in the job having expressed strong interest in inflation targets and in a desire to introduce -- a vogue word, this among financial officials these days -- "greater transparency" into the workings of the Fed.
Now traditionally the delphic utterance can cause problems. Classical scholars will recall that sometimes the oracle at Delphi seemed to possess specific intelligence about what lay in store for those who consulted her. But on another famous occasion, which helped give rise to the modern meaning of "delphic," the oracle was decidedly ambiguous: a Bronze Age Greek king, Croesus of Lydia, asked advice about attacking Persia and, according to Herodotus, was told if he went to war a great empire would be destroyed. It was, but not the one Croesus expected. It was Croesus' own empire which tumbled.
Anyway, within days of retiring from the Fed, Greenspan downgraded the opaque approach and told a private meeting -- private, that is, until his views were broadcast around the world -- that he thought financial assets were overvalued.
That wasn't a very nice present for his successor, because Greenspan undoubtedly nourished the nervousness that has affected the markets ever since and for which Bernanke is being widely -- and I think wrongly -- blamed.
On June 5 Bernanke pointed to an "unwelcome" increase in US inflation and the market dropped sharply. Earlier, on May 1 he told a television presenter that the markets had misunderstood earlier remarks of his and that he was "flexible" rather than "dovish" with regard to interest rates -- he had talked about a possible "pause" in the sequence of increase interest rates. This led to another drop in the market, albeit a much smaller one.
But the markets blamed
Bernanke for the gyrations, when all he was doing was being, well, "transparent."
Inflation obsession
So what is the real reason why the markets are nervous? I think the most important background point is that there has been a prolonged "bull" market and all history suggests there has to be a reaction at some stage.
This is that stage. And the most important foreground point is that the central banks have gradually become concerned about an acceleration in inflation -- the Bank of England's Mervyn King made this transparent this week -- and that has convinced the markets that interest rates are likely to rise further, which will be bad for economic growth and therefore profits.
Behind all this is a feeling that the central banks, in their obsession with inflation targets, have been too relaxed about asset prices.
If there is one expert who has paddled against the tide it is Bill White, economic adviser to the Bank for International Settlement in Basle, who has been warning for some time now that "inflation targets are not enough."
Oh, and by the way, Greenspan would have been proud of Mervyn King this week. The Bank of England governor's speech led some commentators to pronounce that there would be "no change" in rates and others to say rates were bound to go up.
And your correspondent's view? I wouldn't like to make a forecast about interest rates that might be misunderstood.
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