Wednesday, February 28, 2007

Whose Text? Whose Message?

There is a curious sentence in the story that Krishna Guha recently filed from Washington for the Financial Times, under the headline "Bernanke seeks to reassure markets:"

However, under Mr Bernanke, the Fed has consistently taken the position that it is not Mr Greenspan’s fault if investors pay excessive attention to what he has to say.

This has the vague feeling of Conan Doyle's classic dog-that-did-not-bark-in-the-night. It is not a quotation, nor is attributed to any specific member of the Federal Reserve. Is Mr. Guha speaking for some "Deep Throat" source; and, if so, in the tradition of All the President's Men, did his editor require him to identify a confirming source? Alternative, is Mr. Guha offering his personal interpretation of the record of Fed activities under Bernanke; and, if so, should he not have said something to this effect more explicitly?

An alternative to the Conan Doyle reading is an interpretation closer to the surface. Someone is putting out a don't-blame-the-messenger message; but we, as general readers, are left entirely in the dark as to the identities of either the sender or the intended recipient(s). One possibility, of course, is that Bernanke is the sender but asked explicitly not to be identified as such (not uncommon in journalism). Under this hypothesis one could imagine that, as a professional courtesy, Greenspan tends to give Bernanke a heads-up on any public statements he makes, possibly even inviting feedback from Bernanke. Taking the speculation (and bearing in mind that it is nothing but speculation) another step, one could imagine Bernanke using Greenspan's "unofficial" comments as "probes," i.e. instruments to see how markets would react to having certain hypotheses about their behavior raised.

If all this speculation sounds too much like conspiracy theory, we might do well to recall one of the key messages from Friedrich von Hayek's "Economic and Knowledge" paper:

In short I shall contend that the empirical element in economic theory—the only part which is concerned, not merely with implications but with causes and effects, and which leads therefore to conclusions which, at any rate in principle, are capable of verification—consists of propositions about the acquisition of knowledge.

In other words economic behavior may ultimately depend more on the exchange of knowledge than on the exchange of value. Since knowledge is basically the bread and butter of organizations, such as the Federal Reserve, responsible, at least indirectly, for perception of value (through regulation of the money supply), it should not be surprising that they acquire that knowledge through the exchange of messages. Most of those messages are probably in the form of analytic reports, but sometimes one has to take an approach that is more empirical than analytic. This may be going on even is I write this and regulatory agencies around the world are worrying about how to react to yesterday's unanticipated behavior in China. On the other hand, as I suggested yesterday, because of its size, China is under no obligation to follow any playbook other than its own; so yesterday's sell-off may have been their empirical attempt to send a message! If that is the case, though, we may still be at a disadvantage in lacking the cultural context required to read that message.

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