Larry Summers and asset prices
By Scott Sumner
I frequently argue that anti-EMH theories are not useful. That is, theories of irrational market behavior, such as “bubbles”, are simply not useful to policymakers, academics and ordinary investors. If they are useful to anyone (it’s hard to know either way) it would only be to the tiny, tiny, number of lucky individuals who are smarter than the markets. I’m certainly not one of them.
I thought of this when I read a recent interview with Larry Summers:
The essence of democratic governmental institutions is that they’re supposed to distill the conventional wisdom and act on it, and the essence of bubbles is that the conventional wisdom is dead wrong. To expect democratically accountable institutions to be good at recognizing and puncturing bubbles is unrealistic.
I don’t know how Summers feels about academics and investors, but he certainly agrees with me that bubble theories are not useful to policymakers.
And speaking of Larry Summers, TravisV directed me to this article:
Jeffrey Gundlach and Larry Summers are joining derivatives traders in saying the Federal Reserve is too ambitious in its plans to raise interest rates against a backdrop of slowing global economic growth.
Gundlach, the co-founder of DoubleLine Capital LP, said moves by the central bank to raise rates are fighting non-existent inflation and hurting gross domestic product growth. Summers, the former Treasury secretary, said the economy can’t withstand the four rate increases that policy makers project this year.
Turbulence in global financial markets emanating from China has fueled concern of a global slowdown as oil prices dropped to a 12-year low. That has traders and investors questioning the Fed’s stance that domestic inflation will rebound gradually as U.S. wages pick up. Derivatives traders are pricing in fewer than two quarter-point rate increases in 2016.
“I’d be surprised if the world economy can comfortably withstand four hikes,” Summers said Wednesday in an interview with Bloomberg TV. “Markets agree with me and that’s why, despite the statements that are being made, markets aren’t expecting four hikes.”
If Summers keeps this up he’ll soon be considered a market monetarist. Although I suppose that his saying “markets agree with me” is a bit different from my tendency to simply accept the market forecast. But then Summers has a bigger . . . um . . . amount of self confidence than I do.
PS. If there is a recession this year then I’ll have to issue a mea culpa, as I advocated Yellen over Summers a couple of years ago.