First, the RBA finally cut the lending rate by 25 basis points to 2.75%. By the close of the market, the Aussie dollar remained weak as some were surprised by the move. As I promised my readers of NOTES it is the 2/10 yield curve where the indicator of further currency and bank action will be found. The 2/10 steepened a slight three points, but the action ahead will be the key. Failure to take out recent steepener highs will be an indicator that the RBA has more work to do if it wishes to give a boost to the Australian economy.
Even with today’s cut, the yield on the two-year note is below the overnight lending rate. The new contagion for the global financial system is a battle to ease pressure on what have been very strong currencies. THIS IS POLITICS OVER FINANCE–MBAs have never been to the barricades. This BLOG uses the tools of political economy to analyze the markets for to do otherwise is to accept that 2+2=4 … always. It seems that RBA Governor Stevens is answering the call of PM Gillard, who has decried the overly strong Aussie dollar. The RBA cutting rates four months ahead of the Australian national elections … ah, a mere coincidence.
***Sitting in the Commander Hotel in Cambridge, Mass (sounds like a Joanie Mitchell song), I feel obligated to respond to Larry Summer’s op-ed piece in Monday’s Financial Times. Professor Summer’s enters the Reinhart/Rogoff discussion with a piece, “The Buck Does Not Stop With Reinhart and Rogoff.” Summers maintains that “… the errors such as the ones they made are distressingly common.” Summers rightfully maintains that no policy should be made on the output of a single study.
Then the professor tries to bring reason to what has been an emotional debate with the following insight: “Even then,there should be a reluctance to accept conclusions from ‘models’ without an intuitive understanding of what is driving them. It is right and understandable that scholars want their findings to inform the policy debate. But they have an obligation to discourage and, on occasion, contradict those who would oversimplify and exaggerate their conclusions.”
I think that the good professor is spot on, but it raises a question about why the FED and Chairman Bernanke are allowed to have the results of their models accepted as policy. The use of global economy as a laboratory for economic theory should also be called into question and held to the same standards that Professor Summers recommends for all theoretical models. Remember that the Fed proclaimed the subprime crisis contained in 2007. Did the Fed’s brain trust rely on the same models now in promoting massive QE programs as they did previously?
Yes, equity markets are rallying and bond yields are remaining low but that is only part of the policy equation. Market manipulation makes all theoretical valuations suspect. Is there a way to test QE in a way that limits the physics principle of the “observer effect,” in which the scientists mere observing has an impact on the data outcome? Or as Woody Allen would say: “But objectivity is subjective.” If Professor Summers is searching for high standards for the use of economic research in policy, let ‘s be consistent and demand the same from the FED in its use of theoretical models.