Thursday, September 22, 2016

Constraining an economist to 140 characters is never a good idea...

It is safe to say that twitter rants are occurring more frequently now than ever before in the history of the world. Ahead of the Fed's decision on whether or not to raise interest rates, former Harvard President, Treasury Secretary, and Chief Economist of the World Bank - Larry Summers - decided to post his lecture notes from his money and banking class on twitter. He posted 11 scathing tweets back-to-back-to-back-to-back-to... well, you get the idea - about why the Fed should not raise interest rates. Hours later, the Fed decided to hold rates constant but signaled the possibility of a rate hike in December.

The outcome of the September FOMC vote was probably the least interesting part of this story. The more interesting part of the story is what I'd like to call the "Moral Hazard of Twitter". Let me speculate that Mr. Summers, and those around to him, feel that his tweets may have influenced the FOMC vote. And to the extent that this perception is accurate, we can only expect more twitter rants by famous economists ahead of important policy decisions.

Isn't it interesting that some who make bold predictions or emphatically state their equally bold opinions on various matters take an unworthy amount of credit when their predictions finally turn out to be correct? One of the problems in society is that there is virtually no penalty for having the wrong opinion or making a bold but wrong prediction. In this case, humans are quick to explain their errors away blaming it on a myriad of factors - most of them unrelated to the real reason they were wrong. In the case that they turn out to be right, humans are quick repeat the familiar phrase, "I told you so".

Here's a personal experience - some 18 months ago I was interviewed about oil prices by Utah Public Radio. When asked, I predicted that oil prices would increase in the not so distant future. Well, oil has increased more than 3% during the last week. "I told you so".

(FACT: Since the day I made my prediction 18 months ago, oil is down more than 27% despite its recent up turn in the last few weeks - but OPEC unexpectedly decided to increase production and... Putin is crazy... and LeBron won the title... and...)

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