Saturday, December 01, 2007

Moral Certainty in Economics

Somewhere in the midst of stagflation two brothers meet. Drink. Discuss.
Marty (Artistè): The economy is out of control.
Henry (Banker): Nonsense. The Fed has complete control. But it takes time, maybe six months, for a Fed action to show up in the economy. Kind of like you turn the steering wheel and a bit later the car begins to turn.
Marty: So, if I'm on a mountain road full of switch backs and the fed turns the wheel to go 'round a curve, six months later the car will turn?
Henry: That's right.
Marty: And six months later where, exactly, is the car? If I turn the wheel even three seconds too late I know where it will be: Bottom of the ravine.
Henry: Mmphf.
Marty: So, tell me, How long does it take the Fed to figure out how much to turn the steering wheel and which way? A month? Three? Instantaneous?
Henry: You have to gather the statistics and analyze the data.
Marty: You call that control?

The rest is irrelevant drunken muttering.
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