Wednesday, 20 October 2010

Myron Scholes on QE2

Myron Scholes (famous enough) on QE2.

Arguments around risk premium. And a basic assumption is about risk-averse somewhere. Are we?

Then, about expectation and rational behaviours.

Expectations are key. Fed won’t go far enough to dump money into the system because Fed officials worry somewhat about becoming Argentina. And markets know this. They think that Bernake is rational and act accordingly. This is a rational game. If the Fed is irrational, the whole world breaks apart.

Do we remember what Stiglitz says

"Given the complexity of the economic system, the difficulties in predicting how expectations will be altered, and the pervasive irrationalities in the market, there is no way the impact of any economic policy could be ascertained with certainty. There may be some circumstances in which the effect of monetary policy can be accurately gauged. But recessions of this depth come only once every 75 years. What is true in normal times may be of little relevance now, especially as central banks engage in unusual measures such as QE."

Personal thought: Some of his explanations and thoughts of how QE2 affect risk premium and expectations are excellent. But since he tries to tilt the argument towards the cons, it is a little bit unclear with lots of assumptions and uncertainty. For example, I think, most of us, we have shorterm views due to our short-term position (president's term, FED chair, CEO, Board of Director, etc) and people develop shorterm momentum. So, they will behave opportunistically this time. So, it is hard to really assume anything about expectation and rationality at this point. Just as Stiglitz says, nothing is certain about expectation and outcome at this time. But 1 thing for sure, this is an interesting topic.

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