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The Kapali Carsi

Radical Views from the Street

Our sister (or rather big brother) daily Referans merged with Radikal yesterday, a paper undergoing significant changes itself.

Their editor-in-chief has been particularly raving about how he intends to change traditional op-eds by molding your average newspaper columnist into a terminator he has named “the street columnist.” I have been to quite a few conferences in the past few weeks myself, as well as talk to people who have been to others, so I am in the perfect position to relay my impressions from the street.

At the IMF-World Bank Annual Meetings in Istanbul last year, uncertainty on the macroeconomic outlook was the name of the game, with endless debates on the shape of recovery. That kind of ambiguity has decreased considerably, although some party-spoilers like the great Roubini continue to muddle the future. But that does not mean that the horizon is crystal-clear; macroeconomic clouds have simply given way to others.

The most-discussed of these new uncertainties is arguably woes of a European kind: I sensed a great deal of pessimism on the Euro Area, whether it be short-term fiscal worries or long-run structural problems like declining competitiveness and fallback in innovation. On the contrary, there is quite a bit of optimism on the U.S. economy. Even those opting for a more wary outlook believe that as long as employment prospects do not improve, American policymakers will continue to support the economy every way that they can.

And that brings me to Fed’s Quantitative Easing II, which is just around the corner. Many economists, including PIMCO’s Mohamed El-Erian, are critical that it will work. Their main reasoning is that investors cannot be bribed into equities; nor can banks be induced to lend by flushing them with liquidity. Agents will take risk if and only if it is attractive for them to do so.

Then, all that money for nothing will end up somewhere else, and judging by the preemptive strikes, that somewhere looks like commodities and emerging markets. As a result, positions are being built by speculators, and battle lines in the form of currency wars are being formed by policymakers. There is even the worry that there might be another Great Trade War in the making.

In the same vein, there is quite a bit of debate on the future of policymaking, which has already undergone many changes. The International Monetary Fund revamped its crisis prevention toolkit this past year. It was also quick to depart with its well-established mantra by advising fiscal easing for the developed world and capital controls for emerging markets. But now policymakers have taken those radical changes a step further by putting central banking in the spotlight.

Given the financial crisis, it is not startling that there is a lot of discussion on whether central banks should be in charge of financial regulation as well. But I was taken by complete surprise with doubts about inflation targeting. What started as an innocent pissing contest by the European Central Bank, as they claimed their two-pillar approach was superior to inflation targeting, has morphed into something much more sinister.

Economists and policymakers alike are well aware that an inflation-targeter faced with free capital flows is more or less helpless against appreciation pressures on its currency. But they are ignoring the benefits of inflation targeting for the likes of Turkey, or not coming up with an alternative, as one Central Bank of Turkey official lamented in a quick chat over coffee at the Global Economic Symposium in Istanbul.

This is your friendly neighborhood economist reporting radical views from the street…


Originally published at Hurriyet Daily News & Economic Review and reproduced here with the author’s permission.

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