This post is trivial
and I will take it down within a couple days. Oops, I mistakenly projected my usual regret.
I am a big fan of Larry Summers, purely on entertainment grounds. This is not to say he has no substantial merits, but separate from that he appeals to my funny bone.
My old shop once had him in for a debate with Glenn Hubbard. I was the house liberal, so I figured I would be seated by Larry or something. But I was given no role. And Summers has so much star power that at cocktails the whole room was drawn to him and I ended up having to make small talk with Glenn Hubbard, who is a real gentleman by the way. I asked him about this. He said, I was not aware I had so much power.
During the discussion, Summers and Hubbard both made some good points, but Summers carried the room with devastating and misleading metaphors and by leaning forward in his chair and just glowering at anyone who challenged him. One guy I will never forget went after Summers on fiscal policy saying that the Obama Administration’s policies were unsatisfying, when I think he meant unsatisfactory. Oops. But the guy dealt with Summers’ rage very well. I was impressed, but also very amused. I made sure the whole firm knew that this guy picked a fight with Summers on THE worst topic imaginable. So odd I am no longer employed there.
Summers likes to rant and rave about infrastructure spending, which is fine. But he is funny for paying particularly close attention to bridges and to the sate of JFK. He is clear that the bridge between his office in Cambridge and his home slows down his daily commute. And he is clear that the poor planning at JFK makes his monthly commute to speaking engagements in London less pleasant than it might be. Larry Summers wants infrastructure spending targeted at making the life of Larry Summers easier. Kidding!
He has a piece in the FT arguing that the new Administration seems hell bent on doing infrastructure spending all the wrong way. He is probably authoritative on that point, knowing much more about the feasibility of “private-public-partnership” than, for example, I do.
But I particularly love this passage warning us not to read too much into short-term market moves, in this case post-election:
The result has been a rise in real interest rates and inflation expectations, along with a strong stock market and a strong dollar. Experience suggests, however, that initial market responses to major political events are poor predictors of their ultimate impact.
Gee, Lar, what “experience” might you be referring to? If I recall correctly, wasn’t it you who applied the logic of an event study to what would happen in the event of Brexit?
Second, markets are likely to suffer extraordinary volatility in the wake of Brexit. A Black Friday could follow referendum Thursday. It is likely that foreign investors in British stocks would lose 15 percent off the bat, adding together market declines and currency losses. This is a judgement supported by the gyrations in markets induced by relatively small fluctuations in the perceived chance of Brexit and by the very high prices commanded by out of the money options.
So you are willing to extrapolate purely local noise globally, but not willing to accept results delivered over a wider range of observation? From an econometrics perspective, we might say that is different. Actually, that is probably unfair. I bet Summers will from now on stick with the idea event studies don’t work in sample or out of sample when applied to macro. Good!
Incidentally, and to repeat, all that “empirical evidence” saying QE reduced bond yields was based on event studies. Just saying. Not that Summers is a huge fan of QE. I totally share his view on that. Given that public supply of rates duration SURGED under QE, it seems unlikely that a dearth of publicly-supplied rates duration is why bond yields fell after the crisis. But the Lord works in mysterious ways, and Jesus covers his tracks.
Somehow this post ended up an an anti-QE rant. I have, like, three ideas.