A sideways look at economics
At Fathom, discussing monetary policy is one of those topics that can set blood boiling, comes at least with a PG rating and, in past eras, would have probably been settled by duelling “à l’outrance”. Much of the reason for such heated exchanges centres around the concepts of credibility and independence. These were the central tenets of Fathom’s founding father and have been the bedrocks of our professional offering ever since. Yet, independence and credibility are too often taken for granted and used interchangeably, betraying a complacency that directly undermines the very premise of both. This is true in the central banking world and in our line of business in equal measures. This TFiF tackles both concepts in a lighthearted way through the lens of our respective goals and objectives.
Independence is rarely a goal in itself, but rather a means to various different ends. One such end might well be the enhancement of credibility, but it doesn’t guarantee it. For central banks, for example, independence was always meant to provide a framework that allowed them to break free of the short-term incentives behind the financing of profligate political promises. The split between fiscal and monetary policy is the economics counterpart to the separation between temporal and spiritual powers without the pretence that one would save your soul. For Fathom, independence means first and foremost no ulterior motives, the pursuit of truth and the luxury to grind an axe or two in the process. It’s no secret that central banks have often been a regular target of ours. For example, legend has it that after founding Fathom, Danny once introduced himself to the communications team at the Bank of England along the lines of: “You probably don’t know me, but I’m Danny Gabay from Fathom…” to which he got something like this reply: “…don’t know you? We have whole meetings about you!” The ultimate accolade and a hallmark of independence if ever there was one. Now, as then, we feel it’s important to reiterate the message that we have no agenda besides helping clients the best we can and that we will change our mind based on arguments, data and facts not referential reverence or dogmas. Overall, we would argue that independence has served central banks and us very well over the years. However, I would also counter-argue that Fathom’s independence looks more solid than that of central banks given the intensifying political pressures on both sides of the Atlantic and, more importantly, the progressively blurred lines between monetary and fiscal policy courtesy of Quantitative Easing.
In and of itself, independence does little for credibility: just look at the different fates of Belgium and Switzerland during both world wars. Both were neutral, but only one had a credible strategy to remain that way, both times. Moving swiftly on from war analogies, in the 90s research on central bank credibility was the economic equivalent of sporting a pair of Air Jordans or a slap bracelet or both at the same time. Yes, that cool. The raging debate was about whether central banks should strive for some degree of ambiguity or maximum credibility in setting monetary policy. The strong arguments from the latter camp prevailed, but I always found the actual prescriptions on how to achieve this coveted credibility a bit of a cop-out. They basically involve three steps: make the central bank independent, appoint a governor/chairman with a reputation for disliking inflation and get him/her to stick to a relatively simple rule. In time, the extra duty of promoting something of a personality cult through a monthly press conference was also informally added to the governor’s task list.
Overall, it all seems quite straightforward in principle and it might have worked in practice. But more fundamental questions remain unanswered. Can the credibility of an institution be defined primarily by the credibility of its temporary chief? Is this achieving credibility at all or is it actually undermining it by imparting a bias and institutional inflexibility? In my opinion, these are close to rhetorical questions, but they also run very deep and are unlikely to be resolved in this column.
At Fathom, our credibility hangs on a process that seeks to be as free from bias as possible. We hope to achieve this through creating ample scope for discussions and disagreements, by actively seeking opposing views, transparently communicating our calls and learning from mistakes. It would be fair to say that at Fathom there is an equal dislike for ‘safe spaces’ and ‘sacred cows’.
Our credibility is also more strongly linked to our independence relative to the industry average or, indeed, central banks. This is particularly true for our consultancy work which can only be credible if our independence doesn’t get confounded with a ‘for hire’ sign. We tackle this problem by being selective about the work we carry out. In particular, Fathom will neither rubber-stamp a decision that has essentially been taken already nor pay lip service to a view resting precariously on a one-sided set of arguments and assumptions. We don’t just say this, we have willingly passed on many consultancy opportunities that didn’t fit this standard and no doubt will do so again. We’re conscious that we’re leaving a lot of money on the table, but this is how much our credibility is worth to us.
Like central banks, we believe clear communication is also essential for building credibility. However, this doesn’t require an uptight, highly rehearsed and redacted delivery. For credibility to be enhanced, we need to have an engaging communication strategy, but also show originality of thought as well as depth and breath. It’s a question of striking the right balance. In this respect, the monetary policy world looks increasingly unbalanced with central bankers more and more resembling celebrity chefs: spending a lot of time on TV and little in the kitchen, talking rather than cooking, being lawyers rather than economists. Perhaps I’m being too harsh as there is at least one exception which could teach us all a few lessons on the communication front: the Bank of Jamaica under Governor Wynters. The cool BOJ has created a marketing and communication campaign aimed at boosting its credibility (or at least its inflation-fighting ability) through reggae music with tag lines such as: ‘low and stable inflation is to the economy what the bass-line is to reggae music’ (go check their Twitter feed @CentralBankJA). This is ballsy, forward-looking, original and effective at the same time. It reveals a clear grasp of how credibility needs to be built from the grass roots up without being captured almost exclusively by small, but influential groups such as financial markets. The Bank of England could certainly do worse than focus on adding a bit of refreshing coolness and levity when the next governor is chosen, I know who I’d pick (#BWynter4BoE). As a second best, it would be nice to replicate if not the reggae at least the spirit of the BOJ communication over here but, let’s face it, that’s not the English way. No: the English way is sad, wistful, nostalgic, guitar riff rather than bass … Something like this:
How I wish, for a new MPC
You’re just nine lost souls swimming in a fishbowl
For all the world to see
Running over the same lower bound
What have you found?
The same QE
How I wish you were free
As a third best, we could throw a party and get a band to cover aptly modified versions of your favourite British music hits. RSVP to us (@Fathommacro) and, why not, the BoE (@bankofengland) and let’s get this party started.