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[quote=Anonymous]From Nobel Prize winning economist Paul Krugman

Whatever happens, Trump’s campaign to take over monetary policy has shifted from a public pressure to personal intimidation of Fed officials: the attack on Cook signals that Trump and his people will try to ruin the life of anyone who stands in his way. There is now a substantial chance that the Fed’s independence, its ability to manage the nation’s monetary policy on an objective, technocratic basis rather than as an instrument of the president’s political interests and personal whims, will soon be gone.

So why aren’t markets freaking out? Nations in which central banks lose their independence sooner or later suffer high inflation, especially when they are taken over by autocrats who buy into crackpot economic doctrines. And Trump, who has been demanding large rate cuts because, he claims, the economy is running hot — which almost every economist would say is a reason to raise rates, not cut them — certainly fits that pattern. Yet although there have been small tremors in the bond and currency markets, there have been no significant upheavals in financial markets that reflect the severity of the situation we are in. Throughout this episode, the stock market has remained fairly flat and bond yields haven’t spiked.

Why not? Do financial markets doubt that Trump will get his way? Or do they reject mainstream economics and the clear examples of countries like Turkey and Argentina?

Neither. My read of economic and financial history is that market pricing almost never takes into account the possibility of huge, disruptive events, even when the strong possibility of such events should be obvious. The usual pattern, instead, is one of market complacency until the last possible moment. That is, markets act as if everything is normal until it’s blindingly obvious that it isn’t.

The inimitable Nathan Tankus summarizes this by saying that the market is not, as stylized economic models would have us believe, a mechanism that pools the knowledge and informed judgment of millions of investors. It is, instead, a “conventional wisdom processor.” That is, it reflects views that seem safe to hold because many other people hold them — and the crowd only abandons those views when they become blatantly unsustainable.[/quote]

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