The problem is that central banks tend to follow the conventional wisdom of economists. So when central banks screw up, the conventional wisdom of economists will never blame the central bank (at the time); that would be like blaming themselves. They’ll invent some ad hoc theory about mysterious “shocks.”
The other night at dinner my wife told me that the Chinese sometimes say, “If you cannot see the true shape of Lu Mountain, it’s because you are standing on Lu Mountain.”
That’s Scott Sumner. He distinguishes himself by being consistent. I remember a post he wrote early in 2009 saying he was baffled that he felt he was in the majority of economists on his beliefs about the causes of the crisis but as soon as the crisis bit everyone else retreated to some vague wacky model that had been discredited in the literature.
I can’t evaluate the evidence on that claim but I think there is something different about how people think about difficult, complicated situations when they’re in them than they do looking back.
For example, in my business there are cycles of high and low margins, called hard and soft markets. Many firms adopt an explicit strategy of ‘waiting out’ the soft market. Sounds easy.
Yet when hard markets come, being defined as rapid increases in prices after a big cycle changing event, they say instead, wow the new normal is riskier than ever and even with these price increases we can’t make money. So we’ll keep sitting out until we are sure. And they miss out.
The phenomenon is captured in the title of the Reinhardt and Rogoff book “This time it’s different”. We are able to distill the essence of complex situations in hindsight. In the moment we can’t see the forest for the trees.
Because we are scared.