That Frisbee example stole the show at Jackson Hole, Wyoming. The unexpected question: how can a mere dog, uneducated in Newtonian physics, figure out the dynamics of a flying disk in an often unpredictable atmospheric environment? And what might central banks learn from that?
At least some of the headlines out of the big confab at the end of August concerned the latest observations by Chairman Ben Bernanke. Let’s do justice thereto before getting back to our Best Friends. The Chairman said, in essence, that the Fed under his leadership has done what it has had to do, and he countered critics who complain either that it has done too little or that it has done too much.
Bernanke finds it “noteworthy,” for example, “that the expansion of the balance sheet to date has not materially affected inflationary expectations, likely in part because of the great emphasis the Federal Reserve has placed on developing tools to ensure that we can normalize monetary policy when appropriate…” in other words, that it will be able to exit from its positions. Someday.
Stealing the Hearts of Pundits
The Chairman spoke early Friday morning, August 31. After some discussion and a coffee break, Andrew Haldane, executive director, financial stability, and the Bank of England, had his turn at the podium later that morning.
On the Fed’s agenda, the name of Haldane’s speech was couched in the usual bland bankerese that he surely knows how to employ at will. It was, “Ensuring Long-Term Financial Stability.” But on the front page of the address itself, available here, he has given it a more intriguing title: “The dog and the frisbee.”
That is what has stolen the show, in terms of post-Wyoming commentary. The Financial Times gave Haldane’s speech lengthy respectful coverage, though relegating the canine analogy to the final graph.
“Total Return,” a WSJ blog, gave the dog higher play, and called the speech the one “people should long remember.”
The invaluable folks at Dealbreaker treated us to a photo of a border collie in mid air, with Frisbee in mid mouth, and a long thoughtful post.
Angle of Gaze
But let’s start at the beginning: why are border collies better at catching a flying disk than humans? Maybe because they keep it simple: their rule is to “run at a speed so that the angle of gaze to the Frisbee remains roughly constant.”
As a clueless human myself, I had to work this through after reading it. But I think I ‘got it’ at last. Imagine a dog running a certain distance behind a Frisbee, both of them moving forward at a constant speed, and the Frisbee slowly descending. The dog is looking up at the Frisbee and finds that, in order to keep the angle of his gaze constant, he has to run more rapidly. In time he’ll catch up to it and catch it before it hits the ground.
On the other hand, suppose (to complete the thought experiment) that as dog and Frisbee proceed, a gust of wind raises the frisbee higher. The dog will now have to drop back in order to keep the angle of its gaze constant. And dropping back in that situation turns out to be the sensible thing to do.
The point: central bankers have failed to “catch the crisis Frisbee” because they have made matters too complicated. How many parameters are necessary for a “typical large international bank” to calculate the probability of default of retail mortgages in order to apply credit risk capital charges? Haldane estimates between 400 and 600.
Raze the Tower of Basel
This turns into a call for a thorough overhaul of the Basel system for international banking supervision, a system Haldane playing the biblical card calls the “Tower of Basel.” Part of the complexity arises from the uncontroversial-seeming idea that disclosure is good, transparency is good. Here, though, more is not better.
“The explosion in banks’ reporting over the past decade has not conspicuously helped in pricing bank risk,” he says, adding that regulators and investors alike end up seeking needles of relevance in the “rising haystack of information.”
Unfortunately, Haldane doesn’t really have a simple single rule to propose, an analog to “keep the angle of your gaze constant” that could replace the present dangerous “subsidy to complexity.” When he discusses simple rules, like Paul Volcker’s “thou shalt not engage in proprietary trading” it is only to warn that they “run some risk of backdoor complexity.”
So maybe the dog can’t help central bankers or other bank regulators after all. Maybe such folk simply aren’t capable of thinking like a sensible disk-chasing pooch. Still, it was fun to work through the imagery, and razing that tower, rather than raising new ones, is a good idea.