Individuals or small teams can move markets or persuade policymakers with incisive economic analysis.
Economic analysis melds models, data, and experience to prognosticate
broad market movements or to steer policy discussions. It is empirical but not
exclusively quantitative, giving both numbers and words their due weight. It
synthesizes large swathes of information while searching for big picture patterns
that can help businesses, investors, or policymakers to foresee the next big
crisis or innovation before it overwhelms positions outflanked by an inherently
volatile world.
Economic analysis differs from financial price data
dissemination and post-market narration, which date from the 16th
century. It offers less precise predictions than forecasting, which in
modern form began in the 1920s,
because it tries to capture sea changes, not middle run trends or short-term
fluctuations. Its scope far exceeds that of securities or even industry analysis.
Warren Buffett and Alan Greenspan both exemplify the power
of economic analysis. The former made billions for stockholders through
extensive reading and contemplation rather than relying on technical signals or
trading hunches. The latter’s understanding of macroeconomy conditions proved
largely ineffable but almost infallible as he guided U.S. monetary policy for the
almost two decades now called The Great Moderation.
This post surveys three older but no less important economic
analyses, Economist editor Walter Bagehot’s (1826-1877) lender of last
resort rule, Brian Anderson’s (1886-1949) case for free trade in the Chase
Economic Bulletin at the apex of American protectionism, and Wilma Soss’s (1900-1986)
empirically based campaign to put women on the board of directors of America’s
largest corporations.
Bagehot (pronounced badge ut), longtime editor of The
Economist, explicated the lender of last resort trigger rule employed by
the Bank of England during the periodic financial crises that struck the City
of London in the Victorian Age. Sometimes called Bagehot’s Dictum, the rule,
laid bare by Bagehot in his 1873 book Lombard Street, stated
that to stave off panic and contagion central banks should lend freely to all
borrowers with sufficient collateral at a rate of interest high relative to
pre-panic levels.
Implemented but left unarticulated by U.S. Treasury
Secretary Alexander Hamilton
(1757? - 1804) during financial panics in 1791 and 1792, Bagehot’s Rule ensured
that solvent firms could borrow from the central bank when needed but had
incentive to do so only when no private lender would provide better terms. The
collateral requirements minimized moral hazard while also protecting the
central bank from losses. In the aftermath of the 2008 global financial crisis,
central bankers, including the Fed’s Brian
F. Madigan, pointed to the continued overall usefulness of Bagehot’s Rule
when “interpreted in the context of the modern structure of financial markets
and institutions.”
A Ph.D. economist, Anderson wrote economic analyses for the Chase
Economic Bulletin for much of the 1920s and 1930s. One of his themes was
that America thrived due to trade, not tariffs. Policymakers ignored his
analysis until America’s high tariff regime exacerbated the Great Depression
and helped foment the Second World War. As nineteenth century French political
economist Frederic Bastiat (1801-1850) put
it, “Barriers result in isolation; isolation gives rise to hatred; hatred,
to war; war, to invasion.”
Especially relevant for policy discussions today, Anderson
warned against what he termed “the
balance of trade bogey.” Americans fetishized a “favorable balance of trade,”
but “the fear” of imports, he explained, “is an idle one” because “Europe will
not merely send us goods, but will also provide us with funds with which to pay
for them.” “A rich capitalist country,” he concluded, “can afford to import
more than it exports.”
Financial journalist and notorious corporate gadfly Soss used
her weekly NBC radio show, Pocketbook News, to push for corporate
governance reforms like cumulative voting and independent audits.
Importantly, Soss leveraged her empirical studies of widespread
female stockownership to induce many major U.S. corporations in the 1950s, 60s
and 70s to put qualified women, like Alice
E. Crawford of the Corn Exchange Bank, on their boards. Women remain
underrepresented in C-suites but, thanks in large part to Soss’s trenchant
analysis and promotional efforts, female directors are no longer anomalies.
Economic analyses require information acquisition but also
the ability to process data and news as rationally as possible given the natural
constraints
of the human brain. Many of the best models are mental, incapable of being
explicitly shared because they form from embodied human capital, or what was
once known as wisdom.
