August 11, 2013

Central Bank´s forward guidance has a ring of the blind leading the blind.

Sir, John Authers concludes his “BoE guidance signifies more work for investors”, August 10, writing: “The effect of the extra guidance from Mr Carney and other central bankers is to force investors to watch the economy more closely and make their own decisions”.

Indeed, though investors should always watch the economy and always make their own decisions, it now becomes even more complicated with forward guidance, because that is something akin to the blind leading the blind, and because therefore the investor now also needs to concern himself with what the central bank blind sees.

Like banks were forced to heed the opinions of some few credit rating agencies, which led many of them down the wrong path, are investors now supposed to heed the opinions of some few central bankers? Would we all not be better off, if central bankers would just shut their mouths up, and allow for a diversity of investors to guess what they might be up to? That at least sounds as leveraging systemic risks less.

And, if then a central bank guides you down the wrong path, what on earth is a poor investor to do?