Knowing and Making

Robert Peston is in a bad mood this morning . He claims that the National Audit Office's report on Northern Rock shows that Brown and Darling "didn't make adequate preparations for the possible collapse of banks", "didn't expect a recession" and "had a hopelessly naive view" about the Rock's 100% loans. It makes a nice story. The problem is, it isn't really true. I've read the NAO's summary of the report. Here's a notable phrase from it: This report does not consider: the causes of Northern Rock’s problems Indeed, all that the report does consider is the response of the Treasury to the problems that arose in late 2007, and whether it made the right choices and managed things in the right way. And on those counts, it mostly gives its seal of approval. Some exceptions are: The Treasury's worst case scenario planning was not quite bad enough. Instead of a base case loss of £270 million, Northern Rock lost £585 million last...

Three posts in 24 hours, Mr Peston? Back from your holiday and full of energy it seems. One of the enduring phenomena in macroeconomics is stickiness. This most commonly shows up in the idea of 'sticky prices', which in some models are responsible for business cycles. In short, prices of goods and wages increase beyond the level of stable demand (perhaps driven by higher short-term demand or by inaccurate expectations of rising demand). The demand curve turns out to be a bit lower than was thought, but prices do not immediately adjust downwards in response. Therefore the amount of goods supplied is less than the optimal (equilibrium) amount and we get a recession. There are many other examples of stickiness, or as I referred to it in an earlier post, friction . But one that I have not seen discussed is policy stickiness . Robert Peston highlights this in an item today about Northern Rock . The British government is changing its original policy of running down Northern Rock'...