April 23, 2008 | posted by Michael Baxter in Banking |

All physicists will be familiar with Heisenberg’s uncertainty principle in quantum mechanics.   This is the idea that when you measure something you disturb it at the same time, thus distorting your measurement.     And so, it would appear, physicists would say we live in a world of uncertainty.

Then, one famous economist came up with the economics equivalent of this law and gave birth to Goodhart’s Law, which says, “As soon as the government attempts to regulate any particular set of financial assets, these become unreliable as indicators of economic trends.”

So, they were pretty damning words for the discipline of economics.   We might as well all pack up and go home; but before we do that, let’s tell you what the latest is from the law’s author Charles Goodhart.

For yesterday, Mr Goodhart, who by the way was a member of the Bank of England Monetary Policy Committee from 1997 to 2000, told Bloomberg that the likelihood of the Bank of England £50bn stimulus “getting the mortgage market going again is slim.”

This begs the question, why bother with the package in the first place. Here’s the answer:  ”The credit crunch will still hit the economy, but it might have hurt more if it weren’t for these measures,” said the great man. He added, “The measures prevent the risk of a possible recession becoming a depression.”

If we cast the net a little wider, it does seem the general feeling is that Mr Goodhart is right and the Bank of E move won’t kick-start the mortgage market.     Most analysts are predicting the banks will use the money to shore up their balance sheets.  

Or to put it another way, imagine the economy is a watering can.  Previously, banks were spraying economic water over the economy.    Then the can developed a leak, and the water started to ebb away. The Bank of England move will enable them to top up the water a little bit, but they won’t start spraying again, because they are not sure the leak has been fixed.

The trouble is, the banks are uncertain.   And the more we try to measure their uncertainty, the more uncertain they seem to get.   Still, at least we can be certain the top brass at the banks will still earn lots of, well, brass for their troubles.