People that develop new ways of looking at the world are most successful if they can create a new language, a new set of metaphors. I don’t have the literary skills of a Keynes or a Freud, but then again I also don’t have such grandiose theoretical objectives.
For instance, quite a few people seemed to misinterpret my Mishkin post, which was actually intended to be complimentary. The point was that if my views are similar to Mishkin’s, how odd can they be? And yet I am in a very tiny group of people who believe the Fed caused the crash of 2008, so there must be something at least a little bit peculiar about my perspective.
When you are trying to get people to look at the world in a slightly different way, it is easy to be misunderstood. After my QE post last month, some other bloggers observed that I expected the policy to fail, unless other steps were taken. That’s not quite right. I argued the policy had already failed. That’s past tense. How could I argue that the policy had failed after just a few hours? Because in my view the policy objective should not be NGDP, it should be expected future NGDP. But (you ask) surely the ultimate goal must be to boost actual future NGDP?
Here’s how I look at it. The Fed should merely worry about targeting expectations. Until and unless they show any evidence of being smarter than the markets (and right now it doesn’t look too promising) I judge their actions solely based on the impact on expectations. If someone offers you even odds on a dice role, and lets you choose either 1 through 4, or 5 and 6, the smart bet is 1 through 4. If you bet 5 and 6, and one of those two turns up, it doesn’t make it a smart bet—it’s a foolish bet that was bailed out by a lucky bounce. As a citizen and investor I will be thrilled if NGDP grows rapidly over the next 12 months. And I think there is a possibility that it will. But right now the odds are stacked against the Fed. And the Fed is the only institution that has the power to stack the odds in its own favor. The Fed’s failure to do so is a policy failure, whatever happens subsequently.
This is a new way of thinking about macroeconomics. I just read the General Theory’s Chapter 12, at Tyler’s suggestion, and will do a post on it in the near future. Keynes talks about speculative markets as if they are casinos. Right now we have a central bank that likes to gamble, and likes long odds. It is no surprise that Wall Street is putting its money on the short odds—policy failure. Unlike Keynes, I think it’s a big mistake to bet against the market.
[Finally, a short post!]