Good news! The world’s central banks boosted (market) interest rates

It’s much too little, but not at all too late.  (No such thing as long and variable lags.)

This morning there was a sudden jump in (Treasury) interest rates all across the yield curve (except the short end where they are pegged at near zero, and were unchanged.)

What caused this good news?  That’s simple, we had an almost perfect example of an event study.  The world’s major central banks did a coordinated easing of monetary policy this morning.

The Federal Reserve and five other central banks agreed to reduce the interest rate on dollar liquidity swap lines by 50 basis points and extend their authorization through Feb. 1, 2013.

The new interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The Bank of Canada, Bank of England, Bank of Japan (8301), European Central Bank and Swiss National Bank (SNBN) are involved in the coordinated action, the Fed said.

German stock prices soared 4% on the news, and Wall Street also rose sharply.  With easier money we had a small rise in real interest rates, which mostly reflect expected real economic growth.  Inflation expectations also rose.  Of course this is all completely inconsistent with the Fed’s operating model; they think we need to lower long term rates.  And it’s also completely inconsistent with the standard IS-LM model, as interpreted by Keynesians.  But it’s completely consistent with the market monetarist version of IS-LM, as developed by Nick Rowe:

Brad DeLong’s post on John Cochrane’s upward-sloping IS curve triggered this post. But this is not about John Cochrane. It’s about why tight monetary policy may cause real interest rates to fall, if monetary policy is expected to stay tight for long enough.

The story of an upward-sloping IS curve I’m putting forward here isn’t really new. I read something roughly similar a few months back, but I have forgotten who wrote it. (It was a paper linked by a commenter on a previous post, had “Monetarist” in the title, and was written about 10 years back.)

Authors need to re-write the IS-LM model to show upward-sloping IS curves.

Market monetarism:  Describing the world as it is, not as textbooks say it is.

Update: Today’s stock market reactions understate the actual impact of monetary easing on stock prices, as some sort of move was already anticipated, and priced into stocks.


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66 Responses to “Good news! The world’s central banks boosted (market) interest rates”

  1. Gravatar of StatsGuy StatsGuy
    30. November 2011 at 06:30

    The great question is whether the recent spike in Euribor was a liquidity problem, or a solvency problem, and how to even tell the difference.

    If it’s a liquidity problem – a short squeeze on the dollar and a rush to safe dollar assets – this will help tremendously. If it’s a solvency problem, it may help if it restores NGDP growth in Europe sufficiently to make debt loads sustainable, which is unlikely given the limited magnitude.

    Like 2008, the CBs seem to think it’s a liquidity problem, or at least be treating it like a liquidity problem, so they’re likely to not do enough. Especially with Brent at 111 and WTI at 102. This is directly targeted at helping _banks_, NOT at helping the general economy – any improvement in the general economy is merely a side effect.

  2. Gravatar of John Thacker John Thacker
    30. November 2011 at 06:31

    When I saw this story this morning, my first reaction was to come over here to see if you had heard and posted on it. Very nice.

  3. Gravatar of JVM JVM
    30. November 2011 at 06:50

    When markets opened up 3% Monday morning for no apparent reason (and amidst increasing uncertainty in Europe), I assumed that some sort of news had been secretly disseminated… I bet this was that news.

  4. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. November 2011 at 06:50

    “This morning there was a sudden jump in (Treasury) interest rates all across the yield curve (except the short end where they are pegged at near zero, and were unchanged.)”

    Our largest banks must be having a champagne breakfast this morning. S&P up just over 3 percent; large bank stocks more than 5 percent.

  5. Gravatar of Martin Martin
    30. November 2011 at 07:02

    When I read it, the first thing that came to my mind was your post before you went to Italy “Not enough”: what’s their target? I am glad that they did it, but to paraphrase Tinbergen on Burns & Mitchell, ‘It’s policy without a(n) (explicit) goal’.

  6. Gravatar of Morgan Warstler Morgan Warstler
    30. November 2011 at 07:12

    It seems to me the DeKrugman pile on of Cochrane doesn’t recognize the punch line of Sumner’s level target NGDP policy.

    Say we adopt 4% level.

    and then RGDP runs at 3%.

    So the Fed is actively trying to push inflation under 1%.

    The government tries to deficit spend, artificially boosting GDP.

    The Fed instantly raises rates.

    Cost of debt Federal debt goes up.

    Govt. tries to borrow more.

    The Fed instantly raises rates.

    Cost of debt Federal debt goes up.

    It is a death spiral.

    —-

    Of course the taxpayers won’t stand for it.

    Even if you adopt a 4.5% target and 2% RGDP you get the same action.

    —-

    Way back when Cochrane did that paper on a futures market it contained some of this kind of promise, didn’t it?

    The point being that cost of Govt. Debt roll-over, and not “failure to raise taxes” is enough to push the government into greater debt right?

    With a level target the promise of monetizing the debt is off the table, and expectations are set for deep spending cuts, because the Democrats are a straight jacket.

    Is this not right?

  7. Gravatar of Lars Christensen Lars Christensen
    30. November 2011 at 07:16

    Martin, I agree – what we need is commitment. We don’t have that. Said in another way – Chuck Norris is still MIA.

    See my comment here:

    http://marketmonetarist.com/2011/11/30/six-central-banks-take-action-but-where-is-chuck-norris/

  8. Gravatar of gabe gabe
    30. November 2011 at 07:30

    Oil prices up to $100/bbl this morning +$5 from last week.

    I work in the energy industry so I expect another good year, but I do feel bad for all the losers who will have steady or decreasing wages after more of this monetary easing that will be 100% effective at helping primary dealer profits yet hurt the median worker yet again. I guess the sheeple do deserve it though…ignorance is not bliss.

  9. Gravatar of gabe gabe
    30. November 2011 at 07:32

    I love to hear the defenders of the Fed explain how a move like today’s in oil and copper have nothing to do with monetary policy.

    Actual economic PHDs tell us the fed doesn’t create any money, instead they merely engage in “asset swaps”…would love to get some more of that type of talk going as we NGDP target our way back up to $140 oil.

  10. Gravatar of John Thacker John Thacker
    30. November 2011 at 07:39

    @gabe:

    Glad to see that you’re admitting that we had massive deflation and monetary collapse at the end of 2008, then, considering what happened to the price of oil then.

    Or perhaps you will admit that sometimes the price of oil goes up because the economy gets better, increasing, demand, and sometimes it collapses because the economy is terrible? There are multiple effects.

  11. Gravatar of gabe gabe
    30. November 2011 at 08:25

    Thacker…yes it was massive deflation. It was impossible for the existing money stock to pay off or even service the debt that had been encouraged to build up. The central bank insiders get to scientifically create massive deflation or inflation whenever they want and this is quite a big competitive advantage over the sheeple….they do not wish to lose that advantage. See this market movement this morning?! think anyone had inside information that would help them know when this was coming? think that can help someone make money?

    quite a little club these guys have going huh?

  12. Gravatar of Martin Martin
    30. November 2011 at 08:39

    Lars,

    I just saw it. Regarding the commitment, I just recalled that, the ECB actually does have a commitment, it’s just the wrong one. The HICP averages now about 1.9% or slightly less than 2%.

  13. Gravatar of Benjamin Cole Benjamin Cole
    30. November 2011 at 08:41

    Great post.

    Does it get more obvious than this? We need monetary stimulus. The more the better.

    Right now I do not care about theories or moral rectitude. I care about what works. Printing money works. Ergo, print money–we have 9 percent unemployed, we are 13 percent below trend GDP, and the latest PPI, CPI and unit labor cost readings were all negative.

    Blow the roof off of the Fed, print money until the plates melt, and then start issuing scrip. Set the damn house on fire, tip over the kegs of malt, and dance naked in the streets flinging $100s in the air.

    Anything is better than a damn perma-recession-deflation courtesy of the weenie-prude pettifogging sermonizers at the Fed.

  14. Gravatar of gabe gabe
    30. November 2011 at 09:00

    Cole,
    TPTB do not want you to look behind the curtain. NGDP level targeting is way too transparent…how would TPTB maintain their ability to create booms and busts from which to game and profit off of?

    The naivity I see here is beautiful…you guys think the Fed was actually created to benefit us and now you can’t understand why they don’t behave as if they actually want to help the median wage earner. I am an internet austrian and I am 100% supporter Sumner/Cole and the NGDP targeters. Will you ever get frustrated that Geithner, Bernanke and others ignore you? what if they don’t address your ideas after another 1 month, 6 months, 1 year etc…what will it take for you to understand that they are not working for us?

    Should be interesting to witness your illumination.

  15. Gravatar of gabe gabe
    30. November 2011 at 09:03

    Cole…in times of crisis like this I’d say it is morally correct to counterfeit money in your basement. Do you agree? If the “authorities” won’t do it then shouldn’t real patriots like us take matters into our own hands?

  16. Gravatar of gabe gabe
    30. November 2011 at 09:04

    people can’t make mortgage payments because the fed won’t print enough…effectively making these over-indbted people serfs…aren’t we basically pro-slavery if we support the governemnt monopoly on money printing in such situations?

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. November 2011 at 09:52

    Russ Roberts and Simon Johnson talk banking:

    http://www.econtalk.org/archives/2011/11/simon_johnson_o.html

  18. Gravatar of James in London James in London
    30. November 2011 at 09:53

    Oh dear, you have this one wrong in many ways. This is the second time in a few months the FedECB has done this. The first time the market got very excited too, and then it all subsided when nothing further happened, apart from banks taking up a grand total of $2bn via the first swap line.

    Despite Monday’s rally there was still a real liquidity squeeze or disclocation in money markets all this week, including Monday. USDEUR 3m swap rates continued to go to wides not since Lehman went down and the German 1yr T-Bill went negative for the first time ever at 10am European time this morning.

    Of course you are “right” in that it worked for a day for equity markets (or was it really just short-covering?) and Treasury yields went out a bit, we can all see that, doh! But in the real world of bank balance sheets it was very different.

    What drove today’s action was much more cold fear about a major financial institution on the brink of failing having gripped real funding markets for a few days needing to be somehow responded too. No monetary easing here, and definitely no plan.

    Sorry.

  19. Gravatar of Morgan Warstler Morgan Warstler
    30. November 2011 at 10:55

    gabe is exactly right, that’s why there is only one real play… mine.

    The OWS lefty (including DeKrugam et al) have to swallow hard give up fiscal and agree to follow the demands of the Tea Party.

    The Fed’s antics ONLY work if the left and right are at odds enough to not train guns on Wall Street and the “1%” together.

    Since the Tea Party (basically those who spend time in the the 81-99%) is the largest player in the game, the true A power, things will change when the C power (the left) stops supporting the antics of the B power (the 1%).

    —–

    You see it all the time in DeKrugman now going after the .1% as if he just shave the number down, the A power will suddenly agree with him, the C power.

    The POINT is WHO GETS the stuff ripped out of the hands of Wall Street.

    And until the left gives it up and says out loud, lets hit the oligarchs and use it to reduce Tea Party taxes, the 1% will remain relatively unscathed.

    —-

    This is of course why Sumner needs to focus all his messaging on the winning the Tea Party over to NGDP.

    If he wins them, and he will win them at 4%, the game changes 100% guaranteed.

  20. Gravatar of Rob Rob
    30. November 2011 at 11:08

    Knock me over with a feather that coordinated action was even possible, but color me skeptical. I have two questions. 1) Is it really good news if it isn’t enough, or is this a kick of the can? 2) This is kind of a funny way to do it, no? 2) Might this kind of action be a defensive reaction to some kind of liquidity problem/potential event we don’t know about rather than a proactive move to deal with the debt burden?

  21. Gravatar of John John
    30. November 2011 at 11:13

    Morgan,

    Summer’s glowing approval of radical central bank actions like this one won’t win him too many fans in the Tea Party. I hate the hubris and stupidity they’re showing by trying to paper over the world’s problems. That’s why people should have been buying commodities and conservative foreign currencies like the Australian or Canadian dollar. The Fed wants to link the economy of the US to the Euro and I don’t like that bet.

  22. Gravatar of David Pearson David Pearson
    30. November 2011 at 11:34

    James in London is right. Moreover, the stock market rallied multiple times during 2007 and 2008 on the back of such measures. We all know how that turned out!

    Why praise the Fed each time they make the market jump, only to indict them for their overall policy when the rallies don’t stick and the bear market continues? If a policy is worth lauding, it should also have some lasting effect.

  23. Gravatar of Dustin Dustin
    30. November 2011 at 11:34

    Morgan, son, looks like your Tea Bags are going the way of the dodo bird:

    More Now Disagree with Tea Party – Even in Tea Party Districts
    Since the 2010 midterm elections, the Tea Party has not only lost support nationwide, but also in the congressional districts represented by members of the House Tea Party Caucus. And this year, the image of the Republican Party has declined even more sharply in these GOP-controlled districts than across the country at large.

    http://www.people-press.org/2011/11/29/more-now-disagree-with-tea-party-%E2%80%93-even-in-tea-party-districts/

  24. Gravatar of David Pearson David Pearson
    30. November 2011 at 11:39

    BTW, just as in 2007-2008, we still have not seen the other shoe drop after a central bank action. My sense is the liquidity measures were taken because, like Lehman, one or more E. banks are having difficulty putting up collateral for repo’s.

  25. Gravatar of JimP JimP
    30. November 2011 at 11:50

    Its all expectations. What this shows is the the Fed, unlike the ECB, is not totally insane. The Fed will act – maybe not in the best of ways – but at least they will act. And the markets expect more from the Fed and they will get it.

  26. Gravatar of Lars Christensen Lars Christensen
    30. November 2011 at 11:53

    David, I agree. There is good reason to be skeptical about these measures implemented by central banks around the world. As I argued often Market Monetarists should not scream for monetary “stimulus” unless it is done within a comprehensive framework with a meaningful nominal anchor.

    See for example here: http://marketmonetarist.com/2011/11/22/adam-posen-calls-for-more-qe-thats-fine-but/

    We risk discrediting NGDP targeting if we applaud all attempt to ease monetary policy. NGDP targeting is not about “stimulus” or fine tuning the business cycle. It is about avoiding having to do “stimulus” or fine tuning in the first place. Monetary policy should be aimed being “neutral” and should not created monetary disequilibrium in the first place.

  27. Gravatar of David Pearson David Pearson
    30. November 2011 at 12:11

    Lars,
    I propose a useful exercise for MM’s: watch the movie “Margin Call”. During the movie, try to imagine how an NGDP targeting would have changed the chain of events that the movie describes. Some possibilities:

    -the firm would not have become over-levered to begin with
    -once over-levered, the firm would not have faced an unexpected expansion in the volatility of its MBS position
    -the firm’s attempt to liquidate its MBS position would not have led to a run on other shadow banks

    BTW, its a good movie!

  28. Gravatar of Lars Christensen Lars Christensen
    30. November 2011 at 12:19

    David, the problem is that if monetary policy is “good” then the world gets pretty boring…I guess if you had the “luck” to be on a trading floor anywhere in the world today you would have heard traders (and analysts alike) scream in joy, excitement, anger, happiness or whatever. These things never happens if there are clear rules like NGDP targeting – then are there will never be any major market moving surprises (other terror attacks, natural disasters etc.). Said, in another way “Margin Call” would never been a movie with NGDP targeting, but I guess that that is exactly what you are saying…damn, agreeing is also boring…

  29. Gravatar of Six central banks take action, but where is Chuck Norris? « The Market Monetarist Six central banks take action, but where is Chuck Norris? « The Market Monetarist
    30. November 2011 at 12:20

    [...] policy is very powerful – so why not use it? —— Update: Scott Sumner also has a comment on the global monetary [...]

  30. Gravatar of gabe gabe
    30. November 2011 at 12:24

    D Pearson makes a good point:”Why praise the Fed each time they make the market jump, only to indict them for their overall policy when the rallies don’t stick and the bear market continues? ”

    I’ll presumptously answer for Scott as I have spent many years reading the posts of smart people who hope to get into the big boy club by being a good promoter for the elite.

    Scott is critical of Fed policy(he has to be to build up the following he has thus far) but he doesn’t want to be seen by the beltway/central banker boys as “overly negative”…so after building up a following he has to throw the occasional support and bootlicking comments out to the elite.

    If Sumner continues to build momentum he will eventually be offered prestige and power to offer up his intellectual defense of the bastardized version of his original NGDP targeting scheme. The new scheme will be carefully crafted to allow the money printers to continue to be more equal than the rest of us when it comes to deciding when the booms and busts will be created.

  31. Gravatar of David Pearson David Pearson
    30. November 2011 at 12:31

    Lars,
    Fortunately, I don’t agree! I think the first two items on my list are related. Imagine your “boring” world exists. Market actors cannot imagine playing out the scenes from Margin Call. They expect volatility to remain low, in other words. What does their VAR model tell them in such a world? Increase leverage. Promised enough “boredom”, markets will find a way to raise leverage to such a point that the boredom “promise” cannot be delivered on.

  32. Gravatar of Lars Christensen Lars Christensen
    30. November 2011 at 12:40

    David, very good point. We were indeed in the “boring” world and our VAR models where telling us to increase leverage and then the world blew up. But why did that happen? Because monetary policy blew up.

    But there is in fact a problem with the “boring world”. Both central bankers and market participants forgot how monetary policy works and they still have quite a big problem understanding…

  33. Gravatar of Morgan Warstler Morgan Warstler
    30. November 2011 at 12:55

    Dustin the TP is just another way of saying the 81-99%, they can’t go away.

    That they are the A power is unarguable.

  34. Gravatar of gabe gabe
    30. November 2011 at 13:46

    Dustin, The image of the Republican party has dropped in Tea Party districts because more people have woken up to the fact that the Dem and Repub elites are supporters of the same scams.

    “TEA PARTY” tm has had it’s image tainted because it has been in large part co-opted by elite puppet big government Republicans….not because people have now realized big government is the solution!

    has the popularity of central banking risen or fallen?
    has the popularity of the drug wars risen or fallen?
    has the popularity of high(payroll/carbon/income/property/energy) taxes risen or fallen?

    has the popularity of big government republicans and military industrial compelex democrats risen or fallen?

  35. Gravatar of Liberal Roman Liberal Roman
    30. November 2011 at 14:52

    Paul Krugman admits he has no clue what’s going on.

    http://krugman.blogs.nytimes.com/2011/11/30/what-the-central-banks-did-today/

  36. Gravatar of David Pearson David Pearson
    30. November 2011 at 15:13

    Lars,
    What if you built a model in which the Fed has good credibility in NGDP targeting. In this model, asset price volatility would die down, yielding higher VAR-allowed leverage. As actors pile on leverage, asset prices go higher and volatility lower. As volatility falls, the Fed’s targeting credibility rises, and VAR-allowed leverage rises. What would be the tendency of this model? I imagine that a small shock would have out-sized effects on systemic risk; and if the Fed wanted to pre-emptively “cushion” against systemic risk, it would risk overshooting NGDP to the upside. The result would be that NGDP would ultimately become harder and harder to keep on target.

  37. Gravatar of Lars Christensen Lars Christensen
    30. November 2011 at 15:14

    Liberal Roman, very interesting. Indeed Krugman admits he do not understand expects and monetary policy…

  38. Gravatar of Tom Harvey Tom Harvey
    30. November 2011 at 15:24

    How do we tell the difference between the German stock prices soaring 4% and the euro plummeting 4% ? The feeling in our stomach?

  39. Gravatar of Mike Sax Mike Sax
    30. November 2011 at 15:34

    Ok it sound good to me. They did something whatever that is. Krugman and Mark Thoma however throw some cold water on things pointing out that ITalian bond yields didn’t move.

    I’m not saying who is right-Sumner or Krugman-just noting that “opinions differ” and I don’t know which side is more right. It was an impressive move in the equity markets though-of course they know nothing about all this.

    http://diaryofarepublicanhater.blogspot.com/2011/11/worlds-central-banks-unite.html

    http://diaryofarepublicanhater.blogspot.com/2011/11/what-did-central-banks-do-today-second.html

  40. Gravatar of biL. biL.
    30. November 2011 at 16:02

    Scott,

    Maybe I’m confused here, but as these dollar swaps are only loans, any increase in the global money supply as the result of the lower rates is only temporary – so expected future NGDP (or nominal gross global product/NGGP?) is unchanged – so this should have no substantial long-run effect, and therefore no substantial short-run effect, yes? Temporary increases in the money supply don’t help, right?
    Unless it is expected that the rate will stay lower permanently, which would imply a higher equilibrium level of loans, greater global money multiplier, higher broader money supply permanently?

    Would love to hear your thoughts, thanks.

  41. Gravatar of ssumner ssumner
    30. November 2011 at 17:35

    Statsguy, I agree they are unlikely to do enough; the ECB certainly doesn’t see a NGDP problem (the Fed may be beginning to see.) I’m just as confused as Krugman by today’s events.

    But if markets think it’s expansionary, then it’s expansionary.

    Thanks John.

    JVM, It was definitely this news, prices spiked on the story.

    Vivian, That’s right.

    Martin, Good point. Until they get more explicit it will never be enough.

    Morgan, BTW, Cochrane got the idea from me. I don’t see it as making a huge difference here, because I don’t think the Fed would monetize debts in either case (NGDP rule or not.)

    gabe, “More of this monetary easing”? When did it start?

    You said;

    “Actual economic PHDs tell us the fed doesn’t create any money, instead they merely engage in “asset swaps”…would love to get some more of that type of talk going as we NGDP target our way back up to $140 oil.”

    Yes, $140 oil, like when we had 5% unemployment. There are some people who love 9% unemployment because it allows them to save a few bucks when filling up. I’m not one of them.

    Ben, That would “git er done.”

    Patrick, Thanks for the link.

    James, You said;

    “This is the second time in a few months the FedECB has done this. The first time the market got very excited too, and then it all subsided when nothing further happened, apart from banks taking up a grand total of $2bn via the first swap line.”

    Must be a nice feeling to be able to predict the stock market.

    Rob, Your guess is as good as mine.

    David; You said;

    “Why praise the Fed each time they make the market jump, only to indict them for their overall policy when the rallies don’t stick and the bear market continues? If a policy is worth lauding, it should also have some lasting effect.”

    I’d put it differently. If it’s having a positive market effect, keep doing it. Do QE every day, don’t stop doing QE as they did earlier this year. Announce more. Keep the stock rally going. Or course I’m half joking, I want them to target NGDP futures, not stock prices, but you get the idea.

    I can’t comment on your second point–you may be right.

    JimP, I think that’s the most likely explanation.

    David, I’m not trying to prevent bank panics, I’m trying to prevent (demand-side) business cycles.

    Lars, That’s a good point about the need for an explicit target, but perhaps this move makes it more likely–see my next post as well.

    gabe, I’m afraid you don’t know me very well. The approval of big shots is the furthest thing from my mind. When Perry was leading in the polls I called him “evil” in the title of a post.

    Liberal Roman and Mike Sax, I sort of agree with him.

    Tom, Check the data.

    Bil, I am not sure, I think the expectations channel worked via a recognition that the central banks took the problem seriously, and were about to get more active. But that’s just a guess.

  42. Gravatar of Edwin A. Edwin A.
    30. November 2011 at 18:05

    “Liberal Roman, very interesting. Indeed Krugman admits he do not understand [expectations?] and monetary policy…”

    I think does understand expectations. He does understand that it’s one of the main channels in which monetary policy works. The problem is that without an explicit target (like you mentioned above), Krugman believes expectations will eventually fall back down again like nothing ever happened when the Fed doesn’t follow through to keep the buzz gong. So in a that sense, he thinks the market is overreacting even though he understands the current buzz is how monetary policy works.

  43. Gravatar of Once Again The Stock Market Shows its Love for Inflation « Uneasy Money Once Again The Stock Market Shows its Love for Inflation « Uneasy Money
    30. November 2011 at 19:55

    [...] were capable of working in concert to stabilize monetary conditions. One other point worth noting, already mentioned by Scott Sumner, is that the provision of liquidity so much welcomed by the markets was associated [...]

  44. Gravatar of OGT OGT
    30. November 2011 at 20:13

    An NYT article today makes the point that this is the eighth time since 2008 that the S&P has rallied 4% or more, and it has gone down by that much in one day ten times in that period. So to build on Pearson’s point, in such a volatile and sensitive market, one should discount the significance of any one day even more than usual. The point ought to be to get to a place where the market doesn’t shift a few percent every time a central banker breaks wind.

    That said, today’s move was clearly needed, and I take the interest rate moves here and on European sovereign debt as somewhat more significant sign.

  45. Gravatar of Liberal Roman Liberal Roman
    30. November 2011 at 21:14

    Yea, I guess I was being too hard on old Paul. He does make the correct point that this move is probably less about what the central banks did and more about the expectations they are setting that they won’t let the world go to hell.

  46. Gravatar of Good news! The world’s central banks boosted (market) interest rates « Economics Info Good news! The world’s central banks boosted (market) interest rates « Economics Info
    30. November 2011 at 23:01

    [...] Source [...]

  47. Gravatar of James in London James in London
    1. December 2011 at 00:35

    Scott, you said: “Must be a nice feeling to be able to predict the stock market.”
    It keeps me in my job.

  48. Gravatar of Gabe Gabe
    1. December 2011 at 04:42

    Polls!= big shots

    Perry is a phony and a jerk, but you were defending the fed, which is expected.

    Now you praise the fed for no good reason. They haven’t adapted ngdp targeting, just crony capitalist bailouts

  49. Gravatar of Nick Rowe Nick Rowe
    1. December 2011 at 06:55

    Notice how the price of oil rose yesterday?

    Which is a better proxy for the tightness or looseness of monetary policy: the rate of interest; or the price of oil?

    Which price of oil? Dunno. Which rate of interest? Dunno either.

    Can other things also affect the prices of oil? Yep. Can other things also affect the rates of interest? Yep too.

    When you say “other things” in the above, you mean “holding monetary policy constant”, but what precisely do you mean by that? Ummm, dunno.

    But a monetary policy that held a price of oil constant, so that *all* changes in the price of oil were by definition caused by changes in monetary policy, would be less daft than a monetary policy that held a rate of interest constant.

    And at least we know which direction all oil prices should change when monetary policy loosens, for any sensible definition of “monetary policy”. We can’t say the same about interest rates.

  50. Gravatar of gabe gabe
    1. December 2011 at 06:58

    Brent and WTI , Copper etc went up yesterday at the exact same time as the bank press release. Anyone who doesn’t realize by now that the prices of these things responds to changes in perception of monetary policy is not following the markets.

  51. Gravatar of StatsGuy StatsGuy
    1. December 2011 at 08:43

    The question is how much of the rise in oil/copper is due to increased AD expectations, and how much is due to inflation hedging and/or relief from the unwind of hedges caused by the dollar squeeze.

    Today Draghi spoke, and could not possibly have made it more clear that the ECB is keeping the screws on until it gets the fiscal policies it wants. (link to FT through google)

    http://www.ft.com/intl/cms/s/0/87b3db16-1bfc-11e1-9631-00144feabdc0.html#axzz1fImEyNAI

    Moreover, he indicated directly that the combined CB move yesterday was designed to keep the “credit channel” intact – aka, to SUPPORT BANKS.

    ‘The ECB president added: “The most important thing for the ECB is to repair the credit channel.”’

    So that’s it, the ECB is going all in on european union. They will trickle support to the banks to keep them going while letting european sovereign bonds hold at a level that is too high, but not so high that it triggers an actual default event (which would wipe out the banks). In other words, they will deliberately keep the world on the brink until they get the fiscal solutions they want.

    Truly impressive.

  52. Gravatar of Assorted Links « azmytheconomics Assorted Links « azmytheconomics
    1. December 2011 at 08:46

    [...] 3. Good news on jobs. Sumner comments. [...]

  53. Gravatar of W. Peden W. Peden
    1. December 2011 at 09:24

    Leo Rosten once asked Hayek “What phenomena would you like economic theory to be able to explain?”

    Hayek’s response? “Any price change.”

    Something to bear in mind when analysing the price movements in oil and copper.

  54. Gravatar of David Pearson David Pearson
    1. December 2011 at 09:38

    Scott above says, “I’m not trying to prevent bank panics, I’m trying to prevent (demand-side) business cycles.” What he misses is that velocity is a function of the collateral used by the shadow banking system. When that system starts to run out, as is happening in Europe (for Repo’s) today, velocity can contract dramatically. I don’t usually agree with Karl Smith’s prescriptions, but he has a nice summary of how this works:

    http://modeledbehavior.com/2011/12/01/has-the-ecb-completely-lost-control-of-monetary-policy-ctd/

    Below is Tyler Cowen’s link to a recent IMF paper detailing how velocity and collateral are related:

    http://tiny.cc/u03ar

    The point is that hitting NGDP targets when the availability of collateral is the issue is quite difficult. The solution is to have a well-capitalized banking system that does not get to that point. There are various reasons to believe that macroprudential policy is bound to fail at this task.

  55. Gravatar of Morgan Warstler Morgan Warstler
    1. December 2011 at 09:41

    StatsGuy,

    1. So just start telling the Greeks and Italians to EAT IT. Jesus man, WHY keep urging the losers to keep fighting??? Go yell at the left to knock down their king! Beg them, plead with them, to just take the regulatory, labor and pension rollbacks necessary to compete with the north.

    Look man, South Carolina figured out how to win jobs.

    You owe it to them left in Europe to teach them how to become southern state conservatives.

    2. Now that you have finally been forced to BELIEVE what I have been saying, they are saying it themselves in no uncertain terms…

    Just ACCEPT that’s what our Fed is doing too…

    You should be mad at OBAMA, he had his chance to do a Clinton, he could have skipped Obamacare, gotten some tax hikes mixed with real cuts to public employee pay to balance the budget…

    And right now unemployment would be far lower.

    If you care about the unemployed you should be furious he didn’t play it smart.

  56. Gravatar of David Pearson David Pearson
    1. December 2011 at 09:43

    Another relevant article to the shadow bank collateral shortfall:

    http://ftalphaville.ft.com/blog/2011/12/01/775341/draghi-we-are-aware-of-the-scarcity-of-eligible-collateral/

    I would venture to say that prescriptions for monetary policy that do not get down into the “weeds” of this issue are bound to fall short of robustness. One could say, “confidence in NGDP targeting would prevent that from happening.” A fine solution if we could travel back in time to, say, 2006, but not a terribly useful one today. Besides, IMO, “confidence” in central bank stability-seeking regimes is what produced the leverage in the first place.

  57. Gravatar of StatsGuy StatsGuy
    1. December 2011 at 12:05

    “WHY keep urging the losers to keep fighting”

    ? I don’t recall doing this – I’ve advocated Greece leaving the Euro, devaluing massively, and immediately moving to a balanced budget. When Gpap tried to do give Greeks an option to do this, however, he was replaced by someone more loyal to the EU banking cartel.

    “You should be mad at OBAMA, he had his chance to do a Clinton, he could have skipped Obamacare”

    I never favored Team Obama’s health care plan… I favored a plan with basic coverage (option to buy more) and a focus on public health (vaccination, etc.).

    Are you confusing me with someone else?

  58. Gravatar of Morgan Warstler Morgan Warstler
    1. December 2011 at 14:47

    No, what I’m wondering about is when do you stop lamenting the facts as they are, and instead start advocating policy base on it?

    I spend all day telling the left to stop playing the game as if they matter enough to take down the Fed and the oligarchs themselves, theya re the C power for christ’s sake.

    In ANY game the third best or three players KNOWS he’s the weakest and strategizes accordingly.

    But not the American left, not DeKrugman, not Matty, not the NYT, not OWS, not Huffington, not you.

    If there is real anger at Wall Street and the Fed, and a real desire to beat their ass, the Quarterback has to be the Tea Party, and the American left has to cheerlead.

    You aren’t a very good cheerleader.

  59. Gravatar of Matt Waters Matt Waters
    1. December 2011 at 15:33

    I have my issues with the EMH, but it’s useful for discussions like this. The stock market did go up on similar Central Bank moves in 2007 and 2008, and they didn’t matter in the end. But stocks also went up as Greenspan lowered rates after the 2000 and 1990 recessions. They also went up after QE1 and QE2, which turned out to actually increase NGDP as the market expected. Before QE1, the market priced in a Great Depression and Bernanke’s unexpected action raised stock prices, and the prices turned out to correctly forecast future NGDP growth.

    The EMH’s best insight is how market process information and why the market moves in a random walk. Market prices do, in fact, generally process information faster than central bankers and economists who do not have money on the line. I have serious issues with how purer forms of EMH argue for complete financial deregulation, despite the huge principal-agent problems and information asymmetry inherent in markets. But it’s correct in how we should take notice of how markets process news.

  60. Gravatar of StatsGuy StatsGuy
    1. December 2011 at 17:27

    Morgan, what you fail to realize is that given a choice between the bank cartel running the world and the Tea Party running the world, most of the left would strongly prefer the bank cartel. The Tea Party essentially chose to create massive strife to block the democratic agenda (even if the cost was severe recession and fiscal unsustainability). The Tea Party chose to burn it all down rather than let the Left have any success.

    The left now intends to return the favor – they’ll give it to the bankers, the 1%, or watch it burn before letting the right have it all – just to prove they are as willing to do blow up the country as the right is if they don’t get their way. It’s a wonderful little game of chicken we’ve got set up.

    Personally, I don’t care to expend the mental or emotional effort to try to change anything – the political environment is going to need to get to the point where people of their own volition decide to abandon the extremes. People of strong opinions and worldviews simply do not change, unless their personal circumstances so conflict with their worldview that they are forced to change. My political views have shifted over the last 3 years (and my support), but I doubt there is anything I could tell you that would convince you to alter your world view even slightly. So, why try, except to enjoy the discussion?

    Judging by the Republican primary, we’re still far away from the point where reality forces people to change their worldviews… The sustainable self-sorting demographic and geographic trends (only exacerbated by technology and mobility) have carried the country to a point of non-homogeneity that creates severe political friction, and is proving ever more costly.

    And so, it seems we could get Newt Gingrich as the Rep nominee, even though he’s almost certain to fail and Huntsman has a decent chance of succeeding (but he’s a moderate).

  61. Gravatar of ssumner ssumner
    1. December 2011 at 19:27

    Edwin, Yes, that’s a good explanation of his view.

    OGT, You said;

    “The point ought to be to get to a place where the market doesn’t shift a few percent every time a central banker breaks wind.”

    Exactly. The issue isn’t easy or tight money, it’s uncertainty. We need policy stability, transparency, and then stocks will be much more stable. In the 1930s stocks were very unstable during periods when there was uncertainly about dollar devaluation.

    But the policy moves are still important, they are simply important in a not very useful way. If someone tells me there is a 1/20 chance that an killer will show up at my house, and try to shoot me, that’s very important to know–even if 19/20 it’s a false alarm. That’s why markets are so trigger happy

    James, You are probably making lots of money by stealing my ideas, aren’t you?

    Gabe, I’m not defending the Fed, I’m criticizing them from the opposite direction.

    Nick, That’s right.

    Gabe, I said many times that QE2 boosted oil somewhat, but the evidence is also clear that much of the rise occurred on days with no monetary news–factors like Libya and developing country demand also matter.

    Statsguy, Yes, It’s a game of chicken.

    David, Bond velocity and money velocity are two completely different things. The ECB doesn’t claim to be out of ammo, does it? They simply don’t want more inflation. Markets react to even trivial easing as if monetary stimulus would be highly effective.

    Regarding your second point, I’d remind you that March 1933 was as bad as it gets, but turned out to be not too late for monetary stimulus. After 1933 bank failures pretty much ended.

    Matt, I don’t think we are far apart. Markets often make mistakes, but also give the best initial estimate of the policy’s likely effect.

  62. Gravatar of Morgan Warstler Morgan Warstler
    1. December 2011 at 19:38

    “The left now intends to return the favor – they’ll give it to the bankers, the 1%, or watch it burn before letting the right have it all – just to prove they are as willing to do blow up the country as the right is if they don’t get their way. It’s a wonderful little game of chicken we’ve got set up.”

    That’s just it though, you are not responding.

    The Tea Party GETS TO veto that shit because they are the A POWER.

    Look, what don’t you get here??? they have FAR MORE MONEY and just as many votes.

    It isn’t rational game play for the C power to do this.

    LOOK AT THE RESULTS: Since the left has gone down on the banksters (since Clinton), where has the wealth shifted?

    Your guys, the C power, lost X.

    The B power, the banksters, gained X.

    The A power stood its ground, the 81-99%, the Tea Party did’t lose or gain.

    The very definition of the A power is that even when B and C team up, A plays to a draw.

    Look, this isn’t tit for tat, you guys SUCK at this stuff, you aren’t being logical.

    WHO ON YOUR SIDE is preaching a gospel of get along with the Tea Party?

    Nobody.

    But If the C power followed the A power, we could deeply hurt the B power… and while the C power wouldn’t get the most,t hey would get some.

    What’s wrong with you?

  63. Gravatar of David Pearson David Pearson
    1. December 2011 at 20:24

    Scott,
    I’ll remind you that we saw scores of banks close before an extreme monetary shock resulted in inflation. There’s nothing like solving a lemons problem by actually getting rid of the lemons! Unfortunately, we seem determined to keep ours around.

  64. Gravatar of James in London James in London
    2. December 2011 at 08:42

    Not lots of money, it’s not that sort of place. I’m not that sort of person.

    However, your ideas do help provoke a bit of debate around my sort of place that gives us a bit better understanding of the world, that hopefully gives our clients a bit of a better return than the peers give them. And rewards us a bit, but not excessively.

    There are other things in life to aim at than success as measured by the standards of the average Goldman Sachs rent-seeker or Russian oligarch or Warren Buffett.

  65. Gravatar of ssumner ssumner
    2. December 2011 at 18:25

    David, Yes, I favor getting rid of lemons too. With NGDP targeting the lemons will fail one at a time, not all at once, as when NGDP falls sharply. It makes it easier for government to let them fail.

    James, That sounds like a good attitude.

  66. Gravatar of More ‘Free Market’ Double Standards « Unlearning Economics More ‘Free Market’ Double Standards « Unlearning Economics
    14. December 2011 at 07:56

    [...] Reality trumps theory. But I love the EMH so much…and RET…and [...]

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