Brad DeLong was right

[Warning, this post will initially seem sarcastic, but I'm dead serious.]

In July 2008 Brad DeLong made the  following astute prediction:

The chance that American taxpayers will actually lose any money if Ben Bernanke and Henry Paulson decide that Fannie and Freddie need government support is very low:

* The interest payments they have coming in are greater than the interest payments they have going out.

* Their government guarantee is itself a very valuable asset that they have made a lot of money off of in the past and will make more off of in the future.

* They are not even in liquidity trouble–unless they begin to have problems rolling over their discount notes…

* As long as it is generally understood that they are too big to fail, they should not even have liquidity problems–absent a depression that bankrupts many currently-solvent homeowners, that is.

I’d guess that 99% of readers would find DeLong’s prediction incorrect.  That’s because most people are excessively impressed by unconditional forecasts.  When dealing with business cycles and financial markets only conditional forecasts matter.  People win the lottery every day.  I’m no more impressed by an economist making an unconditional prediction that turns out correct than I would be if my plumber won the lottery.

DeLong correctly realized that a depression could push a lot of otherwise-solvent homeowners over the edge.  And of course that’s exactly what happened; the biggest drop in NGDP since the 1930s began the very month DeLong made the prediction.

I’ve had a hard time convincing people that much of the financial crisis was caused by falling NGDP.  Or that with better Fed policy the banking crisis would have been far milder.  I don’t know if DeLong agrees with me, but based on the logic of his prediction he ought to.  After all, the very same factor that caused the GSEs to end up much worse off than expected, also damaged the rest of the financial system.  That’s not to say that there weren’t many problem loans that were unrelated to the fall in NGDP, and I won’t deny that some banks (plus Greece) would have failed with even perfect monetary policy.  But the NGDP collapse made the crisis far worse than it should have been.

I’d guess DeLong made the same mistake as I did.  I suspect he assumed that a Fed chairman who has written papers criticizing the BOJ for not showing “Rooseveltian resolve” in fighting against inadequate NGDP growth, would be unwilling to preside over the greatest NGDP collapse since the 1930s.

I blame myself.  As Ball recently showed, the warning signs were there.  Ever since 2003 Bernanke was increasingly absorbed into Fed-think, which doesn’t allow for price level or NGDP commitments that might later embarrass the Fed.

HT:  123

PS.  After I completed this post I ran across Paul Krugman’s Playboy interview:

PLAYBOY: Were crimes committed here, and should people be in jail?

KRUGMAN: It’s hard for me to believe there were no crimes. Given the scale of this, given how many corners were being cut, some people must have violated laws. I think people should be in jail partly because I’m sure crimes were committed and partly because the lack of accountability is a serious problem. Something terrible happened and nobody has been held accountable. The public is angry, and a lot of the anger is being directed at the wrong targets.

I wonder how commenters will react to this quotation.  His answer reminds me of  the film “12 Angry Men.”   And also that if I’m a banker I don’t want Krugman on the jury.  But I do very much identify with the final sentence of that answer.  There are lots of scapegoats out there, and sometimes it’s easier to see the real villains in another culture, where you can be more dispassionate.  Krugman underestimates how much of our recession was caused by the Fed.  But there’s no doubt he knows who’s to blame for the eurozone recession:

PLAYBOY: Greece and Italy are in financial chaos. Are the euro and the European Union dead? Is that a good thing or a bad thing, or should we even care?

KRUGMAN: It’s on the edge. They need drastic action—basically printing a lot of money for the time being—and it looks highly doubtful that they’ll do it.

DeLong is right that much of our debt crisis is due to falling NGDP and Krugman’s right that the eurozone’s big problem is excessively tight money.

Now that both Keynesians and market monetarists agree on the problem, let’s start working on solutions.

PPS.  And don’t worry, the link is completely work-safe.  That is as long as you don’t live in a country founded by Puritans.


Tags:

 
 
 

53 Responses to “Brad DeLong was right”

  1. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 19:26

    Paul Krugman, Brad DeLong and Scott Sumner are always right (especially when they disagree).

  2. Gravatar of 123 123
    19. February 2012 at 21:16

    At the same time DeLong also wrote:
    “It and might even require more liquidity than the Federal Reserve can provide with its current balance sheet. Either the Fed needs to be given the power to pay interest on reserves immediately–so that it can swap interest-paying reserve deposits for mortgages next week–or this has to become not Fed but Treasury business.
    … So that the economy does not fall into a depression deeper than that of 1982…
    In which case all bets are off”
    My interpretation is that DeLong advocated printing money in order to stabilize AD in June 2008.

  3. Gravatar of mbk mbk
    19. February 2012 at 21:24

    Hilarious!! The link is not accessible from Singapore! This is only maybe the 2nd or 3rd time ever that I stumble over link that’s blocked here. Ah well, I’ll have to do without Mr. Krugman’s wisdom.

  4. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 21:38

    123,
    Put up or shut up. I’ve wasted good time looking for the link. There’s no evidence so far that what you say is true.

    Show us the link. (And if you can’t produce an unedacted link that proves that you are lying.)

  5. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 22:51

    Scott,
    Take a look at this. What country is credited as an economic success?

    I push and I push and I push. But the facts win out. But I credit you with some of the realization as I haven’t the visibility that you do. yahoo!!

    http://krugman.blogs.nytimes.com/2012/02/18/austerity-and-growth/

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. February 2012 at 22:59

    P.S. I know this is all about monetary policy. But it doesn’t matter. Once we know which counbtries are succeeding we can figure out the policy details later.

  7. Gravatar of A. Clark A. Clark
    19. February 2012 at 23:15

    Scott, I’m a first time commenter to your blog but a reader for several months. I’m not an economist, but I do have an MBA from Chicago Booth, so I understand most of what you blog about. Your NGDP-targeting proposal is convincing from a theoretical standpoint, but I remain yet unconvinced about both the practicality and sustainability of it as a viable policy objective. Allow me to explain my objections, and I’d appreciate your response.

    First, the practicality objection: it seems that for the Fed to be able to prop up nominal GDP when there is a real recession, it will have to buy more than just treasury bonds, which, as we have witnessed in the last few years, only serves to increase banks’ excess reserves when the rate of lending slows or contracts. In fact, the Fed will have to purchase all assets sold in the economy if it wants to uphold the value of all things produced in the domestic economy (i.e., NGDP) when consumption rates otherwise contract – correct? If this is true – or even if the Fed must purchase merely a lot of non-treasury bond things (as opposed to all things) – I don’t see how this action by the Fed can ever be palatable to the American people. In the aggregate, Americans generally oppose government ownership of economic output and government intervention in markets. I can’t see them embracing a Fed policy to step in amongst them and to buy things like Chevrolets, real estate, and food. Have you considered this, and what is your response to this objection?

    My second objection involves your proposal that the targeted rate of NGDP growth be higher than the historical real GDP growth rate trend: If the Fed is continually buying goods in the economy to keep NGDP above real GDP, I don’t see how the Fed doesn’t become bloated with goods that it cannot use or sell. Under your proposal, the Fed will have to become a net purchaser of goods as it prints more money to buy goods than will sustain the current price level (whence comes the NGDP growth higher than real GDP growth). I acknowledge that if the average difference between NGDP and RGDP trend rates is small (as per your proposal), then the Fed’s ownership of output as a percentage of real output will also be relatively small – but even at 2% of real GDP, that’s still a lot of stuff. What, in your proposal, is the Fed supposed to do with all that it buys? Destroying it seems to be the only option if the goal is for NGDP to outpace RGDP, but destruction, along with buying it in the first place, creates a whole slew of microeconomic incentive problems for producers of whatever the Fed buys. This becomes a widespread, even macroeconomic, problem if the Fed is buying some of everything produced. If you expect (or want) your proposal to win enough minds in order to become actual policy, how does your proposal deal with these unsustainable implications (bloat and incentive problems)?

  8. Gravatar of q q
    20. February 2012 at 03:17

    @mark, scott included the link in his post. i’ll repeat it. http://delong.typepad.com/sdj/2008/07/every-time-i-tr.html

  9. Gravatar of Sculeeto Sculeeto
    20. February 2012 at 03:32

    “I’ve had a hard time convincing people that much of the financial crisis was caused by falling NGDP”

    Do you mean that the initial slight deviation of NGDP from its trend might have affected condition of the whole financial sector?

    Because NGDP started to deviate from its trend in early 2008, but the entire fall in absolute NGDP happened basically in 4Q2008 and 1Q2009:
    http://research.stlouisfed.org/fredgraph.png?g=57U

    So for me it seems that the crisis happened because of Lehman shock, which reduced the NGDP by raising demand for money,…

  10. Gravatar of Bill Woolsey Bill Woolsey
    20. February 2012 at 04:12

    Sculeeto:

    I believe this is more or less right, though I also think that loose talk by Bush about another Great Depression made it worse.

    Still, Sumner’s argument is that an incease in the demand for money can be accomodated by the Fed.

    More importantly, all that is really necessary is for people to believe that the Fed will accomodate the increase in the demand for money in the future, so that if nominal GDP does fall in the near future, it will return to its previous growth path soon after.

  11. Gravatar of Max Max
    20. February 2012 at 04:52

    “More importantly, all that is really necessary is for people to believe that the Fed will accomodate the increase in the demand for money in the future, so that if nominal GDP does fall in the near future, it will return to its previous growth path soon after.”

    The problem is that the return that investors require can become extremely high relative to normal. So you may need to *raise* your level target in order to prevent a crash or get a prompt recovery from a crash.

    Alternatively, the Fed can be the investor of last resort. This lowers the required return and therefore higher inflation isn’t required.

  12. Gravatar of Jason Odegaard Jason Odegaard
    20. February 2012 at 05:42

    Maybe a little off-topic, but you know it always grinds my gears to see articles written like this:

    “New ECB cash injection seen bringing pain for euro”
    http://www.reuters.com/article/2012/02/20/us-markets-euro-ltro-idUSTRE81J0PC20120220

    Greater lending by the ECB is going to help. Granted, I’m sure most everyone will agree here that they should be doing NGDP targeting, setting goals, etc – but at least they’ve reduced their passive tightening.

    But the article continually mentions the effects of more lending being negative effects of inflation, weaker currency. Isn’t that exactly what they need?

    Maybe my gripe is that it seems just a little too balanced. It gives too much emphasis to the downside risks of currency depreciation, and too little emphasis on the risks of euro-zone recession and collapse. Nia Williams from Reuters isn’t the first person to make that mistake. I used to think the same thing too.

  13. Gravatar of ssumner ssumner
    20. February 2012 at 06:03

    123, I disagree. Printing money means producing non-interest-bearing base money. He wants to pay IOR. The whole point of which is to bail out banking without printing money (i.e. causing hyperinflation.) He wants to print interest bearing ERs, not cash.

    mbk, Yikes, is there a country even more puritanical than the US?

    Mark, Yes, I saw that too. The graph is supposed to show countries that had no power to use monetary policy (i.e eurozone countries) but Poland is not even in that group. I was thinking of doing a post.

    A. Clark, I’m afraid your premise is wrong. An expansionary monetary policy doesn’t require them to buy lots of debt–they’d never run out of T-bonds to buy. Indeed they bought only a minority of T-bonds from 1913 to 2007, despite often having NGDP growth at rates that are higher than I propose.

    In a real recession inflation is quite high, very few people or banks want to hold large amounts of non-interest bearing base money when there is high inflation.

    They would never have to buy real goods.

    Sculeeto, No, if you look at monthly NGDP data from Macroeconomics Advisers the peak of NGDP was in June 2008, and then it fell sharply from June to December. The severe part of the financial crisis was one half way through that decline. Quarterly data is quarter over quarter, and doesn’t pick up break points well.

    Jason, Yes, most of the press is clueless about the fact that we need more inflation. And remember, these same people mock the Republicans for opposing fiscal stimulus.

  14. Gravatar of Sculeeto Sculeeto
    20. February 2012 at 06:05

    Bill Woolsey:
    Yes, I agree that FED can and should accommodate the shock to demand for money. I was just wondering what did Scott mean.

    Perhaps it is then more accurate to say that the slow recovery is caused by slow NGDP growth. Even though FED was an (implicit) inflation targeter, the shock was so big that it took more than a year the inflation expectations to recover back to the pre-crisis level. So it could be the case that the NGDP (expectations) would recover slowly as well. Only the recovery after spring 2010 could have been faster.

  15. Gravatar of david david
    20. February 2012 at 07:32

    Singapore bans Playboy.com “symbolically”, yes, along with a list of about a hundred websites of varying nature. Apparently the explicit intent is to show that it can, not to actually prohibit the contents of Playboy.com; this rather says a lot about the regime’s psyche, doesn’t it?

  16. Gravatar of Rien Huizer Rien Huizer
    20. February 2012 at 08:40

    David,

    Good government is not always pleasing…

  17. Gravatar of Rien Huizer Rien Huizer
    20. February 2012 at 08:59

    Scott,

    1) Dr Krugman and Dr Sumner are probably well aware that the ECB is subject to many inflexible formal constraints that make it impossible (even if Mr Draghi and his Board were in favour). Furthermore, most of the assets it would be buying in some form of heterodox scheme like QE are very risky (relative to F&F for instance), inherently so (F&F are de facto public sector, the Fed is hence the the US Treasury, as the Fed’s residual claimant and de facto guarantor is responsible for both CB and issuer of claims bought by the CB). There is no comparable situation in the EU.

    2. The issues that A Clark brings up are worth considering in the US but even more so in the EU. If one looks at “helicopter drops”, QE programs of just monetizing gvt debt, there are serious issues of redistribution. Whenever the FEB buys a risky security from the private sector, some private actor gets money for something that without the Fed’s willingness to buy might have a different value. The Fed’s programs will benefit most of all the holders of those assets (and penalize shorts) and in the case of truly risky and especially, illiquid assets (once you run out of reasonably marketable ones) those gains may be large. Of course there is nothing unjust about winning a lottery, but I wonder why these private gains are unavoidable. Of course, your NDGP futures would avoid that problem , but in the absence of that technology, there is a potential problem with externalities of heterodox monetary stimulus and it is easy for the market to outguess the Fed in that respect.

  18. Gravatar of Troy Troy
    20. February 2012 at 09:26

    “I’ve had a hard time convincing people that much of the financial crisis was caused by falling NGDP”

    Falling GDP was caused by the cut-off of the stealth stimulus of the six trillion dollar housing debt of 2002-2007.

    It was the housing bubble’s borrowed money that gave us what feel-good prosperity we had during this decade:

    http://research.stlouisfed.org/fred2/graph/?g=582

    It was a form of redistribution — peaking at $10000 per household per year –and when that party ended it was only natural that the economy would contract.

    You can’t pull away a $10,000 per year monetary stimulus directly hitting the masses without seeing AD collapse.

    We’ve just replaced that $1T/yr housing debt bubble with the fiscal debt bubble of $1T/yr Federal deficits. Try cutting that deficit back to just 2007 levels and see how much a functional economy we actually have.

    http://www.themoneyillusion.com/?p=13117&cpage=2#comment-136716 for more on that.

  19. Gravatar of acarraro acarraro
    20. February 2012 at 10:24

    I usually agree with Krugman with many things, but I think he is totally wrong on that (at least in part because I am a banker, I guess).

    Just because something bad has happened, it doesn’t mean someone is at fault. What about natural disasters? Do we jail house-builders when there is a freak earthquake? We have regulation and unless you prove the regulation was broken, you cannot put people to jail. I think this is a basic constraint to civil society.

    Even if it wasn’t a natural disaster, it was caused in large part by the interaction of many people doing the same thing. It’s unreasonable to demand what people have perfect foresight of what other people are doing/will do.

    Let me make another example: climate change. Producing CO2 is bad depending on how much CO2 other people produce. It’s impossible for me to know what other people will do, so in some sense I have no clear moral duty to reduce my production as I am not sure it will make a difference. Once we coordinate, I have the moral duty, but only after the coordination is agreed. If after the agreement to coordinate, there is still a disaster, how’s fault it is? Of the agreement, not of the single individual…

  20. Gravatar of Peter K. Peter K.
    20. February 2012 at 10:52

    acarraro,

    I don’t believe the CO2 and natural disaster analogies work well.

    There was a housing bubble that was enabled in many ways and by many people how made money off it. The crisis was sparked in the subprime market but spread elsewhere. There was panic after Lehman wasn’t bailed out because a shadow banking system was allowed to grow and supplant the old FDIC insured one. Being unregulated it was vulnerable to a bank run and it had one. Finally the government didn’t respond adequately to the downturn.

    The biggest blame goes to anti-government, anti-regulation ideology that is supposedly pro free market. We had massive free market failure that has been seen throughout history and across the world. Why haven’t we had a disaster of this size since the Great Depression? Luck?

    If you look at the history of the Great Depression, there was a lot of fraud and there were a lot of convictions and jailtime. This time around I don’t believe there were as much because fraud wasn’t pursued very hard except in a few cases like Bernie Madoff and the mortgage deal with the states.

  21. Gravatar of Tom Tom
    20. February 2012 at 10:56

    FYI – the link to the playboy article is decidedly NSFW. The first ad that appeared was something to the effect of “NUDE COLLEGE GIRLS”.

  22. Gravatar of Major_Freedom Major_Freedom
    20. February 2012 at 11:04

    ssumner:

    “DeLong correctly realized that a depression could push a lot of otherwise-solvent homeowners over the edge. And of course that’s exactly what happened; the biggest drop in NGDP since the 1930s began the very month DeLong made the prediction.”

    The drop in NGDP didn’t cause the recession. The recession caused the drop in NGDP. Just because NGDP could potentially be increased by the Fed, it doesn’t mean that the Fed’s lack of printing enough money to boost NGDP is responsible for the recession. You’re not even asking why would NGDP all of a sudden collapse, and why that which caused the collapse in NGDP all of a sudden took place, and why it was that thing which caused the collapse in NGDP to all of a sudden take place, but not something else.

    Just like the Keynesians, market monetarists have no other explanation than “animal spirits.”

    “I’ve had a hard time convincing people that much of the financial crisis was caused by falling NGDP.”

    With good reason. The recession wasn’t caused by the fall in NGDP. It was caused by excessive monetary policy prior to the housing collapse. Yes, if the Fed printed more money after 2008, then they could have engineered another false recovery, one far worse than the one we’re experiencing by less printing of money that result in less than 5% NGDP. You said before you’d rather have a false recovery than a real recovery. It is that very destructive thinking that created the housing bubble after the Nasdaq bubble burst in 2001. Then, just like 2008, the thinking went “We should have a Fed engineered false recovery.”

    You are so utterly clueless at the extent of the damage you monetarists are intellectually responsible for, and not on the side of not printing enough money, but on the side of printing money to forestall the correction. You are hiding behind the excuse that things are bad because the Fed isn’t printing as much money as you would like them to, and you ignore the damage that printing money is actually doing, and is actually responsible for the problems you now see, and then you keep pretending that that damage is caused by not printing enough money.

    “Or that with better Fed policy the banking crisis would have been far milder.”

    With better Fed policy the crashes of 1929 and 2008 would not have happened, because there would not have been a prior inflationary boom that distorted the market. Inflation doesn’t affect all prices equally. It affects the structure of relative prices, and with relative price changes, there is a revolution in the capital structure of the economy. The Fed System’s artificially low interest rates, and credit expansion, is what caused the capital distortions to take place, because the low interest rates and credit were not a product of additional real savings.

    “I don’t know if DeLong agrees with me, but based on the logic of his prediction he ought to. After all, the very same factor that caused the GSEs to end up much worse off than expected, also damaged the rest of the financial system. That’s not to say that there weren’t many problem loans that were unrelated to the fall in NGDP, and I won’t deny that some banks (plus Greece) would have failed with even perfect monetary policy. But the NGDP collapse made the crisis far worse than it should have been.”

    All these things that you “won’t deny” are again just nothing window dressings that hide your fetishism of NGDP.

    “I’d guess DeLong made the same mistake as I did. I suspect he assumed that a Fed chairman who has written papers criticizing the BOJ for not showing “Rooseveltian resolve” in fighting against inadequate NGDP growth, would be unwilling to preside over the greatest NGDP collapse since the 1930s.”

    There was the largest collapse in NGDP since the 1930s because there was a period of credit expansion prior that in relative terms matched the period prior to the 1930s. The more credit expansion takes place, the more the economy is built on a house of cards, and the further the money supply can fall. It’s not because the Fed sat back while NGDP fell, it’s because the previous run up in credit expansion was so huge. The Fed can’t force banks to lend. They can print even as much as they did after 2008, and the banks didn’t lend. When the problem is debt based money, the solution cannot possibly be more debt based money.

    “I blame myself. As Ball recently showed, the warning signs were there. Ever since 2003 Bernanke was increasingly absorbed into Fed-think, which doesn’t allow for price level or NGDP commitments that might later embarrass the Fed.”

    I blame monetarists like you for the housing bubble, the Nasdaq bubble, and the current sovereign debt bubble.

    “DeLong is right that much of our debt crisis is due to falling NGDP and Krugman’s right that the eurozone’s big problem is excessively tight money.”

    DeLong is wrong that much of our debt crisis is due to falling NGDP and Krugman is wrong that the Eurozone’s big problem is excessively tight money.

    Our debt crisis is due to too much debt based money created in the past, which distorted the real economy, and the Eurozone’s big problem is too much inflation and credit in the past, which distorted the real economy.

    The problems in an economy are caused by monetary manipulation, but the effects crystalized in the real part of the economy. The solution cannot possibly be more of that which distorts the real part of the economy.

  23. Gravatar of 123 123
    20. February 2012 at 11:55

    Scott:” Printing money means producing non-interest-bearing base money. He wants to pay IOR. The whole point of which is to bail out banking without printing money (i.e. causing hyperinflation.) He wants to print interest bearing ERs, not cash.”

    There is zero Celsius, and there is zero Fahrenheit. There is zero IOR when the CPI target is 2%, like in the U.S., and there is zero IOR when the CPI target is 0%, like it was in Japan ten years ago. In fact, 2% IOR in the summer of 2008 was economically equivalent to 0% IOR in Japan ten years ago.
    The whole point of IOR is to select the socially optimal combination of base quantity and IOR. There is nothing in the theory of monetarism that says that 0% real IOR is optimal in Japan, and that real negative 2 percent IOR is optimal in the U.S.
    BTW printing 2% IOR reserves can cause hyperinflation too.
    Here are the differences between the 0%IOR and 2%IOR monetary stimulus in summer of 2008 (assuming expected NGDP is on target in both cases):
    1. the exchange rate is different, accordingly, the distribution of AD between exports and internal demand is also different
    2. the profit of the Fed is different
    3. the expected standard deviation of NGDP is different

    What we need is a theory of optimal size of central bank profits.

    BTW I oppose bailouts by the Fed, but I support purchases of assets at market prices.

  24. Gravatar of Troy Troy
    20. February 2012 at 12:04

    I agree with some of what Major Freedom wrote above but find his:

    “The problems in an economy are caused by monetary manipulation”

    is incorrect. I think the core problem with any economy is poor cycling of money within it. The ideal middle class economy consists of wealth-creators trading among themselves with minimal rent-taking.

    We’re very far from that now, with trillions of rents going to already very wealthy players. We’re more like the unpleasant endgame of a Monopoly game, with the winner BKing players left and right.

    Money adds now is just like putting money on Free Parking for people to get. Yes, it extends the game, but it does not fix the unpleasant imbalances of it.

    To actually fix our economy is going to require reducing the $1T+ in health care rents, the $1T+ of ground rents, and closing the $600B/yr trade deficit.

    All of these flows are just sucking the marrow out of the middle-class economy, and it’s stunning to me that nobody can apparently even see this.

  25. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. February 2012 at 13:01

    ‘I also think that loose talk by Bush about another Great Depression made it worse.’

    That’s what Bernanke was telling Bush. At least according to Bush’s memoir.

  26. Gravatar of Troy Troy
    20. February 2012 at 13:48

    We did have another depression coming, but doubling household debt pushed it off several years, past one major election, and almost past 2.

    The trillions of stealth stimulus hitting the middle class 2003-2006 was a lot more effective than happy words. Is this not obvious?

  27. Gravatar of david david
    20. February 2012 at 14:39

    Apparently some readers of your blog want to know about Singapore’s censorship policy.

    It’s like this: back when the Internet was a new and shiny thing, the technocrats in charge realized they wanted this new technology with all deliberate speed but also, with a level of insight that we in the West do not generally expect of government bureaucracies, realized that (1) this immediately meant the death of the prevailing way of exercising domestic media control, briefly being an exacting interpretation of slander laws applied to the media (which forced media organizations to be able to prove any statements they made. This legal standard itself is typical in common-law nations after the UK model, but is not normally applied so widely).

    Refreshingly intelligent, eh? Unfortunately they also realized that (2) that domestic opposition would necessarily have to coalesce about key sites anyway, so it would be ‘enough’ to be able to swing a hammer every now and then. The Internet routes around censorship, but it does not route around it fast enough to matter at a political-action level – particularly not against a small, agile state exercising a kill switch. That this was implicitly understood in Singapore in the 1990s was very impressive; we still get states today, liberal democratic or otherwise, who don’t get it. As Rien Huizer says, this is a very good government, albeit not a nice one.

    Hence the we-can-but-we-won’t banlist.

    Atop all that – this is a Westernized, culturally liberal government foisting itself upon a culturally conservative population; there had to be some way for the state to claim it was capable of protecting locals from Western perversion (even if it does not then go on to do it).

  28. Gravatar of RN RN
    20. February 2012 at 14:46

    Sumner said: “Krugman underestimates how much of our recession was caused by the Fed.”

    No, he doesn’t remotely. He’s been as tough on Greenspan as anyone has.

  29. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. February 2012 at 16:48

    J. Bradford is getting a crack at the big time;

    http://freetochoose.net/media/broadcast/testing_milton_friedman/participants.php

  30. Gravatar of Max Max
    20. February 2012 at 18:09

    123, good post.

    I object to the Fed’s IOR because it’s an unauthorized fiscal transfer to banks (to the extent that it’s higher than treasury yields), not because there’s any big economic significance to 0.25% vs 0.0%.

  31. Gravatar of ssumner ssumner
    20. February 2012 at 18:55

    David, Interestingly, Singapore allows prostitution.

    Rien, A couple replies:

    1. Over the last few years I’ve noticed that whenever someone says the Fed or ECB cannot do X, they are usually doing it soon after. I teach money and I had no idea the Fed could bail out Bear Stearns, for instance. Rules can be changed.

    2. When I criticize the “ECB” I am criticizing the entire monetary policy regime, including the decision to target inflation rather than NGDP. This means I’m also criticizing governments.

    Troy, You said;

    “It was a form of redistribution — peaking at $10000 per household per year –and when that party ended it was only natural that the economy would contract.”

    No, when parties end people go back to work. The economy should have expanded after the party ended, people should have worked harder, because they were poorer. Older people did, but what about the young? It turns out there was too little AD.

    acarraro, You said;

    “Just because something bad has happened, it doesn’t mean someone is at fault”

    Yes, I’m surprised more people didn’t pick up on that. Perhaps because we all hate bankers. Imagine he’d said that about some other group. How can one be convinced crimes occurred, without seeing the evidence?

    Peter K.

    You said;

    “Why haven’t we had a disaster of this size since the Great Depression? Luck?”

    You forgot about the S&L fiasco of the 1980s, which was of comparable magnitude. Of course this time the recession was much worse, but that was due to monetary policy, not the financial crisis. The losses in the 1980s were huge. After that fiasco we re-regulated banking, and it did no good (as I predicted) because the regulation addressed the wrong problem. This time we got Dodd-Frank, which also addresses the wrong problem. We need a system like the Canadians have, but both the GOP and Dems are opposed, as both want to keep the housing gravy train rolling.

    The pro-regulation Obama administration is still promoting sub-prime mortgages! The left has this mantra of blaming “deregulation” but it’s much more complicated. Our regulations are some of the most complex in the world, they are simply the wrong type of regulation.

    Tom, You must live in a country founded by Puritans. Are you American by any chance?

    Major Freeman, You said;

    “The recession caused the drop in NGDP.”

    Zimbabwe just had a bad recession with the fastest NGDP growth in the world. NGDP and RGDP are different issues. The causation runs from NGDP to RGDP. When NGDP falls sharply below expectations, you have a severe problem.

    There was no “inflationary boom” prior to the 1929 rash. indeed the 1927-29 boom was the only deflationary boom in modern history, so you couldn’t be more wrong. It was the least inflationary boom since the 1800s.

    123, I agree that the optimal IOR may not be zero, and much of what else you said. I just don’t think monetary stimulus was DeLong’s main goal at that time. I think it was preventing a banking freeze up.

    I agree the Fed should buy things at market prices–if they do that I’m not too worried about “bailouts.” I expect they’ll make profits, as they always have in the past.

    Patrick, That’s right.

    RN, You said;

    “No, he doesn’t remotely. He’s been as tough on Greenspan as anyone has.”

    I should have said he underestimates the role of monetary policy. He doesn’t criticize Greenspan for monetary policy, but rather for bad regulation of housing lending. And the monetary mistakes that caused the recession occurred under Bernanke, not Greenspan.

  32. Gravatar of mnop mnop
    20. February 2012 at 19:47

    You’ve repeatedly asserted that the bankers are being scapegoated. However, it’s important to note that while the proles may whine about the bankers from time to time, the Inner Party makes sure that the bankers face no real sanction, and that no real reform gets accomplished.

    Socialized losses, privatized gains – what could possibly go wrong.

    On the plus side, when the banks blow up again, sooner rather than later, we’ll have another chance to test your NGDP hypothesis. Yay!

  33. Gravatar of 123 123
    21. February 2012 at 02:24

    Scott:”I just don’t think monetary stimulus was DeLong’s main goal at that time.”

    Near that time DeLong was saying that the unconventional monetary stimulus is actually a form of fiscal policy. However, in 2011 he said: “I’m happy to call that a “monetary phenomenon” if it will make Nick Rowe happy.”
    http://delong.typepad.com/sdj/2011/03/nick-rowe-has-another-first-class-rant-about-how-keynesians-are-really-monetarists.html

    “I think it was preventing a banking freeze up.”
    To the extent banking freeze up was caused by expectations of low AD, it was the right thing to do.

    The big problem is how to determine which part of the banking difficulties was caused by the real shocks, and which was caused by low AD. Zero IOR scenario is not the right answer here.

  34. Gravatar of Ben Wolf Ben Wolf
    21. February 2012 at 04:36

    “Of course this time the recession was much worse, but that was due to monetary policy, not the financial crisis.”

    I find it fascinating that four years on we continue to deny that balance sheet recessions are a reality.

  35. Gravatar of Blissex Blissex
    21. February 2012 at 06:50

    «“It was a form of redistribution — peaking at $10000 per household per year –and when that party ended it was only natural that the economy would contract.”

    No, when parties end people go back to work. The economy should have expanded after the party ended,»

    HAHAHAHAHAHA! Way to skip over several hundred years of history of economic troubles. “this time should have been different” seems like the analysis we need :-).

    «people should have worked harder, because they were poorer.»

    HAHAHAHAHAHA! Way to apply “ceteris paribus” on the lifetime hypothesis with grandiose disregard for trivial issues like empirical evidence.

    Even people working harder does not raise NGDP unless their pay stays the same. But if they are unemployed their pay does not stay the same, and if labor markets are swamped with offer of labor, their pay will go down.

    Never mind the other little details, the one referred to by the previous poster: that the bubbles were engineered to redistribute income upwards, by creating capital gain for the largest property owners, and while capital gains as such are not accounted in NGDP, they are income that gets spent, some of it in consumption, some of it in investment of more capital gains opportunities.

  36. Gravatar of Barry Barry
    21. February 2012 at 10:46

    Scott: “Krugman underestimates how much of our recession was caused by the Fed”.

    Incorrect.

    Correct version: “Krugman underestimates how much of our recession was not prevented by the Fed, acting to limit the vast damage caused by widespread financial fraud.”.

    You’re playing a conditional game here, ignoring what Wall St did, and ‘starting the game’ after they did it.

  37. Gravatar of Greg Ransom Greg Ransom
    21. February 2012 at 10:54

    Hyperinflation would make all sorts of predictions come true and would allow the government to “make good” all sorts of promises …

  38. Gravatar of Major_Freedom Major_Freedom
    21. February 2012 at 15:06

    ssumner:

    “Major Freeman, You said;

    “The recession caused the drop in NGDP.”

    “Zimbabwe just had a bad recession with the fastest NGDP growth in the world.”

    The recession was caused by the same thing that caused the central bank to respond to it by inflating the money supply and causing a rise in NGDP.

    “NGDP and RGDP are different issues. The causation runs from NGDP to RGDP. When NGDP falls sharply below expectations, you have a severe problem.”

    You’re still not explaining why NGDP should suddenly fall. You’re taking it as an unexplainable given. No, saying the Fed didn’t print enough money can’t explain why NGDP should fall without the Fed’s inflation. You have to explain why NGDP should fall without the Fed’s positive intervention.

    Individual sellers don’t sell into and individual investors don’t invest into “NGDP”. No business has “NGDP expectations.” They have expectations for their own particular sales. You have to explain why it is that suddenly so many investors and sellers made errors at the same time in terms of their sales expectations.

    “There was no “inflationary boom” prior to the 1929 rash.”

    Yes, there most certainly was. You’re conflating falling prices with monetary deflation. What distorted the economy was the monetary inflation during the 1920s. Productivity was just so high that production outpaced the monetary inflation such that prices remained stable or fell. But the distortions still built up, regardless of the fact that prices were stable.

    “indeed the 1927-29 boom was the only deflationary boom in modern history, so you couldn’t be more wrong.”

    You couldn’t be more wrong because you’re incorrectly focusing on prices, rather than money production, which is the culprit in distorting the economy and setting it up for a crash later on.

  39. Gravatar of ssumner ssumner
    21. February 2012 at 18:13

    mnop, I believe the banks should be severely criticized, just not for the recession. The problem is the bailouts.

    123, Certainly by 2011 the situation was much different, and DeLong favored lots of stimulus.

    Ben, I don’t deny that balance sheets get much worse when NGDP plunges, and that this makes the recession even worse. But low NGDP is the cause.

    Blissex, You said;

    “Even people working harder does not raise NGDP unless their pay stays the same.”

    I think you misunderstood the argument. I was claiming more work leads to higher RGDP, not NGDP.

    Barry, Everyone including the government knew exactly what the banks were doing. They were standing on the sidelines cheering them on. To call it “fraud” is silly. It was government policy.

    Major Freeman, It does no good to keep claiming the 1920s were inflationary, you need to provide data showing why. All you do is tell me the price index is wrong. But the monetary base was also flat during the 1920s. The Fed wasn’t printing money. So what is the right data?

    There was no “positive Fed intervention” as you put it.

  40. Gravatar of Major_Freedom Major_Freedom
    22. February 2012 at 05:34

    ssumner:

    Major Freeman, It does no good to keep claiming the 1920s were inflationary, you need to provide data showing why. All you do is tell me the price index is wrong. But the monetary base was also flat during the 1920s. The Fed wasn’t printing money. So what is the right data?

    First off, the monetary base was not flat during the 1920s.

    From 1922 (after the early 1920s depression was over), to 1928 (soon before the crash), the monetary base increased from $5.2 to $6.1 billion.

    But this isn’t the most important statistic that connects monetary inflation of the 1920s to the crash of 1929. The most important statistics are A. the aggregate money supply, which includes the monetary base, currency, and fiduciary credit, and B. manipulated interest rates.

    As you yourself admitted here:

    http://www.themoneyillusion.com/?p=12111

    “The broader monetary aggregates rose significantly…”

    It was these broader monetary aggregates that is the very inflation I am talking about.

    Now, you added this absolutely absurd caveat to the above admission:

    “…but the government didn’t even keep data on M1 and M2 until fairly recently. No one in the 1920s thought the Fed should be targeting aggregates that didn’t even exist.”

    This is the equivalent of saying the black plague somehow didn’t kill all those millions of people in the 14th century on the basis that nobody knew what bacteria even was back then.

    The damage unleashed by the rampant monetary inflation during the 1920s that you admitted took place, is what fuelled the boom of the 1920s that had to inevitably bust. This is the case regardless of whether the Fed was “tracking” M1/M2 or not.

    So just how much inflation took place during the 1920s? The St Louis Fed website doesn’t go back that far, but Joe Salerno looked at this and he found:

    “Including [the surrender cash value in permanent] life-insurance policies, the increase in Rothbard’s money aggregate between mid-1921 and the end of 1928 totaled about 61%, yielding an annual rate of monetary inflation of 6.5%, compounded annually. Leave them out, and we get 55% over the period, or 6.0% per annum. For comparison, in the highly inflationary 1970s, the money stock grew at an average annual rate of 6.35%, including the double-digit Carter years.”

    You cannot be more wrong.

  41. Gravatar of Major_Freedom Major_Freedom
    22. February 2012 at 05:57

    There was no “positive Fed intervention” as you put it.

    I nominate Sumner’s claim here as the blogosphere’s most uninformed monetary claim of the year.

  42. Gravatar of 123 123
    22. February 2012 at 10:45

    Scott:”Certainly by 2011 the situation was much different, and DeLong favored lots of stimulus.”
    What I had in mind that by 2011 DeLong was persuaded by Rowe that all the rationale for stimulus is basically monetarist. These days DeLong is even writing about the “net-of-monetary offset multiplier parameter” of fiscal policy.

  43. Gravatar of ssumner ssumner
    24. February 2012 at 06:47

    Major freeman, The monetary base started the 1920s at 6 billion and ended at 6 billion. I’d call that flat.

    Are you seriously claiming that growth in the broad money supply is the definition of inflation? So if the Fed doesn’t exist and you have a pure gold standard with a constant gold supply then if bank deposits rise by definition there is an inflationary monetary policy? My question is: Whose doing the inflationary monetary policy?

    Or what if the broad money supply is constant but the CPI rises 25%–then no inflation!!!???

    123, I should read DeLong more often, do you have a link for that post?

  44. Gravatar of 123 123
    25. February 2012 at 01:57

    Scott,
    1. Since the day Milton Friedman died until the day The Money Illusion started the best way to read a reasonable perspective on the current affairs was to put the market-monetarist glasses on and read Krugman and Delong, while putting greater weight on the arguments compatible with the Krugman’s ’98 Japan paper.

    2. “do you have a link for that post”
    You’ll never find it, if you use the same search engine Sadowski used before writing in this thread “123,
    Put up or shut up. I’ve wasted good time looking for the link” :)
    Here’s the link:
    http://delong.typepad.com/sdj/2012/01/thinking-aloud-about-fiscal-policy-in-a-depressed-economy.html
    Note that DeLong assumes that the monetary policy is unable to completely drive the AD at the zero rate bound

    3. If you are thinking about reading DeLong more often, please read Karl Smith instead. He is much better than DeLong. His recent post “Cochrane on the Run” is excelent. Karl Smith links to the first market monetarist video ever. Taken in the summer of ’07, the video argues that Bernanke is an academic who does not phone the markets.
    BTW, in a recent WSJ interview, Draghi said:

    “WSJ: What’s the first statistic you look at in the morning?

    Draghi: Stock markets.”

  45. Gravatar of ssumner ssumner
    25. February 2012 at 12:07

    123, Thanks for the link. Of course DeLong is wrong in the first point, because monetary policy is not ineffective. He knows that, he just doesn’t know he knows that. I was thinking of doing a post–still might.

    I like Smith, and tried to leave a comment for that very post–but his blog doesn’t seem to accept my comments anymore.

    The Cramer video he links to says tight money is the problem, period, end of story. Smith implies Cramer agrees with his post, but I don’t see it that way.

  46. Gravatar of 123 123
    25. February 2012 at 13:21

    Scott, perhaps your comment in Smith’s blog is still in the moderation stage. In any case, you always have the luxury of responding on your own blog.
    In my opinion, Smith and Cramer are saying exactly the same things.

  47. Gravatar of 123 123
    25. February 2012 at 15:23

    Scott, in my opinion, fiscal policy does not change expected AD when the economy is at the zero rate bound. But fiscal policy can significantly reduce the expected standard deviation of AD.

  48. Gravatar of ssumner ssumner
    26. February 2012 at 07:51

    123, I can’t imagine how you say they are saying the same thing. Cramer says tight money was the problem, Smith says the financial panic was the problem. Please explain.

    I don’t understand your second statement. What do you mean by “fiscal policy?” If you mean a bigger government, I don’t consider that fiscal policy, nor does the Keynesian model.

    I did check a day latter, it still wasn’t there.

  49. Gravatar of 123 123
    26. February 2012 at 08:21

    Scott: “I can’t imagine how you say they are saying the same thing. Cramer says tight money was the problem, Smith says the financial panic was the problem. Please explain.”

    Both Cramer and Smith think that the problem is the passive tightening of monetary policy caused by the financial panic.

    “I don’t understand your second statement. What do you mean by “fiscal policy?” If you mean a bigger government, I don’t consider that fiscal policy, nor does the Keynesian model.”

    When the interest rates are not close to zero, it is easier to avoid monetary policy mistakes. So if the fiscal stimulus increases the natural nominal interest rate above zero, the expected standard deviation of AD is lowered. My preferred fiscal policy is lower taxes during recessions when nominal interest rates are very low, and spending cuts during normal times. So G goes down over time :)

  50. Gravatar of ssumner ssumner
    28. February 2012 at 06:03

    123, I don’t recall him saying that, but I’ll take your word, as it read it a long time ago.

  51. Gravatar of 123 123
    28. February 2012 at 13:52

    Scott,

    Smith wrote:
    “However, it was clear in August 2007 that this whole thing was going down on its own. The only question was when and how the Fed was going to stop it. But, they didn’t. “

  52. Gravatar of ssumner ssumner
    29. February 2012 at 19:46

    123, Maybe you are right. I guess I assumed (based on other things Smith said) that he meant stop it with a Tarp-like bailout, not lower interest rates. But maybe I’m wrong.

  53. Gravatar of MC MC
    15. March 2012 at 07:42

    I guess my highschool is run by a bunch of puritans

Leave a Reply