Why no sorry?

I suppose that’s bad grammar, but you’ll get my point.

Here are two views of the situation:

1.  The Fed has been given a relatively clear mandate, and it’s just a question of how best to implement the mandate.  Because of policy lags, FOMC members will have differing views of how best to meet that goals.  In August 2008 Richard Fisher thought higher interest rates were a good idea, other FOMC members did not.  Over the next few years a small group of FOMC member often preferred a tighter stance, while Evans preferred easier money.

2.  The Fed has been given a very vague mandate.  FOMC members have completely different policy goals.  Rather than being technicians trying to carry out the mandate given by our elected leaders, they are in fact unelected policymakers with enormous power.  They are able to create severe recessions at the drop of a hat.  And they can do so without attracting much attention, as easy money looks like tight money, and vice versa.

I think there are good arguments for both views of the Fed.  The first view seemed to fit the Great Moderation, and the second view seems to better fit the period since the onset of the Great Recession.

But whichever view you hold, there is an outrage that is being ignored by the American press.  If the first view is true, then it’s outrageous that FOMC members aren’t apologetic for their past mistakes.  I’m not saying they should say “I’m sorry,” we know that alpha males are too childish to do that.  But there should be some sort of general consensus that group one was correct and group two was incorrect.  Surely it ought now be possible to agree on whether Richard Fisher was correct in calling for higher interest rates in August 2008.

And if it’s not possible, isn’t that an extremely sad comment on the state of monetary policy-making?  Think about it.  Suppose it were true that we can’t say whether monetary policy was too tight or too loose in 2008 or 2009.  What would that imply about the subsequent growth in NGDP?  It would mean that it was “merely a matter of opinion” as to whether the biggest drop in NGDP since 1938 was too big or whether it should have been even bigger.  That Congress had no real opinion on the matter, and was leaving it up the Richard Fisher’s of the world to decide whether it’s be a good idea to whack $1.2 trillion off our nominal GDP relative to trend, right in the middle of the biggest financial crisis in American history.

I’m not very good at hiding my sarcasm, so I think you know where I come down on this issue.  I think the Federal Reserve System has been an absolute disgrace in recent years.  I respect Ben Bernanke, and assume he is doing his best.  It’s too bad he has so many colleagues who seem to be totally unaware of the grave responsibility in their hands.

PS.  I’m not calling the Fed a disgrace for not agreeing with my policy views, but rather for dodging their responsibility.  Was monetary policy too tight in late 2008 or not?  Was the fall in NGDP in 2009 undesirable or not?  Was the slow pace of recovery in NGDP after early 2009 undesirable or not?  There’s simply no accountability, and that’s the problem.

PPS.  After I wrote this I saw that Lars Christensen was thinking along the same lines; he’d already posted this:

In fact it is interesting that when central bankers describe the ups and downs in the economy nearly never hold themselves accountable. If inflation overshoots the inflation target we rarely (in fact never) hear central banks say “the failure to fulfil our inflation target was due to our overly loose monetary policy”. I wouldn’t really expect that and frankly I also hate admitting being mistaken. But this is nonetheless telling of the general tendency for macroeconomists – including those working for central banks – to fail to realise the importance of the monetary policy reaction function.

I’d recommend the entire post, it’s more thoughtful than this one.


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28 Responses to “Why no sorry?”

  1. Gravatar of Lars Christensen Lars Christensen
    28. March 2012 at 05:31

    Scott, thanks for the kind word. I am not entire surely whether central bankers don’t want to take responsibility or whether they might not really believe that they control nominal factors such as NGDP and inflation. Might it be that they are convinced by their own Keynesian models? But if central banks do not control inflation and NGDP why should they then been given the powers to do so? An why do they have inflation targets (or other nominal targets) when they can not really hit these targets?

    In fact one could speculate that central bankers do not fully realise their own powers…whether that is good or bad I am not sure…

  2. Gravatar of ssumner ssumner
    28. March 2012 at 05:46

    Lars, I’m pretty sure they know, otherwise why target inflation? But I agree that talk like they don’t.

  3. Gravatar of dwb dwb
    28. March 2012 at 05:51

    in defense of the devil, the new framework that democratizes the forecasts sterilizes (pun intented) some of the idiots on the FOMC. Having press conferences where reported ask tough questions is a good step. Fisher certainly does not move the markets like he used to. I wish ALL the FOMC members had to testify and get tough press questions.

    Also in fairness, I am sure that steering the FOMC is like herding cats, and Bernanke’s leadership style from what I’ve read does not lend itself to that skill.

  4. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 05:59

    Commercial retailers and manufacturers across the country are about to go bankrupt, and NGDP of $20 trillion is set to fall by 5%, down to $19 trillion.

    In response, the Fed buys $1 trillion of newly issued government debt, and the government then spends the money on bombers, aircraft carriers, tanks, and submarines.

    NGDP remains at $20 trillion.

    Unemployment shoots up, and output on civilian goods plummets.

    Fed does not apologize because it fulfilled its mandate.

    Should the Fed apologize? If not, why should the apologize now?

  5. Gravatar of W. Peden W. Peden
    28. March 2012 at 06:22

    Major Freedom,

    “Should the Fed apologize? If not, why should the apologize now?”

    No: because the Fed can determine the level, but not the composition, of NGDP.

    How much of American NGDP is spent by the US government and how much is spent by the private sector is YOUR responsibility (and the responsbility of 250 million-odd other US adult citizens).

  6. Gravatar of John Thacker John Thacker
    28. March 2012 at 06:26

    It’s very dangerous that they don’t talk like they have power. While they may be afraid of the backlash from voters realizing their enormous power, by failing to admit it, they have power without real accountability or responsibility. That is dangerous.

  7. Gravatar of Military dictators are independent as well… « The Market Monetarist Military dictators are independent as well… « The Market Monetarist
    28. March 2012 at 06:51

    [...] Scott Sumner also has a comment on central bank accountability. Share this:EmailLike this:LikeBe the first to like this post. [...]

  8. Gravatar of Policy Wank Policy Wank
    28. March 2012 at 06:59

    You are far too soft on Bernanke. If he is doing his best what does that say about his powers of persuasion that he cannot convince the more hawkish members that they are so obviously mistaken? And if they are indeed a bunch of ideologues that cannot be convinced he ought to be publicly browbeating them and making the case for further monetary easing. He probably controls enough of the FOMC to enact his desired policies…it would just provoke a more open split on the committee, which he apparently doesn’t have the stomach for. So Bernanke clearly lacks the courage of your convictions and you probably overestimate the degree to which he agrees with you at all, at least at the present date.

  9. Gravatar of Jeff Jeff
    28. March 2012 at 07:30

    I’ve said this before. The First, Second and Third Laws of Bureaucracy is: Above All, Avoid Accountability.

    The Fed is not unique in this respect.

  10. Gravatar of Peter N Peter N
    28. March 2012 at 07:40

    I bought William Barnett’s book Getting It Wrong after it was discussed here. He says:

    “We’ve seen in this chapter that competently produced data provide evidence that Fed policy fueled the bubbles preceding the financial crisis. The best practice data show, after the real estate bubble broke, that monetary policy became more contractionary than indicated by interest rates, and thereby likely aggravated the severity of what followed.”

    and

    “By terminating publication of the severely distorted and thereby useless simple-sum M3 and L aggregates, the Federal Reserve has eliminated the availability of many of the consolidated, seasonally adjusted, monthly component quantities and their interest rates needed to facilitate direct production of Divisia M3 and Divisia L.

    Finally, the Divisia data contain disturbing explanatory power about repeated Fed policy errors, leading up to and including the most recent. Transparency? Not a chance.”

    and

    “the monetary tightening, leading into the financial crisis and recession, is the most precipitous that has occurred over the entire 42-year period for which data is available – from 1968 to 2010! [all in italics]”

    He clearly thinks that monetary aggregates are useful in determining monetary policy, provided they are broad enough and correctly formed (Divisia), which the Fed aggregates are demonstrably not.

    The book is great, though the appendices are tough going.

  11. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 08:08

    W. Peden

    “Should the Fed apologize? If not, why should the apologize now?”

    No: because the Fed can determine the level, but not the composition, of NGDP.

    So what? The Fed determines the price level and short term interest rates, and not the composition of the real economy today. Why should they apologize?

    How much of American NGDP is spent by the US government and how much is spent by the private sector is YOUR responsibility (and the responsbility of 250 million-odd other US adult citizens).

    The same thing can be said about prices. What people do with the given PRICES is YOUR responsibility (and the responsibility of 250 million other citizens). The Fed is not responsible for anything else. If that means unemployment and drop in output, it’s not the Fed’s fault.

    Can’t you see that you are merely DEFINING “NGDP” to be what the Fed should and should not apologize for, and that it has nothing to do with unemployment or output?

  12. Gravatar of W. Peden W. Peden
    28. March 2012 at 08:21

    Major Freedom,

    “So what? The Fed determines the price level and short term interest rates, and not the composition of the real economy today. Why should they apologize?”

    The Fed CAN determine the price level, by adjusting monetary policy in line with changes in real output. It is also true that they cannot determine the proportion of NGDP that is real and the proportion that is inflation. Neither mean that they cannot control NGDP or that they don’t bear responsibility for the destabilisation in NGDP growth after 2008.

    “The same thing can be said about prices. What people do with the given PRICES is YOUR responsibility”

    But monetary policy affects real magnitudes in the short run, so prices and real output are both “given” by the Fed. The inability of the central bank to affect the level of real output holds, at most, in the long-run and if we are to believe the Austrian School the Fed affects real magnitudes in the long-run as well through its operating procedures e.g. by changing interest rates.

    “The Fed is not responsible for anything else. If that means unemployment and drop in output, it’s not the Fed’s fault.”

    The Fed’s mandate is to control inflation AND unemployment. Now, it is true that this is a wrong-headed mandate. It would be better replaced by some mandate to stabilise nominal expenditure. However, NGDP captures the twin mandate far better than the legally incorrect statement that the Fed is soley responsible for prices.

    Ideally, we’d simply had a free banking system and a bitcoin-style computer supplying means-of-tax-payment money, as in George Selgin’s proposal; in that case, there would be no “Fed” as such to have a mandate.

  13. Gravatar of Steve Steve
    28. March 2012 at 08:28

    Actions speak louder than words. Changing policy prescriptions after being confronted with a prior policy error is more important than a public apology. On that basis, Bernanke is doing ok, while some of the regional Fed presidents are truly abhorrent.

  14. Gravatar of W. Peden W. Peden
    28. March 2012 at 08:29

    * Point of clarification: “But monetary policy affects real magnitudes in the short run, so prices and real output are both “given” by the Fed” should read-

    “But monetary policy affects real magnitudes in the short run, so prices and real output are both “given” TOGETHER by the Fed”.

    I.e. when the Fed conducts monetary policy operations, it changes the level of nominal expenditure and any particular instance nominal expenditure can either result in an increase in real output or an increase in prices, depending on the capacity of the producer to increase output. As a result of the fact that the Fed controls prices through changing the level of nominal expenditure and that changes in nominal expenditure affect both real output and prices in the short run, the Fed cannot control prices without affecting real output. So the level of real output is not the sole responsibility of those outside the Fed, since they do not have the power to determine it either invidually or collectively.

  15. Gravatar of Benjamin Cole Benjamin Cole
    28. March 2012 at 08:31

    Success has a thousand fathers; failure is an orphan.

    The Fed will claim paternity of the long American boom. But since 2008?

    That happened to us, not by us.

  16. Gravatar of John Thacker John Thacker
    28. March 2012 at 08:56

    “NGDP remains at $20 trillion.

    Unemployment shoots up, and output on civilian goods plummets.

    Fed does not apologize because it fulfilled its mandate.

    Should the Fed apologize?”

    MF:

    If that happened, yes, the Fed should apologize (as should Scott) because its theory would be wrong. However, Scott and I (and others) are convinced that that wouldn’t happen, because Scott’s theory is correct. The objection with your syllogism is with one of your premises.

    Note that you cannot be consistent and say that the unemployment is not the Fed’s fault. You believe, as your comments indicate, that the Fed would be positively wrong to target NGDP.

    Certainly if the Fed engaged in NGDP targeting and it did not have the effects that Scott claimed, then the Fed (and Scott) would owe an apology. So?

    Even given your dramatically different views on how monetary policy works, I can’t understand you being against accountability.

  17. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 09:46

    W. Peden:

    “So what? The Fed determines the price level and short term interest rates, and not the composition of the real economy today. Why should they apologize?”

    The Fed CAN determine the price level, by adjusting monetary policy in line with changes in real output. It is also true that they cannot determine the proportion of NGDP that is real and the proportion that is inflation. Neither mean that they cannot control NGDP or that they don’t bear responsibility for the destabilisation in NGDP growth after 2008.

    I am not arguing that they cannot control NGDP. My point is why the Fed should ever apologize, for anything that happens on the side of output or employment.

    Suppose NGDP fell like it did post 2008, and yet unemployment and real output remained unchanged, or increased even.

    Should the Fed apologize now? Should they say “We messed up, we should have targeted 5% NGDP, but we dropped the ball.”?

    Or would you point to the employment and output, and say the Fed didn’t do anything wrong?

    “The same thing can be said about prices. What people do with the given PRICES is YOUR responsibility”

    But monetary policy affects real magnitudes in the short run, so prices and real output are both “given” by the Fed.

    SO WOULD NGDP TARGETING.

    If the Fed has to inflate slower and then faster, or whatever the case may be, in order to get NGDP down to, or up to, its target, then that also will have effects on real magnitudes in the short run, and so real output is also “given” by the Fed.

    You seem to believe that NGDP exists in a vacuum, as if the Fed is just making more dollars float in the air and its up to the people to snatch them up. No, NGDP is more like everyone taking their cash balances and throwing their money into the air for the Fed to see, and if there are not enough of them thrown up, the Fed will print and SPEND more, thus affecting the real output of the individuals they give money to, and the real output of the people those initial receivers give that money to, and so on throughout the population.

    The inability of the central bank to affect the level of real output holds, at most, in the long-run and if we are to believe the Austrian School the Fed affects real magnitudes in the long-run as well through its operating procedures e.g. by changing interest rates.

    The same thing exists for price targeting no less than NGDP targeting.

    “The Fed is not responsible for anything else. If that means unemployment and drop in output, it’s not the Fed’s fault.”

    The Fed’s mandate is to control inflation AND unemployment. Now, it is true that this is a wrong-headed mandate. It would be better replaced by some mandate to stabilise nominal expenditure. However, NGDP captures the twin mandate far better than the legally incorrect statement that the Fed is soley responsible for prices.

    But the Fed, on this blog, is not being blamed for unemployment. It is being blamed for letting NGDP fall, even though NGDP is not even its mandate.

    It would be like blaming an NBA basketball player for not scoring enough goals in the NHL.

    Ideally, we’d simply had a free banking system and a bitcoin-style computer supplying means-of-tax-payment money, as in George Selgin’s proposal; in that case, there would be no “Fed” as such to have a mandate.

    Selgin’s proposal would turn money into lottery tickets.

  18. Gravatar of Benjamin Cole Benjamin Cole
    28. March 2012 at 10:28

    Major Freedom:

    It seems like man is on the path to artificially produce gold. What then?

    Gold

    Chrysopoeia, the artificial production of gold is the symbolic goal of alchemists. Alchemists often understood this as a metaphor for a mystical, philosophical, psychological, medical, or religious transformation. Despite this, some alchemists interpreted this literally, and attempted to physically transmute base metals into gold. It is possible in particle accelerators or nuclear reactors, although the production cost is currently many times the market price of gold. Since there is only one stable gold isotope, 197Au, nuclear reactions must create this isotope in order to produce usable gold.
    [edit]Gold synthesis in an accelerator

    Gold synthesis in a particle accelerator is possible in many ways. The Spallation Neutron Source has a liquid mercury target that will be transmuted into gold, platinum, and iridium, which are lower in atomic number.[citation needed]

    Gold synthesis in a nuclear reactor

    Gold was first synthesized from mercury by neutron bombardment in 1941, but the isotopes of gold produced were all radioactive.

    Gold can currently be manufactured in a nuclear reactor by irradiation either of platinum or mercury.

    Only the mercury isotope 196Hg, which occurs with a frequency of 0.15% in natural mercury, can be converted to gold by neutron capture, and following electron capture-decay into 197Au with slow neutrons. Other mercury isotopes are converted when irradiated with slow neutrons into one another or formed mercury isotopes, which beta decay into thallium.
    Using fast neutrons, the mercury isotope 198Hg, which composes 9.97% of natural mercury, can be converted by splitting off a neutron and becoming 197Hg, which then disintegrates to stable gold. This reaction, however, possesses a smaller activation cross-section and is feasible only with un-moderated reactors.
    It is also possible to eject several neutrons with very high energy into the other mercury isotopes in order to form 197Hg. However such high-energy neutrons can be produced only by particle accelerators[clarification needed.

    –30–

    Okay, so what if it becomes technically then commercially possible to produce gold? Do we then finally, at long last have a real economic boom?

  19. Gravatar of ssumner ssumner
    28. March 2012 at 10:48

    dwb, Good point.

    MF, No, Congress should apologize.

    John Thacker, Good point.

    Policy Wank. That’s a fair criticism, I may have let personal considerations cloud my judgment.

    Jeff. That’s right.

    Peter N. Good quotations.

    Steve, Good point, and note how Draghi reduced interest rates just a few months after Trichet raised them–there’s an implicit apology.

    Ben, Good point–they aren’t shy about taking credit for the Great Moderation.

  20. Gravatar of W. Peden W. Peden
    28. March 2012 at 10:51

    Major Freedom,

    “My point is why the Fed should ever apologize, for anything that happens on the side of output or employment.

    Suppose NGDP fell like it did post 2008, and yet unemployment and real output remained unchanged, or increased even.

    Should the Fed apologize now? Should they say “We messed up, we should have targeted 5% NGDP, but we dropped the ball.”?

    Or would you point to the employment and output, and say the Fed didn’t do anything wrong?”

    <5% deflation is a clear failure of maintaining price stability, which is one half of the Fed's job, so yes the Fed should apologise. Policy rules have to be symmetrical, otherwise they're just contingent plans.

    "SO WOULD NGDP TARGETING.

    If the Fed has to inflate slower and then faster, or whatever the case may be, in order to get NGDP down to, or up to, its target, then that also will have effects on real magnitudes in the short run, and so real output is also “given” by the Fed."

    Sure. However, we might have stumbled on our actual point of disagreement here: your counterfactual was-

    "Commercial retailers and manufacturers across the country are about to go bankrupt, and NGDP of $20 trillion is set to fall by 5%, down to $19 trillion.

    In response, the Fed buys $1 trillion of newly issued government debt, and the government then spends the money on bombers, aircraft carriers, tanks, and submarines.

    NGDP remains at $20 trillion.

    Unemployment shoots up, and output on civilian goods plummets."

    - which I took to be a classic case of crowding out: the Fed offsets the fall in PY, but this masks the fall in private sector activity as the government expansion is equal to the expansion in PY.

    (Actually, something rather similar to this scenario has happened to credit expansion in the US recently: IIRC, most of the credit expansion since late 2008 has been to the US federal government, while the private sector and local government have had their belts tightened severely. Crowding out 101.)

    So I took your scenario to be a case of (1) a rise in the G component of Y and (2) this rise being such that it raised the natural rate of unemployment. In such a scenario, the Fed would have to drive unemployment below the natural rate in order to keep it low, which would require continually accelerating inflation in the short run and which would ultimately fail in the long run. The Fed doesn't have to apologise for refusing to play the long-run Phillips Curve game.

    You might have been making another point about the division of PY between P and Y, but I can't get it from that particular comment.

    "But the Fed, on this blog, is not being blamed for unemployment. It is being blamed for letting NGDP fall, even though NGDP is not even its mandate.

    It would be like blaming an NBA basketball player for not scoring enough goals in the NHL."

    I think that the appropriate sports analogy is this: a basketball team has two tasks, which are (1) to score points and (2) to stop the opposition scoring points. Neither of these tasks are identical with "playing winning the game". However, if the team plays well and wins, then they'll have achieved both tasks satisfyingly.

    Analogously, the Fed has two goals: (1) to maintain price stability and (2) to maintain low unemployment. The relation of (1) to stable NGDP growth is obvious, since real output is stable in the long run and therefore stable NGDP growth implies a stable long run path of prices.

    The relation of (2) to stable NGDP growth is a bit more complex and uncertain, because while steady NGDP growth and RGDP growth and unemployment are related (RGDP and unemployment by "Okun's Law") there are other important factors affecting the level of unemployment. In particular, labour productivity can undergo radical short-run and medium-term variations, e.g. privatisation and trade union reforms pushed up labour productivity growth so radically in the UK in the 1980s that we had a period of about 4% RGDP growth combined with persistent high unemployment. The relation of labour regulations to unemployment and the substitution of capital/external labour for domestic labour is so familiar to you that it would be insulting to go into it, so I won't.

    Therefore, NGDP growth has a strong but imperfect relation to the Fed's dual mandate: IF labour productivity is steady and IN the long run, an NGDP target optimally balances (1) and (2). That's not to endorse the dual mandate; it's just to say that "the Fed has let NGDP fall dramatically below trend" and "the Fed failed in fulfilling the dual mandate" amount to the same thing most of the time, including in the last 4 years.

    "Selgin’s proposal would turn money into lottery tickets."

    In what sense? (That is not the case already e.g. lottery tickets are purchasable with wealth, have an uncertain relation with future income, tend to depreciate in value over time, and have a value over & above the value of the materials of which they are composed.)

  21. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 11:07

    Benjamin Cole:

    It seems like man is on the path to artificially produce gold. What then?

    Well then the market process would almost certainly result in another commodity to be money.

    Please note I am not an advocate of the gold standard as being imposed on everyone. I am an advocate of individual buying and selling deciding which commodity or commodities become the standard. I just recognize that gold would almost certainly “win” in free competition.

    Maybe Bitcoins are the future, who knows.

    Okay, so what if it becomes technically then commercially possible to produce gold? Do we then finally, at long last have a real economic boom?

    What do you mean? There can be a boom on “natural” gold by way of a sufficient savings and investment ratio to consumption, and falling prices of real goods as more are produced.

  22. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 11:22

    W. Peden:

    <5% deflation is a clear failure of maintaining price stability, which is one half of the Fed's job, so yes the Fed should apologise. Policy rules have to be symmetrical, otherwise they're just contingent plans.

    What happens if price deflation of 5% was accompanied by stable employment and growing output? Would the Fed still be a failure?

    In such a scenario, the Fed would have to drive unemployment below the natural rate in order to keep it low, which would require continually accelerating inflation in the short run and which would ultimately fail in the long run. The Fed doesn’t have to apologise for refusing to play the long-run Phillips Curve game.

    So you’re saying the Fed should focus on short term, rather than long term monetary stability?

    I think that the appropriate sports analogy is this: a basketball team has two tasks, which are (1) to score points and (2) to stop the opposition scoring points. Neither of these tasks are identical with “playing winning the game”. However, if the team plays well and wins, then they’ll have achieved both tasks satisfyingly.

    Analogously, the Fed has two goals: (1) to maintain price stability and (2) to maintain low unemployment. The relation of (1) to stable NGDP growth is obvious, since real output is stable in the long run and therefore stable NGDP growth implies a stable long run path of prices.

    Real output is stable in the long run, or real output has been stable in the long run? Those are two different questions.

    Therefore, NGDP growth has a strong but imperfect relation to the Fed’s dual mandate: IF labour productivity is steady and IN the long run, an NGDP target optimally balances (1) and (2). That’s not to endorse the dual mandate; it’s just to say that “the Fed has let NGDP fall dramatically below trend” and “the Fed failed in fulfilling the dual mandate” amount to the same thing most of the time, including in the last 4 years.

    What about now with NGDP back up and yet unemployment is still high?

    “Selgin’s proposal would turn money into lottery tickets.”

    In what sense? (That is not the case already e.g. lottery tickets are purchasable with wealth, have an uncertain relation with future income, tend to depreciate in value over time, and have a value over & above the value of the materials of which they are composed.)

    In the sense that he believes it is justified and beneficial for there to be a greater number of property titles to money, than there exists actual money. Those property titles to money circulate as a medium of exchange, and so people would end up exchanging lottery tickets instead of money titles, as the titles are not absolute and unconditional, but conditional on the random withdrawal and redemptions habits of other property title owners.

  23. Gravatar of MMJ MMJ
    28. March 2012 at 11:24

    “There’s simply no accountability, and that’s the problem.”

    Welcome to government. The lack of accountability is a feature, not a bug.

  24. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 11:42

    ssumner:

    MF, No, Congress should apologize.

    Oh, so you are saying it’s possible for the Congress’ interests to be contrary to the people’s interests?

    OK, if you believe that, then why can’t the people blame the Fed for printing money and buying more debt from the very people whose interests are contrary to the people’s interests?

    It would be like the people’s interests being against a mafia family’s interests, and then a counterfeiter keeps lending money to that mafia family. The people can blame the counterfeiter for helping the mafia family, can’t they? If not, then what about if someone hires a killer for money? Should they be blamed? If so, then isn’t the Fed buying debt from the Treasury, akin to someone hiring a killer? Or is this too uncomfortable, and you’d rather not think about the implications of what NGDP targeting and debt monetization lead to in our country, a police state that invades other countries with impunity?

    It’s easy to say “blame Congress”, but then by that logic, we should blame the killer only and not the person who gave them money. The Fed knows what the government does with the money they give to them, they aren’t stupid. The Fed knows the government uses a substantial portion of the money to finance invasions and war both abroad and at home via the growing police state.

    Doesn’t this make the Fed the bankroller of assassins? Just putting that out there. Maybe your criticism of the Fed is, um, slightly off the mark. Maybe we should be criticizing the Fed for bankrolling the Afghanistan and Iraq wars (you do know the NY Fed secretly (at the time) sent over $40 billion in cash to Iraq from 2003-2008, don’t you?).

    Or what about the fact that the Fed has recently violated the Federal Reserve Act by buying European sovereign debt?

    I know this is just a monetary policy blog, but you’re tenured so you can say anything you want.

  25. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 11:46

    MMJ:

    Welcome to government. The lack of accountability is a feature, not a bug.

    Democracy in a superpower is like a Sisyphus play.

  26. Gravatar of Major_Freedom Major_Freedom
    28. March 2012 at 11:57

    John Thacker:

    If that happened, yes, the Fed should apologize (as should Scott) because its theory would be wrong. However, Scott and I (and others) are convinced that that wouldn’t happen, because Scott’s theory is correct. The objection with your syllogism is with one of your premises.

    Sumner’s theory is incorrect, not correct. Please don’t mistake you not having a better theory, with the theory being correct.

    Note that you cannot be consistent and say that the unemployment is not the Fed’s fault. You believe, as your comments indicate, that the Fed would be positively wrong to target NGDP.

    I was rather talking about those who say the Fed should not be blamed if NGDP is stable and yet unemployment and output are not stable.

    Personally, I blame the Fed (in part) for the current state of the economy, and not because they didn’t print enough, but because they are there printing in the first place.

    Certainly if the Fed engaged in NGDP targeting and it did not have the effects that Scott claimed, then the Fed (and Scott) would owe an apology. So?

    So? Do you have any idea what the implications of Sumner being wrong are? It’s not like being late for a friend’s dinner party. If NGDP targeting is wrong, which it is, then the implication (I argue) is a breakdown of the whole monetary system. An expectation of an apology, when NGDP is finally revealed in being wrong, is hardly worth it.

    Even given your dramatically different views on how monetary policy works, I can’t understand you being against accountability.

    I am not against accountability. I’m not actually making the arguments you are attributing to me. The questions I am asking are not rhetorical. You’re reading too much into them.

  27. Gravatar of W. Peden W. Peden
    28. March 2012 at 14:12

    Major Freedom,

    “What happens if price deflation of 5% was accompanied by stable employment and growing output? Would the Fed still be a failure?”

    Short-run or long-run? If we’re talking about a one-year phenomenon, like in 2008-2009, then it’s still a failure because those who have contracted on the basis of stable inflation of about 2% (the Fed’s implicit target) have suffered because the Fed has missed half of its target. If it becomes a long-run trend, then the Fed’s mandate is sufficiently loose to allow to a shift to, say, a Japan-style 0% inflation target.

    “So you’re saying the Fed should focus on short term, rather than long term monetary stability?”

    No, assuming we’re defining long-term monetary stability as stable MV. The point about the long-run Phillips Curve is that the Fed should conduct policy on the assumption that the long-run Phillips Curve is vertical i.e. there is no permanent trade-off between inflation and unemployment.

    “Real output is stable in the long run, or real output has been stable in the long run? Those are two different questions.”

    Real output is stable in that its growth rate continually returns to a trend because the factors that cause this growth rate to be unstable (monetary shocks, technology shocks, natural disasters etc.) do not have long-run effects. The trend does vary significantly under fundamental changes in economic activity: (1) the movement from unsettled hunter-gatherer cultures to settled cultures and (2) the presence of capitalist market economies. Variation (1) shifted human beings to the classic Malthusian condition; variation (2) allowed us to escape the Malthusian condition.

    (2) constitutes an interesting shift in that over the last 100 years we’ve seen what happens when non-market economies isolate themselves from market economies: they get into a Malthusian trap. The Soviet Union hit this Malthusian point in the 1960s, when it became dependent on grain from the US and therefore on American capitalism which subsidises US agriculture. In the absence of the Great Terror and WWII, perhaps the Malthusian point would have been hit quicker in the USSR.

    “What about now with NGDP back up and yet unemployment is still high?”

    A very good question. As I understand it, US NGDP growth is still well below its long-term trend, so strictly speaking NGDP isn’t “back up”; the NGDP growth rate is back up. In fact it seems like the opposite is the case in the US right now: unemployment is falling at a much faster rate than NGDP growth (about 1-2% on average from 2008) would justify, presumably due in part to people dropping out of the labour force and “hidden” unemployment in the sense that fewer illegal immigrants are able to find work in the US but don’t show up properly on the figures.

    To answer your hypothetical though: a level target is preferable to a strict annual growth rate target, since (1) there will be short-term uncontrollable shocks that will need smoothing out over the medium-term and (2) it creates less of an incentive for policy-makers to “miss” targets, since they know they be pressured to make up for them later.

    “In the sense that he believes it is justified and beneficial for there to be a greater number of property titles to money, than there exists actual money. Those property titles to money circulate as a medium of exchange, and so people would end up exchanging lottery tickets instead of money titles, as the titles are not absolute and unconditional, but conditional on the random withdrawal and redemptions habits of other property title owners.”

    Interesting. Two points off the cuff: (1) since what you’re talking about is otherwise called fractional reserve banking, Selgin’s proposal doesn’t involve “turning” money into anything and (2) provided it’s a voluntary contract on the part of the banks and their depositors, I don’t have a problem with it and I don’t see it as fraud (nor presumably do you, since lottery tickets are not fraudulent); I honestly don’t know whether a free banking system would lead to 100% reserve banking or not.

  28. Gravatar of ssumner ssumner
    2. April 2012 at 05:19

    MMJ, That’s what we need to change.

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