Tim Duy recently quoted Bloomberg:
European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.
“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.” Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.
I am not exactly sure that the ECB’s rate hikes last year are something to be proud of, nor would I describe the action as careful. Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet. One would think that the “careful” policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention. Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:
I think Tim was being kind, this kind of statement is just bizarre. Central banks absolutely hate doing embarrassing reversals. It boggles the mind that someone could use this as a example of success. Or am I missing something?
Matt O’Brien sent me a CNBC article showing that the Fed also has some rather strange employees:
Federal Reserve Bank of Dallas President Richard Fisher initially provided the only “No” vote on a motion before the Federal Open Market Committee at the height of the financial crisis—only to reverse his vote after an unrecorded lunch break, according to a heavily redacted transcript of Fed documents released Monday afternoon.
The vote took place during the first day of a two-day meeting of the FOMC on December 15 and 16. The subject of the vote is not revealed by the minutes released by the Fed. A large passage of the discussion prior to the vote is redacted.
The next day, however, the Fed announced a target range for the federal funds rate of 0 to 0.25 percent.
Immediately following the mystery vote, Federal Reserve Chairman Ben Bernanke requested a break for lunch.
Upon returning from lunch, Bernanke announced that Fisher had changed his mind.
That’s funny, I never knew Ben Bernanke was skilled at waterboarding. Seriously, regional bank presidents should never, ever, be allowed on the FOMC.
Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey.
“An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.
We have an “anemic recovery.” But we don’t need monetary stimulus. And why not? Because we have an “adequate recovery.” That seems to pretty much sum up macroeconomics circa 2012.
Here’s Arnold Kling discussing a recent talk by Bernanke:
Bernanke points out that on any given bad day on the stock market, more paper wealth gets lost than was lost in the subprime mortgage market. This poses a puzzle as to how the mortgage market problems could have had such greater effects. Some comments I would make:
1. Isn’t it interesting that the magnitude of the bailouts was greater than the magnitude of housing market wealth lost in 2007 and 2008? And isn’t it interesting that the economic collapse was much larger still in magnitude (particularly taking into account that economic activity is a flow rather than a stock)? This pattern of relative magnitudes is evidence in favor of Scott Sumner’s view that the financial crisis was an epiphenomenon in the context of an aggregate demand shock.
Sumner is the last holdout for conventional macroeconomic analysis. DeLong wants to go back to a pre-Hicksian version of Keynes, with all its deep logical difficulties (although empirically it makes for a spellbinding just-so story). Most economists, probably including Bernanke, want to wave their hands and talk about how breakdowns in the financial sector cause economic disaster.
And yet elsewhere in the piece Bernanke acknowledges exactly what I’ve been arguing. It wasn’t just the financial crisis causing the recession, the recession also drove housing prices much lower (which obviously worsened the crisis):
On the surface, the puzzle of disproportionate cause and effect seems somewhat less stark if one takes the boom and bust in the U.S. housing market as the trigger of the crisis, as the paper gains and losses associated with the swing in house prices were many times the losses associated directly with subprime loans. Indeed, the 30 percent or so aggregate decline in house prices since their peak has by now eliminated nearly $7 trillion in paper wealth. However, on closer examination, it is not clear that even the large movements in house prices, in the absence of the underlying weaknesses in our financial system, can account for the magnitude of the crisis. First, much of the decline in house prices has occurred since the most intense phase of the crisis; the decline in prices since September 2008 is probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession. (Emphasis added.)
I’d go even further. A substantial part of the December 2007 to September 2008 decline was also due to slowing NGDP growth.