1. Tim Duy has some perceptive comments on how Fed-think is ruining our economy:
Bullard divulges that the FOMC still doesn’t understand its job:
“Bullard said that ‘Treasury yields have gone to extraordinarily low levels. That took some of the pressure off the FOMC since a lot of our policy actions would be trying to get exactly that result.’”
The FOMC just cannot see that low interest rates are a sign of tight money, an expectation that the economy is facing headwinds and the Fed is not going to sufficiently offset the subsequent drag on growth. They need policy such that interest rates start to rise on the back of economic gains. That falling yields are a bad, not good sign, completely eludes them.
2. James Hamilton provides a public service. This post allows you to win 100% of cocktail party debates over gasoline prices. Just remember “84 cents plus 2.5% of Brent.” That’s not so hard.
3. Matt Yglesias shows that although GOP voters are opposed to big government, they are also opposed to any significant steps to rein in government spending (at least if you believe polls, which I don’t unless I agree with them, which in this case I do.) There are interesting hints that independent voters might actually be more libertarian than GOP voters (on spending, not taxes.) As the core of the GOP moves south, it becomes more like a European-style conservative party—pro-big government, pro-cartels and regs that favor affluent people, and culturally conservative. Unfortunately our political system has no place for pro-free market and socially liberal people. The kind that read The Economist magazine. So they end up as independents.
4. Alen Mattich of the WSJ has an article discussing my euro-crisis post. It’s pretty good, but the last paragraph somewhat mischaracterizes my views:
Short of such a union, the only alternative is for the euro zone to inflate its way out of trouble, Mr. Sumner argued. The European Central Bank would need to be allowed to print money and buy sovereign debt from across the periphery until those countries rediscover competitiveness. Otherwise, the euro’s days are numbered.
I believe that even a “union” would fail to solve their problems. I don’t view my monetary policy proposal as inflationary. I don’t think they’d need to buy up lots of sovereign debt. I’m no expert on the ECB, but whatever assets they normally buy, or loans they normally make, would be sufficient. There is no need for any change in technique. The euro may survive even if they don’t follow my advice, but some countries may exit.
5. Last, and definitely not least, Ryan Avent has a magnificent post demolishing the recent report by the BIS. Ironically, when the BIS was first created around 1930 they were seen as a progressive organization that would work for central bank coordination to arrest global depression. Now they’ve morphed into a club that represents all the worst aspects of 1930s conservatism:
At the heart of the BIS’ flawed thinking are a number of key misconceptions:
Low interest rates represent accommodative monetary policy. This is a venerable error, also popular during the 1930s. Central banks change the cost of money—the interest rate—in order to clear labour markets. Policy is accommodative not when interest rates are low in absolute terms, but when they are low relative to the market-clearing rate. Economist estimates (including some by Federal Reserve economists using Taylor rules) indicate that for much or all of the period from late 2008 to now the market-clearing interest rate in advanced economies has been negative, substantially so in some cases. Near-zero nominal interest rates (and even moderately negative real interest rates) may therefore represent too-tight monetary policy: money too costly to encourage the spending and investment necessary to achieve full employment.
. . .
Secondly, the BIS takes the distressingly Hayekian (or Mellonist) view that “malinvestment” during the boom must somehow be paid for in slower growth now:
“Because labour and capital do not easily shift across industries, the misallocation of resources during the boom tends to work against recovery in the aftermath of a crisis. Hence, countries where the sectoral imbalances were most apparent are facing higher and more protracted unemployment as their industrial structure only slowly adjusts.”
Exhibits A and B for this argument—Spain and Ireland—are fairly lousy examples given the absence in those countries of an independent monetary policy (the BIS might as well argue that countries with no central bank can’t rely on a competent central bank to stabilise the macroeconomy). America, the BIS’ Exhibit C, reveals the weakness of the argument. America’s housing crash began in earnest in 2006, at which point sales, construction, and real-estate employment all commenced plummeting. GDP growth continued, however, and unemployment remained at normal levels until mid-2008, two years later, at which point nominal output began to fall well short of trend and falling employment affected nearly every major industry. Labour and capital shift easily enough when demand follows expectations—when central banks do their job.
Central banks can’t do more without confronting unacceptable risks. The BIS cites imbalances as obstacles to effective monetary policy while acknowledging that by pushing unconventional monetary policy further central banks can impact aggregate demand. A host of accompanying risks to such policy suggests they should not, however. What sort of risks?
“First, prolonged unusually accommodative monetary conditions mask underlying balance sheet problems and reduce incentives to address them head-on. Necessary fiscal consolidation and structural reform to restore fiscal sustainability could be delayed.”
If the central bank does its job, in other words, politicians may not do the things central bankers think they ought to do. Implied in this assessment is that it is the central banker’s job to hold elected governments accountable for public finances and supply-side policies rather than the electorate’s. This represents both a dereliction of the central bank’s duty and an astounding policy overreach. In a similar vein:
“[L]arge-scale asset purchases and unconditional liquidity support together with very low interest rates can undermine the perceived need to deal with banks’ impaired assets.”
In other words, neglect of the central bank’s primary duty may be appropriate in order to focus the minds of bank executives and politicians on potential asset losses. Translated, this is effectively the liquidationist view of recovery; if interest rates were higher, advanced economies would be forced into wholesale default, the end result of which would be (assuming society survives the ensuing depression) clean balance sheets.
There’s much more—read it all.
I get depressed reading many of the comments in my blog. People ranting about the Rothchilds. Complaining that I’m getting my hands dirty trying to make central bank policy a bit less bad, trying to help the millions of unemployed. They stand on the sidelines without a spot on mud on their clothing, insisting we need to destroy the central banks. Bring on mass liquiditation. Destroy everything and a new and more pure and more beautiful economy will rise from the ashes. Some are the very same people who suggest 9/11 was a CIA plot. It smells of the 1930s. God I hate ideologues.
I plan to take a short break from blogging to finish up some projects.
HT: Tyler Cowen, Saturos
Update: 6. On second thought, maybe we do need a 20-year recession to really cleanse the economy of its excesses.
7. Exactly my view.
8. Peter Tasker in the FT:
If the big cause of the debt problem is declining nominal GDP, then it follows that the solution must be rising nominal GDP. Indeed, if Japan had managed to grow at 3 per cent in nominal terms over the past 15 years, the economy would be two-thirds bigger than it is now, asset prices would be higher and government finances in better shape.