Rather it’s how has the Fed been able to get so far ahead of the profession:
SINCE the crisis hit in 2008, there has been a sharp divide between those who believe that the monetary authorities have been insufficiently aggressive and those who believe that central banks have done everything possible given that households and businesses have no interest in taking on new debts. For what it’s worth, a poll of more than 300 research associates at America’s National Bureau of Economic Research conducted for an upcoming article in the print edition reveals that the overwhelming majority (76%) believe that monetary policy has not been too tight. Nearly half believe that fiscal rectitude has been a principal cause of the slow recovery.
Previously I’ve cited polls of business economists, who may be more conservative that average. But even academic economists appear to be overwhelmingly opposed to QE3 (assuming they held these attitudes before QE3 was announced, which seems likely.)
I don’t have any problem with people who question the need for monetary stimulus, some of them are better economists than I am. But I am bemused that so many apparently believe we have a demand problem, and yet still don’t think money is too tight. How is that even possible? The quotation above was taken from a Free Exchange post that quotes Larry Summers:
As Larry Summers wrote a few months ago:
“One has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate.”
This is like some sort of weird mirror image of the 1970s. Imagine the following conversation, around 1978:
“One has to wonder how much investment businesses are willing to undertake at extraordinarily high interest rates that they would be willing to forego with rates raised by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge profitable at a 12% interest rate but choose not to undertake at a still higher rate. Might we forego some really useful projects?”
Summers seems to assume that money is already easy, and it hasn’t helped much, hence even easier monetary would be unlikely to help. He should read Ben Bernanke, who points out that only NGDP growth and inflation are reliable indicators of the stance of monetary policy. Money is tight. The Fed seems satisfied with 2% NGDP growth over past 4 years. No make-up NGDP growth is being contemplated.
Milton Friedman said that ultra-low rates mean money has been very tight. The question is not whether shifting from highly accommodative to even more accommodative policy would help. It is whether shifting from the tightest policy since the Hoover administration to a more neutral policy would help. It would.
The Free Exchange post also has lots of discussion confusing credit with money, and confusing low interest rates with easy money. Interested readers might want to take a look at how 25% of economists (or more) think about our current predicament—they believe we need more demand, but money’s not too tight.
HT: Bill Woolsey