Add 2 more names

Every so often I make a list of economists who recognized that money was actually rather tight last year; or at least that a more expansionary policy could have greatly reduced the severity of the recession.  Of course it is hard to draw sharp lines, as there are almost as many different views as there are economists.  For instance Tyler Cowen recently suggested that about 1/3 of the downturn was due to the drop in nominal spending.

I recently came across two more economists that I think we can add to the list.  I was contacted by Michael Belongia, who teaches at the University of Mississippi.  In an unpublished paper entitled “The Frozen Pond of Liquidity,” Michael Belongia and William Barnett (of the University of Kansas) argued that monetary policy last year was actually rather contractionary.  Here is a passage from that paper, which discusses how this situation came about:

The reason for this starvation is a classic and repeated mistake Fed officials have made during each business cycle since the end of World War II.  Believing that it, and it alone, controls activity in the federal funds market, the Fed interprets changes in the funds rate as the product of its policy actions.  Thus, if the funds rate declines, it must be the result of an expansionary monetary policy action; if the funds rate rises, it must be because the Fed has taken actions to be more restrictive.  How else, the thinking on Constitution Avenue goes, could the funds rate move, without actions on their part?

Missing from this analysis is the entire other side of the reserves market:  If the Fed is the only supplier of reserves, those who demand reserves must have some ability to affect the price – the fed funds rate – at which reserves trade.  Those demanders are banks, and banks see the demand for reserves rise and fall along with the demand for loans:  When the demand for loans rises, the demand for reserves by banks rises; when the demand for loans falls, the demand for reserves by banks declines.  What all of this means is that the fed funds rate can decline – because of declines in the demands for loans and reserves – without the Fed taking any policy action.  But, if the Fed interprets the world as its oyster, it will interpret this type of decline in the funds rate as “evidence” of an easy policy stance, when, in fact, the real signal in the market is that the economy is weakening and, if anything, the Fed may be starving the banking system of much-needed liquidity.

This was written right before the large upsurge in bank reserves last fall.  It could be argued that the failure of that increase to lead to high inflation, or at least high inflationary expectations, tends to discredit their monetarist approach.  But of course most monetarist models did not assume any interest was going to be paid on reserves, so it is hardly fair to criticize them for failing to predict the resulting increase in the demand for reserves.

Michael is more of a monetarist than I am, but he does make some good points about widely held anti-monetarist views.  For instance, he argues that much of the evidence against monetarism was based on faulty data, as even the Federal Reserve relied on dubious estimates of the monetary aggregates.  He advocates a theoretically superior “superlative index,” which would account for the heterogeneous nature of the various components of the aggregates.  For instance, some types of “money” now pay interest, while cash is still interest free.  He also argues that Keynesians use a double-standard, calling the 1979-82 period a “failed” monetarist experiment, and yet clinging to the new Keynesian model despite the fact that its “Taylor Rule” broke down for an even longer period from 2003 through 2005.  Here’s what Michael has to say in Public Choice (2007):

In that case, what seems to be most interesting is the three-year period of 2003-2005 where, taken literally, the Fed appears to have had an objective for the inflation rate of six percent or higher.  Moreover, assuming that this was not the Fed’s goal, the three year period of sustained “model failure” was much longer than the leash given to the so-called “failed” monetarist experiment.

Michael Belongia is a monetarist worth checking out.  I haven’t had a chance to check out William Barnett’s research, but his vita also looks impressive, and includes studies of optimal monetary indices.

I am no expert on money demand studies, but I have been rather surprised that despite the near-zero interest rates, the demand for cash has been fairly stable.  Between the beginning of the 2001 recession and the beginning of this recession, currency held by the public increased by about 5 1/2% per year.  Since this recession began in December 2007 currency in circulation has increased about 7 1/2% a year.  Thus currency demand is about $20 billion above trend.  I would have expected the near-zero rates to have produced an even larger surge in currency demand.

Thus I can’t help comment on Krugman’s recent claim that the Fed would need to inject $10 trillion into the economy to get the needed stimulative effect:

Well, yes I’m aware that BB is doing a bunch of unconventional stuff. But the available — albeit thin — evidence is that it takes a huge expansion of the Fed’s balance sheet to accomplish as much as would be achieved by a quite modest cut in the Fed funds rate. And the Fed isn’t willing to expand its balance sheet to the $10 trillion or so it would take to be as expansionary as it “should” be given, say, a Taylor rule.

That’s right, $10 trillion, not billion.  I guess if you are a Nobel Prize winner you are allowed to pull numbers out of thin air.  Where did he get this number?  I have no idea.  Perhaps he looked at the fact that the base had already increased by nearly a trillion dollars, with little apparent effect on the economy.  But if the Fed was actually trying to stimulate the economy, rather that inject another $9 trillion isn’t it more likely that they’d first stop paying interest on reserves?  And perhaps even follow the Swedish policy of charging a penalty rate on excess reserves?  As James Hamilton recently noted:

The Fed has never wanted to see the huge volume of reserves it created end up as currency held by the public, for fear this would be inflationary. It has relied on several devices to keep that from happening. One was use of the Treasury’s account with the Fed, another traditional feature of Fed operations that ballooned as it became adapted to new purposes. The Fed asked the Treasury to borrow funds that it simply left in deposit in its account with the Fed. These idle reserves held by the Treasury absorbed some of the vast increase in new reserves created by the Fed.

A more important tool was that the Fed started paying interest on reserves in October 2008, and by November had increased that rate to the target fed funds rate itself. This created a very strong incentive for banks to simply hold reserves idle at the end of each day rather than lend them out on the overnight fed funds market. In effect, by paying interest on reserves, the Fed is borrowing directly from banks and using the proceeds for the various asset expansions detailed above.

And if you look at the relatively small increase in currency demand, which is only about $20 billion above trend even at near zero rates, it’s not hard to understand the Fed’s fear.  So it’s not like the Fed needs to inject trillions more dollars to create inflation, the existing reserves are more than enough if  they stopped paying interest, especially if an interest penalty was imposed.

Now I suppose Krugman could argue that this would drive the yield on T-bills slightly negative, and that Americans would suddenly decide to stuff $10 trillion dollars worth of Federal Reserve notes into safety deposit boxes.  A bit of this did occur in Japan (of course on a far smaller scale.)  But this just begs a much more fundamental question:  What is the Fed’s goal?  It’s rather silly to talk about the Fed being unable to boost AD when almost every day Fed officials are discussing “exit strategies” to prevent a breakout of high inflation.  If the Fed really did wish to boost AD, they could set an inflation or NGDP target high enough to boost velocity.  In that case they wouldn’t need to inject any more cash into circulation.  Indeed they’d need to remove some.

The problem with Krugman’s post is that for the uniformed reader, i.e. 99.99% of his readers, he seems to be saying that the Fed would need to inject $10 trillion if it wanted to adopt a sufficiently expansionary monetary policy, when in fact $10 billion would be more than enough if an explicit inflation target was set.  And without an explicit inflation or NGDP target?  Well what would be the point?

When Krugman refers to the Taylor Rule, he is referring to a backward-looking rule that takes no account of the impact an extra $10 trillion would have on inflation expectations.  Suppose the Fed prevented a buildup of ERs with a Swedish-style interest penalty.  And suppose all the extra $10 trillion went into circulation.  Recall that the total amount of cash in circulation is now much less than $1 trillion.  So cash in circulation would increase more than 10-fold.  Under those circumstances how likely is it that inflation expectations would remain unchanged, even if the Fed issued no explicit inflation target?  Not likely?  Well that’s just one of the assumptions that underlies Krugman’s estimate.  And I haven’t even discussed the fact that there aren’t $10 trillion in T-bills in existence, so the Fed would have to buy a lot of longer term bonds, i.e. bonds with yields well above zero.

The only purpose I can see for Krugman throwing out the $10 trillion figure is to scare the public into thinking that nothing can be done with monetary policy.  Why does he keep doing this?  Your guess is as good as mine.  Whatever the reason, the effect is to take the pressure off the Fed.  Especially in the liberal community, which tends to defer to his expertise.  In the 1930s there were plenty of liberal populists calling for easier money.  And with FDR they got it.  And it did revive the economy.  But that liberal tradition has been lost.


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31 Responses to “Add 2 more names”

  1. Gravatar of StatsGuy StatsGuy
    30. September 2009 at 19:26

    1937, here we come…

    You can say what you want about Goldman Sachs’ economic forecasting and modeling, but one thing they truly excel at is reading the political tea leaves.

    http://ftalphaville.ft.com/blog/2009/09/30/74756/dont-fear-the-inflation-goldman-says/

    Goldman also cites some plausible (but they argue unlikely) “inflation” scenarios and signs, but misses the big one – capital flight – which I think James Hamilton nailed in his Sept 27 post:

    “But the nature of inflationary pressures that we should be watching at the moment would arise from a depreciation of the dollar relative to other currencies and increase in the dollar price of internationally traded commodities. A modest move toward a weaker dollar and slightly higher inflation would be welcome. But the concern in my mind is whether a flight from the dollar could become more precipitous and destabilizing.”

    In the long run, capital flight risk is intensified by shrinking the GDP/tax base, and ballooning the debt. In the meantime, China and the developing world are proceeding with “decoupling”, making the myth that dominated 2007 closer to a reality – and, eventually, real enough that China decides it’s no longer worth buying up US debt to support the dollar (who can blame them?). The short-sighted struggle to avoid modest depreciation now is creating a certainty of massive depreciation (a dollar run) later. Indeed, we’re seeing arbitrage in anticipation of that event.

    So, I agree with Goldman – short term deflation while we keep the economy on life support with fiscal spending, with intermittent busts when we try to retract that life support, followed by a massive depreciation/inflation in the long run (which the Fed will try to fight by spiking interest rates, which will utterly destroy the federal balance sheet and implode the economy). That is my official prediction if the Fed does not change course soon. Quote me on it.

    Shifting to Selgin’s 3% NGDP growth path is NOT a good idea when the debt/gdp and federal debt/gdp ratios are so high.

    What is it about September? Maybe the leaves turning bright colors…

  2. Gravatar of Jon Jon
    30. September 2009 at 20:01

    Now I suppose Krugman could argue that this would drive the yield on T-bills slightly negative, and that Americans would suddenly decide to stuff $10 trillion dollars worth of Federal Reserve notes into safety deposit boxes.

    Why would people stuff a safety deposit box thus when one year paper yields positive? It seems to me that a lot of such thinking is based on the one-interest rate fallacy.

  3. Gravatar of bill woolsey bill woolsey
    1. October 2009 at 02:10

    Scott:

    It is “currency” into circulation, not “cash” in circulation.

    Try to avoid using the term “cash” to mean “currency.”

    In financial circles, “cash” includes short term bonds, like T-bills, as well as all elements of the money supply.

    The “cash balance” approach in monetarism uses cash to include all elements of the medium of exchange, including especially, transactions deposits at banks.

    Yes, “vault cash” is currency held by banks.

    But currency held by the public is not generally refered to as “cash.” Maybe everyone else understands, but I think it is confusing.

    Jon:

    The concern is that the yield on 1 year paper would be driven to something less than zero as well. Though I must plead ignorance about what exactly 1 year paper is. Do you mean 1 year AAA commercial paper? BAA? One year T-bills?

    Anyway, it is possible to see increases in the demand for money, even at slightly negative yeilds, if one year bonds have positive interest rates, because of the liquidity difference.

    The stuffing currency in the safe deposit box constraint doesn’t hit because of T-bills directly, but presumably because banks pay negative yields on checkable deposits.

  4. Gravatar of RebelEconomist RebelEconomist
    1. October 2009 at 02:44

    I know of Belongia from his book (with Binner) on Divisia monetary aggregates, but am puzzled by his argument here. If the Fed sets the nominal Fed funds rate, it passively injects or withdraws reserves to hold that rate, so changes in demand should not affect it – indeed, that is why central banks set an interest rate rather than the base money supply.

    Now if you say that monetary policy was tight because the real Fed funds rate was too high, that makes more sense to me, especially if you include asset prices in your definition of inflation (which I would), though whether the Fed should ease monetary policy for that reason, especially when they have not previously taken account of asset prices, is another matter.

    Regarding your definition of the monetary policy stance in terms of nominal GDP, it seems a bit too high-level for me. Physical analogies for monetary policy are probably over-used, but here’s another: Judging the monetary policy stance according to NGDP (expectations) is like assessing how hard you are driving your car according to its speed, regardless of the gradient of the road. Good enough for a passenger perhaps, but a driver, and especially a mechanic, may well find it useful to know what demands they are making of the engine.

  5. Gravatar of Alex Alex
    1. October 2009 at 04:24

    Scott,

    I guess I will have to bite the bullet and take one for the team. I will write and IOU to the Fed and take the 10 trillion dollars from the them. Of course I´ll need some help spending them so you, your readers and Krugman himself are all welcome to join me on a shopping spree. Let´s get the economy moving!!!

    Alex.

  6. Gravatar of ssumner ssumner
    1. October 2009 at 05:03

    statsguy, The GS summary is very good. They completely agree with me in my debate with Ohanian over inflation. I think they are right.

    I’m not too worried about capital flight. Not because it can’t happen (it can) but because I am confident that the Fed would tighten to prevent a breakout in inflation expectations. TIPS spreads observable in real time are a key difference from the 1970s. My fear is that the Fed will tighten too soon. I have little fear of a breakout in inflation.

    I understand your argument about the national debt, but I think it is really dangerous to let debt policy drive monetary policy. I’d rather we let this mistake motivate us to rethink the relationship between monetary and fiscal policy.

    Jon, I agree as a practical matter. Krugman would probably argue that cash is more liquid, or his other argument might be that even one-year yields would fall to zero.

    Bill, Sorry, I keep forgetting that.

    Rebeleconomist, I see your point, but if you read his entire Public Choice article it becomes clearer. Consider a money supply and demand diagram. Now keep the vertical supply line fixed, but let money demand drop steadily. Notice how interest rates keep dropping. The Fed thinks it has eased, but it hasn’t done anything. The economy has gotten weaker. And remember that even a constant money supply is contractionary in an economy used to steady increases. Earl Thompson also pointed this out–currency in circulation was flat in the early stages of the recession, and I think the base was too. So the fall in interest rates wasn’t the Fed easing, it was weak demand for money.

    You said;

    “Regarding your definition of the monetary policy stance in terms of nominal GDP, it seems a bit too high-level for me. Physical analogies for monetary policy are probably over-used, but here’s another: Judging the monetary policy stance according to NGDP (expectations) is like assessing how hard you are driving your car according to its speed, regardless of the gradient of the road. Good enough for a passenger perhaps, but a driver, and especially a mechanic, may well find it useful to know what demands they are making of the engine.”

    This is true for a gold standard, but not a fiat money regime. For all intents and purposes the Fed can create as much money as they want, and they can do it costlessly. So there are no demands on the Fed “engine.” Indeed bad monetary policy puts more demand on the engine, as it may lead to hoarding of the base, as we have recently seen.

    Alex, Yes, I wondered why if monetary policy is really so ineffective, why not legalize counterfeiting? After all, it won’t create any inflation, so who suffers?

  7. Gravatar of RebelEconomist RebelEconomist
    1. October 2009 at 07:15

    Scott,

    Perhaps we are talking at cross purposes (if Belongia’s paper is not published I cannot refer to that). I am talking about base money (comprising reserves and banknotes only), for which the central bank supply schedule is horizontal when the central bank sets an interest rate.

    By “demands of the engine” I did not mean the cost to the Fed (actually, even in a gold standard, apart from administrative costs like printing notes and storing gold, it costs the central bank nothing to supply money – they buy one non-earning asset with another). I simply meant that the central bank – the mechanic – might have some concern about the interest rate or the money supply growth that was generated in the course of fixing NGDP, because of, say, the effect on the money market. For example, in theory, a central bank could fix the exchange value of its currency for another by adjusting its base money supply as necessary; in practice, the interest rates this might generate might cause a riot!

  8. Gravatar of Current Current
    1. October 2009 at 08:00

    RebelEconomist,

    You are right about pegging one money to another, because the policies followed by the other monetary authority can’t be relied upon. However, I think you’re wrong in general. At least, even if the discount rate rises very high rates that people commonly pay won’t.

    For centuries money was tied to gold. This didn’t cause large spikes in the interest rates borrowers paid. The reason is because the same sort of thing that Scott explains above regarding inflation expectations took place. Agents could reasonably know that money prices wouldn’t change much. So the normal determinants of interest rate in the private sector played a major role.

    As Scott often says, high interest rates are a sign of loose monetary policy in the past.

  9. Gravatar of Bill Woolsey Bill Woolsey
    1. October 2009 at 08:00

    Rebel Economist:

    Let them riot.

    Really, there is no reason to worry about the growth rate (or level) of the quantity of money other than its impact on nominal expenditure.

    And in interest rates need to gyrate to stablize nominal expenditure, then they should do so.

    What we are looking at is the level of interest rates necessary to clear intertemporal markets.

  10. Gravatar of rrm364 rrm364
    1. October 2009 at 08:24

    Hi,

    I’ve seen you comment a bunch of times that the fed would have had to remove currency from circulation to raise aggregate demand. I don’t understand why? I’m pretty sure it isn’t something I’ve learned yet (I’m just an undergrad)

    -Ravi Mehta

  11. Gravatar of RebelEconomist RebelEconomist
    1. October 2009 at 10:56

    “Let them riot”? Typically academic, Bill. Which is why your view will probably remain academic in the other sense of the word! In the ERM crisis in 1992, just raising the UK policy rate back to its previous peak was considered so outrageous that it made the policy even more incredible and more difficult to sustain.

  12. Gravatar of Current Current
    1. October 2009 at 14:41

    RebelEconomist,

    I know what you mean about the ERM. However, that situation wasn’t like what we are discussing.

    British chancellors tried to print money while at the same time staying within the ERM bounds. This couldn’t last.

    It was analogous to an earlier time in the international gold standard. National and exclusive banks of issue were setup, then politicians lent on them to issue more notes than was wise. They reached the stage where a large number of redemptions at once could cause a run. The natives of that country doing this were trapped by legal tender laws within that zone. The money depreciated as it does with inflation, but not just in the way we are used to now.

    When it was plausible that the demands of the redeemability could be met the currencies value didn’t change much compared to other currencies. When it became implausible in the long term that it could things changed quickly. People within the country knew that their money would soon decline in value, so they sought to get rid of it through purchases. This created price inflation and accelerated the devaluation.

    I understand this is what happened in the Austrian and German hyper-inflations. It’s a bit like a bank run.

  13. Gravatar of rob rob
    1. October 2009 at 16:47

    unfortunately, i think TC buys into one third of everyone’s theory. How many TC’s are there?

  14. Gravatar of Lord Lord
    1. October 2009 at 17:01

    So much for negative interest rates in Sweden. It applies to almost nothing. Now if it was broadened it could be interesting.

    http://economix.blogs.nytimes.com/2009/10/01/negative-interest-rates-in-sweden/

    Actual I see this as insignificant other than to provide some recapitalization to the banks. What bank lends at a quarter of a percent? Any loan worth making would offer more, or do you think they are begging to make zero interest loans to anyone other than themselves? They consider it too risky to offer low rates to anyone. It’s only real reason for being is to make the eventual unwinding easier.

  15. Gravatar of Current Current
    2. October 2009 at 03:53

    rob: “unfortunately, i think TC buys into one third of everyone’s theory. How many TC’s are there?”

    As many as there are Keyneses.

  16. Gravatar of RebelEconomist RebelEconomist
    2. October 2009 at 04:03

    Current,

    As I recall, in the years before the ERM crisis, the British government was relatively prudent (in fact, conservative with a big C). I would even say that that crisis was a forerunner of the present crisis, and offers a warning to the likes of Scott and Bill who favour NGDP targeting and emphasise the importance of expectations.

    To cut a long story short, the main reason why Britain joined the ERM was to attempt to shock private sector expectations away from assuming that asset prices (house prices above all) would not be allowed to fall significantly. The private sector did not buy it, and when the test came, was proved largely correct when Britain reneged on its commitment and allowed inflation to rise to over 10% for a while. Inflation targeting, bolstered by central bank independence, was the UK’s next attempt to get something for nothing, which has also failed, but at a higher general level of asset prices which therefore poses an even greater threat.

    In my view, Scott and Bill are playing an unwitting (I hope) role in continuing the pattern. The old mistake is water under the bridge, so lets forgive it and move on with a shiny new commitment – NGDP targeting. I agree that NGDP targeting is better than money, exchange rate, and inflation targeting, because rising asset prices do tend to increase economic activity with little lag, but I can imagine a situation in which asset prices rise out of line with NGDP, and then it becomes politically impossible (or in Bill’s case, physically impossible dangling from a lampost outside the central bank) to sustain the target. Better, in my opinion, to adopt a target that directly includes asset prices, ideally in proportion to their weight in economically significant transactions, to minimise the probability of reaching such points of no return.

  17. Gravatar of Current Current
    2. October 2009 at 05:08

    RebelEconomist,

    That Conservative government were not really very conservative about their monetary policy. As you mention they entered the ERM at too high a rate, and they continued to expand the money supply.

    Regarding the rest of your post, I think you are right. I don’t think the differentiation between NGDP products and other tradable assets is really a good one for monetary policy. The MV that should be considered is MV=PT, where T is all transactions.

  18. Gravatar of Current Current
    2. October 2009 at 05:51

    Also, as I’ve said previously, Central Banks may give lip service to policies of this sort or that. What they do in practice though will always be down to political forces.

    Central banks are bureaucracies and in the long term they will act like other bureaucracies.

    See:-
    http://austrianeconomists.typepad.com/weblog/2009/10/robust-political-economy-and-the-fed.html

    and especially Bob Murphy’s first comment.

  19. Gravatar of RebelEconomist RebelEconomist
    2. October 2009 at 09:27

    Current,

    I disagree. In the late 1980s, UK inflation had fallen to what seemed at the time to be a low level and narrow money supply at least was not growing particularly fast. A central rate of DM2.95 was not unreasonable, as the level of sterling in recent years has shown. It was asset prices that were growing too fast – as in the present episode, first stock prices and then house prices. The authorities were unwilling to exacerbate falling house prices by holding the policy interest rate painfully high, even though it never reached the level of the early 1980s, and the market knew it. Having worked in a central bank, and known many of the people still involved, I can say that I saw no sign of them being driven by personal gain as Bob Murphy implies; on the contrary, many of them have contempt for those who are driven by wealth. What seemed to motivate my colleagues was career progression and a desire for approval.

  20. Gravatar of Greg Ransom Greg Ransom
    2. October 2009 at 09:33

    Scott. Simple question, inspired by Arnold Kling’s ongoing debate with you over macro vs micro understandings of economic processes.

    Is there any room in your imaginary mental model of the “economy” for discoordination / output decline / unemployment to be the result of anything other than an “aggregate” shock of some kind.

    Really. It looks to me like a genuine micro / marginalist / causal process understanding of cycles and economic processes at the level are ruled out by mathematical modeling strategy ALONE.

    If not, explain why this isn’t true.

    And if I got Kling’s claim against your approach wrong, how?

  21. Gravatar of Greg Ransom Greg Ransom
    2. October 2009 at 09:34

    Make that:

    It looks to me like a genuine micro / marginalist / causal process understanding of cycles and economic processes at the global level are ruled out by mathematical modeling strategy ALONE.

  22. Gravatar of Current Current
    2. October 2009 at 11:00

    Rebeleconomist: “It was asset prices that were growing too fast – as in the present episode, first stock prices and then house prices.”

    Well, that can still be a form of inflation. I think asset price inflation is what happened at that time. Which goes back to why I agree with you.

    The fact that the peg was broken shows it wasn’t sustainable. As I expect you understand “speculators” didn’t break the peg, they just used the event to make money.

    The level of sterling in recent years doesn’t really have anything to do with it. It doesn’t tell us about what sterling’s purchasing power was in the late 80s/early 90s.

  23. Gravatar of Richard A. Richard A.
    2. October 2009 at 15:09

    The M1 money multiplier MM is about at rock bottom. At MM=1, reserves=deposits. An MM less than 1 implies reserves>deposits which as I see it makes it difficult for MM to go much below 1. MM is not like the velocity of money which in theory can approach zero. If the Fed were to expand the monetary base by 10 trillion, I do not see how this could be offset much by MM declining even more. M1 would expand by close to 10 trillion, overstimulating the economy and leading to hyperinflation.

  24. Gravatar of Current Current
    2. October 2009 at 17:49

    RebelEconomists: “Having worked in a central bank, and known many of the people still involved, I can say that I saw no sign of them being driven by personal gain as Bob Murphy implies; on the contrary, many of them have contempt for those who are driven by wealth. What seemed to motivate my colleagues was career progression and a desire for approval.”

    Come on! We have the internet these days, telling lies like this to the people is significantly harder than it once was.

    Central banking is a form of robbery. It is one of the most foul institutions ever created by man. No person with a clean conscience can ever work in a central bank. If you worked in one that only proves that you are a form of life lower than bacteria.

    Your colleagues may have been motivated by career progression and approval, but that is only because they were willing to ignore the chaos their actions cause.

    Generations of my family have made fortunes and have subsequently being made poor men by the central bank creating inflation.

    As another libertarian once noted, there is a simple medical solution for this problem. Those who work or have worked for central banks are implanted with a small lead device inside the brain. I understand the mechanism used to implant that device is called a “Colt 45″.

  25. Gravatar of ssumner ssumner
    3. October 2009 at 10:02

    Rebeleconomist, The best way to stabilize interest rates is to stabilize expected NGDP growth, as the two are closely linked. But I can’t imagine why anyone would care if there were modest changes in nominal interest rates as long as NGDP was stable.

    Current, I agree, and would add that nominal rates would be far more stable under a NGDP futures targeting regime than they were under the gold standard.

    Bill, I agree,

    Ravi, I meant to say that if they removed the interest payments on reserves, and wanted to raise the NGDP growth rate to 5%, they’d have to remove reserves. You are right that more reserves are more expansionary; my point was that without the interest on reserves causing hoarding, we’d already have more reserves than we need.

    Rebeleconomist, The 1992 example actually supports my point. They raised the rate sky high to defend an exchange rate peg. As soon as they went back to stabilizing the domestic level of demand, rates went back to normal.

    rob, I have a post speculating there are many TCs. How could one person know so much? How could one person read so many books?

    Lord, I did a post yesterday criticizing that moronic NYT article. Never, ever, rely on the NYT for economic analysis.

    Rebeleconomist. You are confusing two issues, the goals themselves, and tools that are just a means to an end. I intend NGDP stability to be the goal. If it isn’t, the Fed should come up with a goal variable (like the Taylor Rule) and target it in a forward-looking fashion. Nobody thinks exchange rates are a goal. They are an intermediate target, and I agree that when push comes to shove, the government will ditch the intermediate target and focus on the goal variable. I am saying that they should focus on the goal variable and just skip the intermediate target.

    Greg, That’s a silly claim. I must have talked about the Austrian misallocation problem of 2006-08 100 times on this blog. Surely you didn’t miss all 100? There was 2 whole years where the Austrian model explained what was going on. Of course real shocks are important, but only rarely (as in WW2 or 1974) are they big enough to cause a business cycle all by themselves. But yes, allocation issues are important.

    Richard, In theory all $10 trillion could go into excess reserves, but as a practical matter you are right.

  26. Gravatar of RebelEconomist RebelEconomist
    4. October 2009 at 05:00

    Scott, you seem to be missing my point. My point is that, if people care about asset prices, then ANY target that would involve holding policy firm while asset prices undergo an unpopular fall will be subverted and ultimately be abandoned. NGDP is better than some targets in this sense, but I would prefer a target that includes the asset prices themselves, so that monetary policy automatically resists their rise, and mitigates their fall honestly. In other words, targeting NGDP is probably not the best way to stabilise NGDP. Targeting a forecast variable is even more vulnerable to subversion, because the forecast can be manipulated to allow the policymakers to take the least line of resistance.

    And by the way, you are wrong about Britain’s ERM experience. The UK policy rate was not tightened much in an attempt to defend the peg. The policy rate was already high when Britain joined the ERM, was cut on entry, and since the modest rise on the final day never took effect, UK monetary policy was barely tightened as a result of the peg. But that was the point of entry; it was an attempt to get something for nothing, and was abandoned as soon as there was even a modest price to pay. For the same reason, you have no need to worry about the tightening talk coming from various Fed officials at the moment – those who mean it are in a minority, and the rest are happy to add to any expectations that lower the long end of the yield curve.

  27. Gravatar of ssumner ssumner
    4. October 2009 at 06:12

    Rebeleconomist, You said;

    “Scott, you seem to be missing my point. My point is that, if people care about asset prices, then ANY target that would involve holding policy firm while asset prices undergo an unpopular fall will be subverted and ultimately be abandoned.”

    I don’t see any evidence of this . We had huge stock market crashes in 1929, 1987 and in 2000. I n1929 monetary policy was actually tightened after stocks crashed. If people cared about asset prices why wouldn’t policy have been loosened? In 1987 there was no change in policy, and in 200 policy was lightly tightened. I just don’t see any evidence in the US that the Fed is pressured to bail out asset markets.

    And of course there is late 2008, when the Fed adopted a deflationary monetary policy right after housing prices had already fallen sharply.

    In every single case I cited a NGDP target would have been the same (1987) or even more politically popular (1929, 2000, and 2008.)

    Regarding the ERM, It makes no difference whether the rate was raised, or whether it would have had to have been raised to stay in the ERM. The point is that Britain left the ERM so it could more effectively prevent NGDP from falling, which is exactly my point. They care about NGDP, they don’t care about their exchange rate. We saw that again within the past 12 months.

    My point is very simple. People care 10 times as much about NGDP as they do about asset prices. There is no political price to be paid when asset prices collapse and NGDP is doing OK (as in 1987.)

  28. Gravatar of RebelEconomist RebelEconomist
    4. October 2009 at 11:59

    Well, neither of us knows exactly how much people, and therefore central banks, care about NGDP and asset prices Scott, but if they care to any significant degree, asset prices ought to be in the target. On points of fact though:
    (1) Since you mention 1987 as an example of falling asset prices when NGDP was doing OK (I prefer the example of 1998, when the Fed eased specifically “to address the seizing up of financial markets”), note that the Fed did effectively ease in 1987 by “adding liquidity” that lowered the effective funds rate on October 20th, which they validated by reducing the Fed funds target at their next scheduled meeting on November 3rd.
    (2) The asset price of concern to the British in 1992 (as always) was house prices. The exchange rate (which is arguably not an asset price) was just being used as an anchor.

  29. Gravatar of ssumner ssumner
    5. October 2009 at 06:39

    Rebeleconomist; You said;

    “On points of fact though:
    (1) Since you mention 1987 as an example of falling asset prices when NGDP was doing OK (I prefer the example of 1998, when the Fed eased specifically “to address the seizing up of financial markets”), note that the Fed did effectively ease in 1987 by “adding liquidity” that lowered the effective funds rate on October 20th, which they validated by reducing the Fed funds target at their next scheduled meeting on November 3rd.”

    I’m not sure you are following my argument. The 1987 easing was not to boost stock prices back up again, but rather to prevent the fall in stock prices from impacting expected NGDP growth. So it is not an example of the Fed caring about asset prices, it is an example of the Fed caring about what asset prices might indicate about expected NGDP growth. Obviously I look at asset prices, indeed one of my most often repeated arguments is that all of the asset markets were signaling that money was too tight last fall. But that’s not because I care about asset price per se, but rather because I care about what they might be signaling in terms of expected NGDP growth.

    I’d say if the British are concerned about housing prices, they ought to try to make NGDP growth more stable. The fluctuations in NGDP growth are a major cause of fluctuations in housing prices, perhaps the major cause.

    I don’t see why you say exchange rates aren’t asset prices. Isn’t money an asset?

  30. Gravatar of RebelEconomist RebelEconomist
    5. October 2009 at 12:00

    Scott, you are impossible! The issue is not with your argument, but with a straightforward fact. On 4 October at 06.12, you said “In 1987 there was no change in policy…..”. That was not what I recalled, so I checked. Now you say “The 1987 easing was not to….” without a trace of contrition.

  31. Gravatar of ssumner ssumner
    6. October 2009 at 17:05

    Rebeleconomist, I see your point, but the problem is language. In terms of my definition of monetary policy (NGDP expectations), there was no easing. In terms of your definition (the fed funds rate) there was easing. But still the example doesn’t weaken my argument at all, even if I look like a complete fool. Here’s why. I can simply argue, “Yes, they did ease, but only to keep expected NGDP growth on track.” So even if you are right that policy eased in response to the stock market crash, it doesn’t contradict my point that they should only care about expected NGDP growth. Rather it shows that the stock market may influence NGDP expectations, and the Fed must take that into account when setting the Fed funds rate.

    Indeed, I would argue that one reason why the 1987 stock market crash did not cause a recession in 1988-89 is precisely because the Fed took steps to keep NGDP growth on track. Ironically you and I might not be far apart as to what the actual policy should be, but we may describe the policy differently.

    And yes, my strange use of language does make me impossible at times.

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