Fed hawk who helped implement Obama’s tight money policy announces resignation
TravisV sent me the following:
A top Federal Reserve official who has expressed concerns about the possibility that the central bank’s policies could spark financial instability said Thursday he is resigning from his post on May 28.
Jeremy Stein, an economics professor at Harvard University, will be returning to Cambridge, Mass. to teach again, Mr. Stein said in his resignation letter to President Barack Obama.
Just last month, the 53-year old highlighted his argument that the Fed must be mindful of the possibility that its policies could contribute to asset bubbles. “Monetary policy should be less accommodative “” by which I mean that it should be willing to tolerate a larger forecast shortfall of the path of the unemployment rate from its full-employment level””when estimates of risk premiums in the bond market are abnormally low,” he said.
While his views weren’t shared by many of his colleagues, Mr. Stein’s role as an academic economist made him an influential figure within the central bank’s powerful Washington-based board.
. . .
In combating a deep recession and supporting a weak economic recovery, the Fed has kept official interest rates effectively at zero for over five years now. It has also purchased some $3 trillion in mortgage and Treasury bonds in an effort to keep long-term rates down and spur economic activity. But the program has not been without its skeptics. Mr. Stein, while supporting bond buys when they were launch, has been most vocally skeptically of them among board governors.
Given that Stein played a key role in the Fed’s premature taper, this is good news. Let’s hope the seat remains unfilled.
PS. In 2009 I was encouraging Obama to fill Board seats as quickly as possible, until I figured out that he thinks monetary policy is credit policy, not AD management.
PPS. Obama appointed Stein and Powell 2 years ago. Stein was the Democrat. The slow recovery? It’s all the Republican Party’s fault.
Tags:
3. April 2014 at 07:52
Mark Sadowski makes a great point:
“Incidentally, note that three out of four of the most hawkish current FOMC members are Democrats (the only exception is Plosser).”
http://www.themoneyillusion.com/?p=26514#comment-327660
3. April 2014 at 07:56
FOMC Voters 2014 Dove Hawk Scale:
http://www.kathylien.com/site/federal-reserve/fomc-voters-2014-dove-hawk-scale
(From Mark Sadowski)
3. April 2014 at 08:08
Not too long ago, Obama would have counted as a moderate Republican.
Pivoting to deficit reduction may have been the single most destructive action he’s taken. However, I wouldn’t disagree if you said failure to appoint better Fed officials should be near the top of the list.
3. April 2014 at 08:16
Foosion, Strongly disagree about Obama. Obama is well to the left of Bill Clinton. Unless you mean back in 1966–then yes, on economic issues (obviously not gay rights etc.)
Obama favored more fiscal stimulus, but couldn’t get it through Congress. it would not have helped with our current Fed.
3. April 2014 at 08:27
The Fed’s current policy is almost certainly far, far too loose, if we use a standard more rational than 4.526462725% annual increase in NGDP.
The economy is sluggish because of this loose money preventing the inflation induxed malinvestments which are proximately responsible for the sluggish economy.
The 2008 deflation did not go far enough to reverse the ill effects of inflation previous to that.
It is not “spending” that facilitates healthy, sustainable growth. It is prices and interest rates that most accurately convey market information that do it.
It is not enough that investors expect total spending to rise at an arbitrary rate controlled by a cemtral bank. They cannot solve the problem of hampered market prices and interest rates, because they require free market prices and interest rates in order to coordinate their activity in a division of labor.
It is misguided to believe that if spending on houses falls, that it is absolutely necessary that spending on anything else, but only on the same country, rise by the same amount, regardless of the underlying real activity associated with it. It is madness.
If you want to believe full employment should be the standard for why monetary policy X is justified, then be honest and go to the logical conclusion, like TravisV, and imply that impoverishing everyone for the sake of full employment, is better than less than full employment where individuals are free to produce on their own pace. Or that murdering all the unemployed is better than not because it would be an example of “unconditional” and “no exceptions” support for full employment.
The goal of all “policy” should be to protect individual liberty, not ensuring that everyone is “doing something” foe the sake of employment statistics.
Being free with no job is better than being unfree with a job, because in freedom we are free to pursue a job that is constrained to the needs and desires of others who likewise are free to pursue a job that is conatrained to our desires and needs.
It is remarkable how afraid people on this blog, and elsewhere in other socialist circles, are to a lack of a central plan. Are you afraid of the lack of a central plan between countries? If not, why be afraid of a lack of a central plan for people closer to you geographically? The fear is so steep that the belief is without a central plan, fascism will rise.
Yet you’d be amazed at what you can figure out when you shed your fear of “anarchy of production”, to quote Marx.
3. April 2014 at 08:42
Forgot to add:
“The economy is sluggish because of this loose money preventing the inflation induxed malinvestments which are proximately responsible for the sluggish economy…from being corrected.”
MMs agree with this. They know there are malinvestments and they are calling for more inflation to fix the real side problems of output and employment. They are observing malinvestments and yet they don’t see them as such, because they believe that what is already in place, is more or less optimal as it stands, with of course paying lip service to the structural problems by merely casually mentioning them but right away assuring the readers that the “main” problem is not enough paper.
The idea is that the main problem of the economy is not about where existing capital and labor are allocated, because something something EMH and something something this is what free market advocates should believe, but rather, the capital structure and labor activity is “incomplete.”
There is allegedly an excess of owners of capital and owners of labor who are all just sitting around twiddling their thumbs, holding out for higher prices that they cannot fetch in the economy yet. They are all just sitting around, consuming resources, waiting for Yellen to hit CTRL-P more often, and then/i> they will finally be “right” about their hold out asking prices. Then the economy will be more or less “complete”. Then we can talk about how to fix the structural problems which are “mainly” the fault of the taxation and regulatory side of things.
Apparently there are no significant structural problems caused by inflation itself, when NGDP is “stable.” Praise Jebuz
3. April 2014 at 09:28
‘Obama is well to the left of Bill Clinton.’
He’s also well short of Clinton’s IQ. When Clinton spouted economic nonsense it was pretty clear he did it because he thought there was a political advantage; i.e. he knew someone who might vote for him or Hillary, wanted to hear the nonsense.
With Obama, given the shear volume of the nonsense as well as the lack of sophistication, I get the impression he believes the things he says.
3. April 2014 at 10:51
Scott,
Off Topic.
I came across this by Peter Stella on ECB negative reserve rates. He thinks it would not *directly* boost lending (who claimed it would?) but that it might help redistribute reserves between north and south, and that it could help depreciate the euro.
http://stellarconsultllc.com/blog/wp-content/uploads/2014/04/The-Negative-Rate-Chrono-Synclastic-Infundibula.pdf
He also talks about Denmark’s experience and explains why it works there but might not work so well in the ECB.
Mostly it strikes me as an attempt to reconcile the credit perspective with the money perspective on negative reserve rates.
3. April 2014 at 11:40
Scott — Good riddance to Stein. On a similar note, though, in the past you said the U.S. has had three exits from the ZLB and two were premature. I assume 1937 was one. What was the other one?
3. April 2014 at 11:54
Thanks Mark, Interesting paper.
3. April 2014 at 12:31
In the sense that, not too long ago, GWB would have counted as a moderate Democrat, except less racist. But I don’t see what that gets you, under either telling.
3. April 2014 at 15:20
Mark A. Sadowski,
I’ve asked you about this before, but is there a way to tell which of these guys is closest to the truth by examining data?
http://uneasymoney.com/2014/03/31/can-there-really-be-an-excess-supply-of-commercial-bank-money/
It seems to me that of the small group there discussing it, Rowe was at one extreme, Glasner at the other… and perhaps Nick Edmonds somewhere in between. I don’t know about JP Koning… he seems to favor Glasner if anything, but it’s not clear.
3. April 2014 at 15:49
Major Freedom, I think you’re confusing nominal spending with real spending. Nominal spending pivots around nominal debts like mortgages and car payments, obligations that must be paid regardless of the real value of the money used. Allowing nominal incomes to fall, as you suggest, has and will bankrupt millions.
3. April 2014 at 15:50
JKH makes the following claim:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/04/what-is-a-managed-exchange-rate.html?cid=6a00d83451688169e201a3fce66267970b#comment-6a00d83451688169e201a3fce66267970b
“I checked my old textbook and there is no question but that the message was definitely causality from bank reserves to deposit expansion via the reciprocal of the required reserve ratio
The causality is expressed as a time series of propagated t-accounts, as excess reserves are “used up” in an iterative process, which is still a not uncommon interpretation as far as I can tell
‘Economic Analysis and Canadian Policy’ by David Stager 1979 – maybe Nick R. knows it
I remember it well because I was working in a bank at the time, and I knew then that the causality was wrong – through direct observation (not theory)- the Canadian reserve system operated similarly to the pre-2008 Fed system at that time – reserves played no role in core lending and deposit creation
As I’ve before with Nick, the causality story amounted to an academic confusion between how bank money market liquidity management works, and how main lending operations work
Causality was the core theme as it was explained in the book – adjustments such as changes in the reserve ratio or people taking out currency etc. are at the margin to that
There was no “next page” correction to that basic causality…”
To which I respond by saying:
“I doubt it has anything to do with the age of the textbook. I’ve seen a copy of the 1948 edition of Paul Samuelson’s “Economics” and it also states that the currency ratio and the desired reserve ratio are variables. After all, both soared during the Great Depression.
Maybe it’s a Canadian thing.”
If anyone has a copy of “Economic Analysis and Canadian Policy” by David Stager 1979, turn the page and let me know what it says. I have a very hard time believing we’ve finally found the mythical textbook that actually teaches that the money multiplier is a fixed ratio.
If so it’s these guys’ fault:
http://mantismusic.us/images/AC/18933/IMG_9688.JPG
3. April 2014 at 15:58
Mark, ha! It’s been a while since I’ve seen those two (your photo at the end).
On a slightly different topic, you’re a wiz empiricist. How can you sort out cases of expectations being set properly? How do you measure something like that?
Here’s what I had in mind: Take Canada vs the US. From what I understand from Nick Rowe, they had a brief period during this financial crisis (I think) where they slipped below inflation expectations, and they did a small amount of QE and got back on track again in short order. Does that sound like an accurate take? So if the same group running the BoC had been invited in to take over for Bernanke and company at a critical time back in 2007 or 2008 or 2009, do you think there would have been any significant difference in the way things turned out here int he US? Say there were free to bring all their Canadian ways (and single focus targets) with them.
3. April 2014 at 16:07
Tom Brown,
“I’ve asked you about this before, but is there a way to tell which of these guys is closest to the truth by examining data?”
I’ve been following the debate pretty closely and I think I can honestly say I’m no longer sure what they are all debating. Everytime Nick or David rebuts the other I agree with the rebutal. So it seems to me like they are splitting hairs at the subatomic level at this point. If you think there is a claim that could be tested empirically, let me know what it is. I sure can’t see it.
My sense is they all agree that the central bank can disturb an equilibrium and that deposits adjust to a new equilibrium. So what are they really arguing about? The rate of adjustment?
3. April 2014 at 16:09
Randomize:
“Major Freedom, I think you’re confusing nominal spending with real spending.”
I don’t even know what real spending means. Not sure how I can be confusing those two. Real spending is what, the goods “spent” on “buying” money? I can assure you that I know the difference between goods and money.
“Nominal spending pivots around nominal debts like mortgages and car payments, obligations that must be paid regardless of the real value of the money used.”
Pivots? Try not to inject mechanics and other physics concepts into economics. It just muddies the waters.
“Allowing nominal incomes to fall, as you suggest, has and will bankrupt millions.”
And? Since when was bankruptcy something that justified initiating force against people?
3. April 2014 at 16:25
“So what are they really arguing about? The rate of adjustment?”
Maybe that’s all it really boils down to. But my sense of it is a bit different. I’m not sure because I haven’t had any feedback from Nick on my attempt to understand/rephrase his point.
But say given a fixed MB, I get the sense that Nick is saying that the borrower/loan market can induce the aggregated commercial banks (and aggregated borrowers, working “in conjunction” with them, as Nick has stated before) to produce more deposits than the rest of the private sector economy wants to hold, and this in turn creates an excess supply of both base and commercial bank monies.
David did seem to eventually acknowledge that such a thing could happen, but seemed to write it off as a very short term effect. I think Nick thinks this is a longer term effect. In short I think David thinks the Law of Reflux is more powerful and applicable to all than Nick does. David thinks he is taking Tobin’s position on this.
I think it’s clear that Nick is drawing a distinction between the commercial bank loan market (in which new “money” is created) and all other markets. The participants in that market selling the loans are “borrowers.” Now it’s not clear to me if he’s drawing a distinction between borrowers and depositors, or just the markets. That’s what’s confusing to me.
So what’s the other case to compare it to? Not one in which the CB does anything different, but one in which the loan market does not result in an excess supply of money in all the rest of the markets.
It’s very confusing to me, so I don’t know if I can help you identify something to measure, although it seems like if (what I think are) Nick’s two scenarios are possible, the first should result in higher prices and the second shouldn’t.
I hope some of that made sense. It’s a bit nebulous to me, so that’s why I’m interested in clearing all this up so I can understand it better.
3. April 2014 at 16:41
Tom Brown,
“Take Canada vs the US. From what I understand from Nick Rowe, they had a brief period during this financial crisis (I think) where they slipped below inflation expectations, and they did a small amount of QE and got back on track again in short order. Does that sound like an accurate take?”
Canada’s policy rate was 0.25% from April 2009 through May 2010. When they raised the policy rate the monetary base dipped by about 3.5% month on month, so perhaps there was a slight increase in the moentary base above trend. But if so it was very small and in my opinion barely qualifies as QE.
“So if the same group running the BoC had been invited in to take over for Bernanke and company at a critical time back in 2007 or 2008 or 2009, do you think there would have been any significant difference in the way things turned out here in the US? Say there were free to bring all their Canadian ways (and single focus targets) with them.”
I haven’t really given that much thought to how Canada handled things in the runup to the Great Recession, so I can’t really say why they did a better job than the US, as seems to be the case. But I doubt it had anything to do with their practice of Inflation Targeting, as the fact that the FOMC was excessively focused on inflation in 2007-8 seems to have been responsible for them allowing NGDP growth to collapse in those years.
3. April 2014 at 16:52
Tom Brown,
“But say given a fixed MB, I get the sense that Nick is saying that the borrower/loan market can induce the aggregated commercial banks (and aggregated borrowers, working “in conjunction” with them, as Nick has stated before) to produce more deposits than the rest of the private sector economy wants to hold, and this in turn creates an excess supply of both base and commercial bank monies.”
(By “base” I take it you are specifically referring to currency. Otherwise it doesn’t make much sense since the monetary base is fixed.)
My basic problem with this proposition is that just because they *can* do this, why would they?
I think Glasner has made this very point. The central bank is motivated by policy goals, but commercial banks (and depositors and borrowers) have no such goals. Why would they engineer something which is not necessarily in their best interests?
3. April 2014 at 17:04
Mark,
“I think Glasner has made this very point. The central bank is motivated by policy goals, but commercial banks (and depositors and borrowers) have no such goals. Why would they engineer something which is not necessarily in their best interests?”
That’s a great point, but I think Nick is trying to construe it such that it IS in the banks’ and borrowers’ best interests, but perhaps not the depositors’. Something like that (it’s easiest for me to think of depositors and borrowers as not necessarily exactly the same groups when trying to make sense of Nick’s position, but perhaps that’s not necessary: it could be every borrower is a depositor, for example, but not vice versa).
3. April 2014 at 18:15
Seems like it can’t be a coincidence that a hawk who was appointed just two years ago is resigning in a milieu of what looks like the Fed moving towards looser policy
Maybe it’s a good sign. Maybe now Obama will have no choice but to appoint somebody who isn’t afraid of ghosts
3. April 2014 at 18:46
One of the articles I read about Stein’s resignation mentioned that he was an assistant to Mr. Geithner, the engineer of the ever so insightful sterilization of the discount window lending that worked out so well. It really is a pity to lose one of the greater minds in the bunch. But fear not, he’s going to be providing a quality education to young economists who aspire to be the next Larry Summers. (I won’t be sending my son there! *Egads*)
3. April 2014 at 19:29
Mark, here was Nick on Canada’s inflation targeting. It’s actually above trend in 2008 or so (total CPI), while core stays nice and steady below trend:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/01/the-bank-of-canadas-success-and-failure.html
Then it dips below later in the year or maybe early 2009.
3. April 2014 at 19:42
Mark, yes “base” should have been currency. Nick mentioned “alpha currency.”
3. April 2014 at 20:37
Obama also appointed Bernanke.
3. April 2014 at 22:11
ChargerCarl, Obama reappointed him in 2010, but he was first appointed by Bush in 2006.
3. April 2014 at 22:35
So?
4. April 2014 at 04:40
“And? Since when was bankruptcy something that justified initiating force against people?”
That’s all you have to fall back on. Dumb slogans.
4. April 2014 at 04:45
MF
http://www.themoneyillusion.com/?p=26468#comment-327483
4. April 2014 at 05:08
“Fed’s Fisher Says Limits to Fed Forward Guidance”
http://blogs.wsj.com/economics/2014/04/04/feds-fisher-says-limits-to-fed-forward-guidance
4. April 2014 at 05:13
Krugman praises a new IMF analysis but says they need to be more strident:
http://krugman.blogs.nytimes.com/2014/04/04/euphemistic-at-the-imf
From the latest IMF World Economic Outlook:
“With respect to monetary policy, a period of continued low real interest rates could mean that the neutral policy rate will be lower than it was in the 1990s or the early 2000s. It could also increase the probability that the nominal interest rate will hit the zero lower bound in the event of adverse shocks to demand with inflation targets of about 2 percent. This, in turn, could have implications for the appropriate monetary policy framework.”
What does that actually say? Well, my subtitled version says this: Raise the inflation target to 4 percent, dummies. But the IMF wouldn’t,and presumably can’t, say that outright. And I suspect that the people who need to hear that won’t at all get what the Fund is really saying.
Secular stagnation, here we come.
4. April 2014 at 06:04
Tommy, We’ve had 2 exits, 1937 and 1951.
Mark, I think part of the problem is that textbooks might have assumed a fixed multiplier when they went over the math of an increase in the base. But of course that is very different from the textbooks teaching students that the ratio is in fact fixed. You see the same thing with the Keynesian expenditure multiplier.
wufwugy, Maybe, but I don’t yet see the Fed moving to an easier policy.
4. April 2014 at 06:50
Re: “money multiplier” … why not just call it the “broad to base ratio?” That’s save a lot of heartache wouldn’t it? Plus it’d save one syllable if you say “ratio” like many of us do.
4. April 2014 at 07:04
Nick’s got another one on the broad to ba…. er, money multiplier theme this morning:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/04/temporary-vs-permanent-money-multipliers.html
4. April 2014 at 07:06
… and Mark, it kind of gets at what I was trying to ask you yesterday, but we got side tracked on my mistake to bring up the US vs Canadian CB’s response to the financial crisis.
As an empiricist, how do you factor in “intention?”
4. April 2014 at 07:14
Pot calls kettle black!
“Fed’s Fisher bashes U.S. politicians for slowing economic growth”
http://finance.yahoo.com/news/feds-fisher-bashes-u-politicians-080137743.html
4. April 2014 at 11:17
Tom Brown,
“Re: “money multiplier” … why not just call it the “broad to base ratio?” That’s save a lot of heartache wouldn’t it? Plus it’d save one syllable if you say “ratio” like many of us do.”
This question caused me to go on a somewhat fruitless quest to try and figure out when the phrase “money multiplier” was first used. Along the way I found the following on the history of the simple model of multiple deposit creation:
http://www.richmondfed.org/publications/research/economic_review/1987/pdf/er730201.pdf
James Pennington seems to be the first one to explicitly explain the process of multiple deposit creation in writing in 1826. Alfred Marshall appears to have been the first one to give it mathematical expression sometime after 1877. But the current version found in most elementary and intermediate textbooks was originated by Chester Arthur Phillips in 1921.
The article also mentions that the formula relating the monetary base to broad money supply, involving the currency ratio and reserve ratio, was first derived by James Meade in 1934. The formula was explained again by Friedman and Schwartz in 1963, and Phillip Cagan in 1964, and this appears to be when it first became popular, particularly for historical analysis.
However, scanning these writings I can find absolutely no incidence of the phrase “money multiplier”, not by C.A. Phillips, or Friedman, or anybody.
In fact the earliest closest approximation I can find of the phrase is by Karl Brunner in 1961, who used the phrase “monetary multiplier”. This was as part of *his model* of the money supply creation process, which I’m sure most endogenous money enthusiasts would be absolutely appalled by.
Incidentally I think it was also in 1961 when Karl Brunner coined the phrase “base money”. So it is with some irony that over time “monetary multiplier” seems to have changed to “money multiplier”, and that “base money” has changed to “monetary base”.
In any case, I’m somewhat stumped and cannot believe the phrase itself is of so recent an origin. Perhaps this is a question for David Glasner.
4. April 2014 at 11:23
Mark, that was a interesting comment… well at least for some people (myself included). Thanks for that!
4. April 2014 at 11:24
Mark, that was a interesting comment… well at least for some people (myself included). Thanks for that!
4. April 2014 at 11:25
Tom Brown,
“As an empiricist, how do you factor in “intention?””
Offhand, I don’t think you can. How does one observe “intention”?
4. April 2014 at 12:05
… perhaps we can call it the “Chuck Norris Coefficient.”
4. April 2014 at 12:21
Tom Brown,
Good one! Intention. Determination. Willpower!
Do or do not. There is no try.
4. April 2014 at 14:32
TravisV, Ha!, thanks. My first thought was to sensibly have the Chuck Norris Coefficient (CNC) range from 0 to 1, or perhaps -1 to 1, but then I thought of other scales:
infinity (on the low end) to “Chuck Norris” on the high end.
I tried to work out something with “countable infinity” vs “uncountable infinity” but my creativity ran dry.
4. April 2014 at 15:22
If you aren’t targeting the forecast, you are expecting to fail.
The dual mandate: It’s not just a good idea, it’s the law.
Sticky wages plus falling nominal income means fewer hours worked.
Interest rate targeting: A policy that only fails when you need it most.
Income: A meaningless, misleading, and pernicious concept.
If you are talking about inflation, you should be talking about something else.
The tightest policy possible (deflation) looks like easy money to most economists.
Macro policies immediately fail or succeed, there is no “wait and see.”
Do or do not. There is no try. (Oops, stole that one from Yoda.)
http://www.themoneyillusion.com/?p=12044
4. April 2014 at 16:23
Mark, I never knew it was that recent.
Thanks Travis, that got me to go back and clean up the grammar.
5. April 2014 at 07:03
I have a basic question for SS.
I have assumed the Fed can only monetize the debt of the treasury permanently, to the degree it continues to hold a constant amount of debt. So far the Fed has purchased about 15-20% of the Treasury debt (not counting the social security/Medicare intragovernment IOUs). I realize there is some belief that these securities will eventually be sold back into the market place or mature (in which case reserves I think must decline). Does anyone really believe this will happen in the foreseeable future? To me, that means a minimum of 10 years. Is this why reserves are so high, because bankers do believe debt will decline on Fed balance sheet?
I happen to believe NGDP futures will not happen in the foreseeable future. So your signaling solution of the Fed may be a pipe dream. Under that set of assumptions, what should the Fed be doing now?
My belief is we are now more constrained by central government policy than anything else.
5. April 2014 at 07:05
By central governmental policy I mean, taxes, regulations, and targeted spending
5. April 2014 at 09:54
Mike, They have not been monetizing much of the debt, because the term ‘monetize’ applies to zero interest base money.
I favor NGDPLT. So that’s my answer to what they should be doing. The Fed is in no way constrained by central government policy. They could achieve 50% inflation if they wished to.