Lost in translation

I have a friend who teaches development.  He tells me that he would often run into the following problem.  He’d carefully work through the logic of some argument, explaining how A implies B, and B implies C. The student would nod his head in agreement.  At the end he’d say; “So here’s the policy implication, right?”  And the student would shake his head and say; “No, you don’t understand, China is different.”  (BTW, it could have been any country.)

Both Paul Krugman and I have felt this frustration when looking at the actions of the Fed, ECB, and Bank of Japan.  It goes sort of like this:

You say inflation is currently below target.  “Yes”

You say inflation is expected to remain below target for years to come.  “Yes.”

You say output is below the natural rate.  “Yes”

You say output is expected to remain below the natural rate for years to come.  “Yes.”

Ergo monetary policy should be made more expansionary.  “No.  You don’t understand, this cycle is different.”

I’ve racked my brains for an answer.  So has Krugman.  Once I even delved into pop psychology, arguing that monetary policymakers needed to have a relentlessly logical attitude in applying theory to policy.  No common sense judgments about whether interest rates “seemed to low.”  I argued this was similar to the autistic cognitive profile–blocking out any extraneous factors.

Stefan Elfwing just sent me a Google translation of an article on Lars Svensson, which led me to recall all this frustration:

Lars EO Svensson wants the federal funds rate is 1.75 percent in three years, not 3.8 percent as the Riksbank’s majority wants. 

He was also against the latest interest rate rise from 0.50 to 0.75 percent. 

His colleague on the Executive Board, Karolina Ekholm, voted for the increase but also want a lower interest rate over the next few years because of the doubts that exist about the global economy. 

For Lars EO Svensson is the “obvious” to select a rate and interest rate forecasts that are considerably lower than the Executive Board a majority of four members chosen because it gives better effectiveness.

Our forecasts for CPIF inflation below the target most of the period and resource utilization is low.  If the interest rate path is lower we get a better effectiveness.

That sounds very logical.  So why don’t his colleagues agree?

Lars EO Svensson has repeatedly asked his colleagues on the Executive to explain why they disagree with, he has asked them to point out errors in their reasoning.  The answers are lacking.

Unfortunately I don’t speak Swedish, and I think something got lost in translation.  But I gather the other members of the board have not been able to point out errors in Svensson’s logic.

He points out that although the Finance Committee stated that it would be desirable that the Riksbank is very clear about why various policy decisions taken or not taken.

I am surprised by the disagreement about some things that should be obvious, for example, that one should not raise rates when the forecast for inflation and resource utilization is too low.

That’s why transparency is so important.  It isn’t because a central bank doesn’t know what it should be doing; it’s needed to make sure the central bank in fact does do what it knows it should be doing.

Lars EO Svensson has been accused of being an academic theorist who hide behind their models and research reports. Especially when he, in the midst of financial crisis, would have zero interest, and led a discussion about having a negative interest rate.

I see no contradiction between theory and practice.  Monetary policy should not be controlled by the brain without the ghosts of the facts and analysis.

I guess Svensson’s fellow board members did not benefit from being educated by John Stuart Mills’ father:

I recollect also his indignation at my using the common expression that something was true in theory but required correction in practice; and how, after making me vainly strive to define the word theory, he explained its meaning, and shewed the fallacy of the vulgar form of speech which I had used; leaving me fully persuaded that in being unable to give a correct definition of Theory, and in speaking of it as something which might be at variance with practice, I had shewn unparalleled ignorance. In this he seems, and perhaps was, very unreasonable; but I think, only in being angry in my failure.

Svensson continues:

The last interest rate path should not uncritically be taken as a starting point.  Any interest rate decision should stand on its own and not lean on the previous.

In a post entitled “Losing Face” I showed that central bankers don’t like to admit that their previous policy decision was wrong.

Svensson continues:

Although my colleagues do not seem to want to listen to his argument, he has not tired of sitting on the Executive Board.

Not a minute have I regretted that I took the job.  It was a challenge I could not say no to.  I got the chance to turn 15 years of research in practice.

All six members have an individual responsibility to make independent decisions and justify them.

My job is to do what I do and continue to do so.

Lars Svensson is one of the few policymakers who will come out of this debacle with his reputation intact.  I’m surprised Krugman hasn’t mentioned him in his blog posts.  (They are colleagues at Princeton.)

PS:  Two Swedish posts in one day!  What other American blog provides such complete coverage of Nordic events?  My half Swedish–half Norwegian grandmother would have been proud.


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31 Responses to “Lost in translation”

  1. Gravatar of malavel malavel
    27. September 2010 at 09:12

    Your guess is correct. A better translation would be:

    “Lars EO Svensson has repeatedly asked his colleagues on the Executive(?) to explain why they disagree, he has asked them to point out errors in his reasoning. The answers are lacking.”

  2. Gravatar of Benjamin Cole Benjamin Cole
    27. September 2010 at 10:13

    Excellent post.

    Why are central bankers so timid right now?

    Perhaps part of the answer lies in the nature of all public agencies: They do not have to change.

    If Ford keeps selling Edsels, they go out of business. Therefore, they change. Perhaps reluctantly, but they do or die.

    The Federal Reserve has been in the business of fighting inflation for 30 years. A culture in a large organization is difficult to change, even when market forces are brought to bear. The Fed has built up a legacy, a set of norms, they have glorified the inflation-fighter. Moral virtue and tight money are synonymous. Their jobs are safe, regardless.

    Now someone says we need more inflation? Run the printing presses until the plates melt?

    Add to that bankerly suspicions about Obama and the left-wing agenda. They should finance that?

    Logic is trumped by tradition at every public agency–ask the captains of the Spanish Armada who took on smaller, more mobile Brit ships–and lost badly.

  3. Gravatar of ssumner ssumner
    27. September 2010 at 10:19

    Thanks malavel.

    Benjamin, Yes, big bureaucracies are beholden to tradition.

  4. Gravatar of Lars E.O. Svensson-The Swedish Ben Bernanke | Aktiebloggar.se Lars E.O. Svensson-The Swedish Ben Bernanke | Aktiebloggar.se
    27. September 2010 at 10:24

    [...] E.O. Svensson-The Swedish Ben Bernanke 27 september 2010 av admin Stefan Karlsson's blog Scott Sumner discusses the case of Lars E.O. Svensson, the by far most inflationist member of the board of the Swedish central bank, the Riksbank. [...]

  5. Gravatar of Morgan Warstler Morgan Warstler
    27. September 2010 at 11:01

    You say inflation is currently below target.

    “Not much.”

    You say inflation is expected to remain below target for years to come.

    “If we become HIGHLY PRODUCTIVE, and banish wage stickiness to the waste bin.”

    You say output is below the natural rate.

    “No, we’ve got about the output thats right on, earlier it was too high.”

    You say output is expected to remain below the natural rate for years to come.

    “No see above.”

    Ergo monetary policy should be made more expansionary.

    “Well, you can print some money if V goes below trend, which is like 1.6, and you can also print some money if we get some really awesome deflationary effects from productivity gains.”

  6. Gravatar of Leigh Caldwell Leigh Caldwell
    27. September 2010 at 16:21

    From the title of this post I thought it was going to be a reference to the Rachida Dati story (possibly not safe for work).

  7. Gravatar of scott sumner scott sumner
    27. September 2010 at 17:03

    Morgan, The post isn’t about what you think, it’s about what the Fed thinks. They are the inconsistent ones. You are definitely consistent.

    Leigh, No I hadn’t seen that story, but thanks for passing it along. With Bernanke having so much trouble creating inflation, perhaps he could hire her as a consultant. From her picture, I’d guess she’s eminently qualified.

  8. Gravatar of Edwin A Edwin A
    27. September 2010 at 17:23

    I remember one of your posts praising the British for being ahead of the US when it comes to monetary policy. More specifically, you said you that Ambrose Evans-Pritchard and yourself shared similar views. Judging by this new article of his, you either severely misinterpreted his views or he has completely changed his mind.

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007777/shut-down-the-fed-part-ii/#disqus_thread

    “I apologise to readers around the world for having defended the emergency stimulus policies of the US Federal Reserve, and for arguing like an imbecile naif that the Fed would not succumb to drug addiction, political abuse, and mad intoxicated debauchery, once it began taking its first shots of quantitative easing.

    My pathetic assumption was that Ben Bernanke would deploy further QE only to stave off DEFLATION, not to create INFLATION. If the Federal Open Market Committee cannot see the difference, God help America.”

  9. Gravatar of scott sumner scott sumner
    27. September 2010 at 17:33

    Edwin, You said;

    “Judging by this new article of his, you either severely misinterpreted his views or he has completely changed his mind.”

    You are right that there are two possibilities, but not those two. Here they are:

    1. He suddenly changed his mind, completely rejecting everything he believed a month ago.

    2. His boss encouraged him to change his mind.

    Inquiring minds want to know.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. September 2010 at 17:40

    On a positive note, Taylor has been praising Norway and Sweden’s central banks for their transparency.

  11. Gravatar of Edwin A Edwin A
    27. September 2010 at 18:24

    “1. He suddenly changed his mind, completely rejecting everything he believed a month ago.

    2. His boss encouraged him to change his mind.”

    I’m not too sure about that. I just a checked a few of his earlier articles. Here’s something he wrote just a single week before that post of yours praising him.
    ( http://www.themoneyillusion.com/?p=6881 )

    “Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.
    They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.

    They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.”

    http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006729/time-to-shut-down-the-us-federal-reserve/

    Uh, I think you did overestimate the British. Looks consistent with both his new article and the one where he was pushing the fed to do more. He dislikes deflation, but also inflation.

  12. Gravatar of scott sumner scott sumner
    27. September 2010 at 19:39

    Thanks Lorenzo.

    Edwin, After 20 years of the Fed targeting inflation at 2%, he’s shocked, shocked, to find out they are targeting inflation at 2%? I don’t think so.

    How can someone be screaming that the Fed is pushing us into deflation, and then a few weeks later, AFTER NO CHANGE AT ALL IN FED POLICY, claim the same central bank is debasing the currency? Sorry, I just don’t buy that explanation. That’s not how people act.

  13. Gravatar of mbk mbk
    27. September 2010 at 20:40

    Scott,

    I was actually surprised when you wrote your initial approving post on that Evans-Pritchard article. I’ve seen a lot of gushing hyperbole from him over the past few years with little consistency except for hatred of the Euro, little sympathy for continental Europe in general, and Germany in particular. It swings all over the place and doom is always imminent. In tone he makes Roubini sound measured and mainstream by comparison. So if I come across one of his articles I discount 80% by default.

  14. Gravatar of Edwin A Edwin A
    27. September 2010 at 20:46

    I think Ambrose has been consistent in having the same set of poorly though out inconsistent views, if that makes any sense.

    Also, I mistakenly said it was one week before. He actually wrote the first “Shut Down the Fed” article in June 29, which is two months before he wrote “Dangerous Defeatism is taking hold among America’s economic elites.” I doubt his boss nudged him to write that new article because if anything, “Dangerous Defeatism” seems to be out of the norm for him. Maybe you didn’t misinterpret that article, but I think you gave him to much credit for thinking you had similar views. He seems to have that standard Austrian view that the easy monetary policy caused this economic mess.

  15. Gravatar of Morgan Warstler Morgan Warstler
    27. September 2010 at 20:57

    Scott,

    I REALLY think you need to come to terms with how EASY it is to hit 2% inflation.

    You seem to assume that there’s lots of QE in there for you, there isn’t….

    As a thought exercise, let’s fiat that the Fed finds it is able to hit 2% inflation, simply by announcing it will take action to get there:

    1. Unemployment stays above 9%.
    2. NGDP hits trend as forecast by 2000-2003, the right slope to target.

    Suddenly, you are back on the opposite side of Fed policy, or are you?

    Please go on record here.

  16. Gravatar of StatsGuy StatsGuy
    28. September 2010 at 04:56

    Congratulations – you have an important convert. Sort of.

    http://www.pimco.com/Pages/StanDruckenmillerisLeaving.aspx?WT.svl=hero_IO

    “What the U.S. economy needs to do in order to return to the “old” normal is to recreate nominal GDP growth of 5%, the majority of which likely comes from inflation.”

    It’s hard to tell whether gross is advocating this or not – at least he’s aware of the looming demographic problems + high expectations of retirees who did not bother to fund themselves.

  17. Gravatar of StatsGuy StatsGuy
    28. September 2010 at 04:57

    Also, this flying around – you will like

    http://www.theglobeandmail.com/report-on-business/economy/world-is-in-currency-war-brazil/article1728151/

  18. Gravatar of scott sumner scott sumner
    28. September 2010 at 05:16

    mbk, Yes, I understand that it was a tabloid-style article, I wasn’t praising it in the way I’d praise an academic article. I was noting that unlike the American press, he seemed to understand that tight money was the problem in the US.

    Edwin, Well obviously you are right about the inconsistency. He did do several articles calling for monetary stimulus in the US, but beyond that I can’t say any more, as I rarely read that paper.

    Morgan, You said;

    “Please go on record here.”

    If the Fed even comes close to doing all those things, I’ll stand up and cheer. That’s actually much more than I’d want them to do. I’d want a bit more than 2% inflation, but to get back to the old NGDP trend line would be a pipe dream, and far too expansionary at this point.

    Statsguy, Well, we’ve certainly entered a new world when investors are skeptical of whether Brazil is able to debase its currency!

    It’s good to see someone advocate 5% NGDP growth, for whatever reason.

  19. Gravatar of Morgan Warstler Morgan Warstler
    28. September 2010 at 07:30

    Scott,

    “If the Fed even comes close to doing all those things”

    My point was, they might not actually have to do much, they are targeting 2%, not “a bit more.”

    If 2% happens and we still have 9% unemployment (which is EASY to imagine), and the NGDP is on target from 2000-2003, then what?

    GDP 2000: $9.76
    GDP 2003: $10.9

    Using that slope which is far more historically accurate, we don’t get much GDP growth from another year or so, right?

    We’re ABOVE trend, and that means we have glide before we turn the motor back on.

    So again, why not take good advantage of this time?

    Get a conservative fiscal house in order, reward the guys with cash, move those hard assets around, do our best to chew up sticky wages… because at the end of 2011, the Fed has hit it’s target and we’re right where we should be on GDP.

  20. Gravatar of D. Watson D. Watson
    28. September 2010 at 11:00

    Morgan – I seem to recall a minor recession happening in the middle of the years you picked. Is that the right trend line?

    Scott – Your last, probably rhetorical, question has an answer in Tino, but perhaps given he is Kurdish-Swedish talking about America and Sweden, and that he does not share your productivity, he doesn’t count….

  21. Gravatar of marcus nunes marcus nunes
    28. September 2010 at 18:14

    The British MPC has its Hoening in the guise of Andrew Sentance (“sentanced” to death), but the FOMC does not have a Posen (though at the very end he says to maintain fiscal policy “ready to blast”)
    http://www.ft.com/cms/s/0/35ff6d06-cb00-11df-bf36-00144feab49a.html

  22. Gravatar of Richard W Richard W
    28. September 2010 at 19:57

    I was also surprised when Prof Sumner cited Ambrose Evans-Pritchard. Some times he writes good articles and others are just so kooky melodramatic stories full of hyperbole. He is targeting an audience especially online who would lap it all up. He has form as an eccentric. When he was the Washington bureau chief in the 1990s he bought into all the Clinton conspiracies and even wrote a book about them. He was not just reporting the conspiracies he believed them. The Telegraph seems to get a lot of online American traffic and I can see his volte-face on monetary policy turning into a general anti-Fed theme.

  23. Gravatar of Morgan Warstler Morgan Warstler
    28. September 2010 at 22:33

    Yes D Watson, it is the right the right trend… it starts at tail of Internet crash and before the Fed got cooking with the housing crud.

    It is the PERFECT trend line to follow. Anything else is used to justify screwing savers…. we don’t need to grow any faster.

  24. Gravatar of Mattias Mattias
    29. September 2010 at 04:51

    I think it’s quite clear why the rest of board doesn’t share Svensson’s recommendation: They are worried about the high house prices and rising debt levels they lead to. In Sweden we have had a long “fight” between bulls and bears in the housing market, especially in the Stockholm area.

    The bears say it’s a bubble (and has said so for more than a decade now) and point to USA, Spain and other nations. The bulls point out the many differences between Sweden’s and USA’s housing markets. We have no “jingle mail”, we have had low investments in new housing for a long time etc.

    Svensson, I think, just points out that since we don’t know if there is a bubble and if it’s the central bank’s job to stop it from inflating further, they shouldn’t let that influence their decisions. The rest of the board seems to disagree. I think they are more afraid of the criticism they will get if the housing bubble inflates further and the pops, than the remarkably litte criticism they get today for not doing more for the economy.

    Worth noting is that the housing market took a real dive in late 2008 but has since then come back to the old highs and are now moving more or less sideways.

  25. Gravatar of ssumner ssumner
    29. September 2010 at 11:47

    Morgan, You will start your 3 year trend in one of the great boom years in all of history, and end up in a depressed economy in 2003? And only three years? That’s not very useful.

    D Watson, Thanks, I didn’t know about him.

    Marcus, Yes, Posen seems more gung ho for stimulus than anyone at the Fed.

    Richard, Thanks, I didn’t know anything about him until recently. He is certainly wackier than I first thought.

    Mattias, You may be right, but that’s not good reasoning. If the banking system in Sweden is taking on excessive risk, they should raise capital requirements, or better yet require larger downpayments on mortgages. Monetary policy is not the right way to address a housing bubble.

  26. Gravatar of Morgan Warstler Morgan Warstler
    29. September 2010 at 15:29

    Scott, 2000 was chewed through niceley by the time it ended, and 2003 things were headed up.

    ALL EXTRA GROWTH past that trend came from Easy Money, we’ve got to accept the discount, otherwise our goals are too lofty… and will lead to stupid NGDP for the long term.

    Our goal is run POST NET BUBBLE AND PRE HOUSING.

    My trend beats your trend – going further back as well.

  27. Gravatar of malavel malavel
    30. September 2010 at 02:11

    Scott, Sweden introduced 15% required down payment, starting tomorrow.

  28. Gravatar of ssumner ssumner
    30. September 2010 at 05:49

    Morgan, Check out the unemployment rates in 2000 and 2003, you’ll see how wrong you are.

    malavel. Wow! I didn’t know this blog was so influential–that’s quick results.

    Seriously, that’s good, but 20% would be even better. Is this a firm requirement, i.e. will all mortgages have to have at least 15% down? If so, Sweden is far ahead of America.

    Also, do have a link in English?

  29. Gravatar of malavel malavel
    30. September 2010 at 11:33

    All new mortgages are capped at 85%.

    I couldn’t find any good links in English. It’s mentioned in this piece (second last paragraph):

    http://news.scotsman.com/news/Analysis-Economy-is-set-to.6536404.jp

    Here’s the press release (in English):

    http://www.fi.se/Folder-EN/Startpage/Press/Press-releases/Listan/Mortgages-capped-at-85-percent-as-of-1-October

    A google translate: http://translate.google.com/translate?hl=sv&ie=UTF-8&sl=sv&tl=en&u=http://www.dn.se/ekonomi/bolanetak-pa-85-procent-i-host-1.1135216&prev=_t

  30. Gravatar of malavel malavel
    30. September 2010 at 11:47

    [trying to post comment again, didn't work first time]

    All new mortgages are capped at 85%.

    I couldn’t find any good links in English. It’s mentioned in this piece (second last paragraph):

    http://news.scotsman.com/news/Analysis-Economy-is-set-to.6536404.jp

    Here’s the press release (in English):

    http://www.fi.se/Folder-EN/Startpage/Press/Press-releases/Listan/Mortgages-capped-at-85-percent-as-of-1-October

    A google translate: http://translate.google.com/translate?hl=sv&ie=UTF-8&sl=sv&tl=en&u=http://www.dn.se/ekonomi/bolanetak-pa-85-procent-i-host-1.1135216&prev=_t

  31. Gravatar of ssumner ssumner
    30. September 2010 at 18:39

    Thanks Malavel, I’m planning a post on that.

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