Bullard on the Fed’s dual failure
Here’s James Bullard, President of the St. Louis Fed.
The Fed’s target is 2 per cent, so critics can say the Fed has not met this part of the mandate. When unemployment is above the natural rate, they say, inflation should be above the inflation target, not below.
I disagree. So does the economic literature. Here is my account of where we are: the US economy was hit by a large shock in 2008 and 2009. This lowered output and employment far below historical trend levels while reducing inflation substantially below 2 per cent. The question is: how do we expect these variables to return to their long-run or targeted values under monetary policy? That is, should the adjustment path be relatively smooth, or should we expect some overshooting?
So the U.S. was hit by a “large shock.” And what kind of shock was this? Bullard doesn’t say, but surely we can infer it was a demand shock. After all, both prices and employment fell in late 2008 and early 2009, a supply shock would be inflationary.
Now the flaw in his argument becomes clear; Bullard is talking about demand shocks as if they are some sort of external shock, which has nothing to do with Fed policy. In fact the Fed’s job, indeed its only important job, is precisely to control AD.
I’m sure that some will argue that the Fed isn’t able to offset demand shocks in the sort run. That’s not true, as almost any severe drop in current NGDP will be associated with a large fall in future expected NGDP; one, two, and three years out into the future. And of course that’s exactly what happened in late 2008, expectations of future NGDP plummeted, causing asset prices and current NGDP to plunge. The Fed most certainly can control NGDP expectations one, two, and three years out. Indeed when I presented a futures targeting paper at the New York Fed in the late 1980s, they basically said “Thanks, but not thanks, we can control inflation expectations just fine, without any help from the futures markets.” And if the Fed had prevented NGDP expectations one, two, and three years out from plunging sharply, then current NGDP growth in late 2008 would have fallen much less sharply.
It’s now four years after the disastrous Fed policy of 2008, and the Fed is finally waking up to the fact that there’s a serious AD problem. Obviously if there is a serious AD problem today, then ipso facto the need for more AD was far greater back in late 2008 and early 2009. Make no mistake about it, the recent QE3 announcement was the Fed admitting that “we were wrong in late 2008 and early 2009, and the market monetarists were right.” But Bullard still doesn’t recognize this reality. He talks as if the US was hit by some sort of mysterious demand shock in late 2008, which was beyond the Fed’s control. And he defends their refusal to quickly boost inflation and employment up to Fed targets by arguing that these problems need to sort themselves out naturally, at a measured pace:
Evidence, for example a 2007 paper by Frank Smets and Raf Wouters, suggests that it is reasonable to believe that output, employment and inflation will return to their long-run or targeted values slowly and steadily. In the jargon, we refer to this type of convergence as “monotonic”: a shock knocks the variables off their long-run values but they gradually return, without overshooting on the other side. Wild dynamics would be disconcerting.
I presume by “wild dynamics” he means a rapid fall in the unemployment rate with a modest and temporary overshoot of inflation.
Given this type of adjustment, it is clear the Fed could be “missing on both sides of its mandate” during the entire time it takes the economy to return to normal, even when the monetary policy is sound. In fact, missing on both sides of the mandate is exactly what one would expect under an appropriate monetary policy. Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.
To argue against monotonic convergence now would imply that when unemployment is above the natural rate, monetary policy should aim for inflation above the Fed’s 2 per cent target. On the face of it, this does not make sense: the US has experienced periods when both inflation and unemployment have been above desirable levels. In the 1970s this phenomenon was labelled stagflation. Monetary policy has been regarded as poor during that period.
I’m not even going to respond to this argument. If you can’t see the flaw, then you shouldn’t be reading this blog.
OK, OK, I’ll channel Milton Friedman:
To argue for monotonic convergence now would imply that when unemployment is above the natural rate, monetary policy should aim for inflation below the Fed’s 2 per cent target. On the face of it, this does not make sense: the US has experienced periods when both inflation and employment have been below desirable levels. In the 1930s this phenomenon was labelled “The Great Depression.” Monetary policy has been regarded as poor during that period.
I can’t even imagine what Ben Bernanke thinks when he listened to his colleagues’ thought process as they make hugely consequential decisions that determine the fate of the world economy.
Lars Svensson was right; we need professors:
Monetary policy is a complicated area. Therefore, I think it is important that those who sit on the Executive Board has a good knowledge of macroeconomics, monetary policy and even financial stability – it may well be more professors of the Executive Board.
Bullard continues:
The financial crisis and the housing collapse probably did some permanent damage. The US growth rate is probably at about the potential growth rate given the situation, not far below as critics have suggested.
So now the problem is supply-side? What happened to the great demand shock of 2008-09? Did we recover from that? If so, when?
If Bullard reads this I’m sure he’ll think I’m an arrogant, elitist jerk. And he’d be right. I believe that only highly skilled monetary economists (people like Bernanke, Woodford, Svensson, McCallum, Taylor, Mishkin, Krugman, Mankiw, etc,) should serve on the Fed board. I also think the 7 member board should vote on monetary policy; the regional Fed banks play no useful role. Bullard has some great personal qualities, such as being unusually open-minded for a policymaker. He’s not an arrogant jerk like me; he’s willing to have conversations with bloggers. So put him on the Supreme Court. After all, if we have non-monetary economists determining monetary policy, why can’t we have non-lawyers evaluating legal matters? I’m serious.
HT: Nicolas Goetzmann
PS. Bill Woolsey has a good post on the path of nominal final sales, which came up in my recent exchange with George Selgin. There’s also a post that clearly explains how Ron Paul and the modern gold bugs differ from the Austrian tradition.
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20. September 2012 at 07:52
Scott, Your post contains a revealing non-sequitur. Although Bullard never has held a formal academic post, was employed as a research economist at the St. Louis Fed prior to promotion to that Bank’s presidency. He also holds or has held editorial positions at journals. So the Fed’s problem, per Svensson, will not be solved by having MORE “professors” in policy making positions. Instead, one might conclude that many of the Fed’s more (insert modifier here) positions are the product of regional bank presidents with academic backgrounds who are attached to particular, if not peculiar, theoretical models. Among other conflicts already in the job, this means a Bank president must balance his standing in the academic community against what might be sensible practical decisions in the real world; the conflict might be more acute if the academic in question has little or not attachment to data, institutions, history or other considerations beyond what works “in my model.” None of this, of course, says that an academic background has no place in policymaking. Instead, it simply points out that when the worst inclinations of modern macro infiltrate the policymaking process, there is potential for great harm to be done.
20. September 2012 at 07:59
“And he defends their refusal to quickly boost inflation and employment up to Fed targets by arguing that these problems need to sort themselves out naturally…Furthermore, the literature suggests that the adjustment times are quite long, possibly many years.”
If the problems need to sort themselves out naturally and we need to wait to wait for years until this has happened, then what do we need a central bank and monetary policy for? The purpose of monetary policy when the economy has been hit by a demand shock is to cushion the severity of the shock and then restore the economy to full employment more quickly than it would return if the economy were left to its own devices.
Unless the crisis is so severe that even our moneyed elite risk losing their wealth, our moneyed elite can afford to wait the long time needed for the economy to return to full employment on its own. People like Bullard are not going to suffer unemployment, or underemployment, and lose their homes and health insurance, but ordingary working people face these severe economic costs. So Bullard is advocating an elitist monetary policy conducted for the bendfit of the moneyed elite and not for the commoners. But even from that perspective, the output and income lost during the time the economy is below potential output is lost forever and can never be recovered, and therefore is a gross inefficiency. And the negative hysterisis effects of the economy being below potential output for an extended period of time does long-term damage to the economy.
“If you can’t see the flaw, then you shouldn’t be reading this blog.” Since Bullard cannot see the flaw, he should not be making monetary policy.
20. September 2012 at 08:03
“it simply points out that when the worst inclinations of modern macro infiltrate the policymaking process, there is potential for great harm to be done”
This is certainly true with Plosser, who has impeccable academic credentials but is totally clueless about how the economy behaves during a recession.
20. September 2012 at 08:34
Maybe I don’t understand these terms correctly, but it seems to me that the events of 2008 were not caused primarily by a “demand shock”. The collapse in demand was a consequence of the main precipitating events – a collapse in asset values, mainly financial wealth – not the cause of them.
It wasn’t a “supply shock” either. This is the problem of models that don’t contain a financial sector: everything gets rammed into the aggregate supply or aggregate demand curves.
20. September 2012 at 08:49
Kind of an unrelated question, but I think one that pertains to the liquidity trap problem. If the Fed purchases a bunch of T-bills or T-bonds, some howl that they are “monetizing the debt.” Yet the treasury must still service that debt, right? If the Fed bought the entire outstanding stock of US gov’t debt with freshly printed cash, then the treasury must simply pay their debt payments to the Fed instead of the public holders of the debt (although I suppose that since the Fed is arguably part of the US gov’t, they do not.) I’m pretty sure I’m wrong on this one, but I don’t know why and am hoping somebody can explain. How are Fed debt purchases “monetizing the debt?”
20. September 2012 at 09:17
“Yet the treasury must still service that debt, right?”
But most of the Fed’s profits on its portfolio holdings are returned to the Treasury. The Treasury takes the money out of one pocket to give to the Fed. Then the Fed turns around and puts most of the money back into the Treasury’s other pocket.
20. September 2012 at 09:30
Bullard’s basic fallacy is quite curious – he talks of growth rates where he should talk of levels, and levels where he should talk of growth. So it’s completely irrelevant if the rate of increase in prices “overshoots” during the recovery; what matters for macrostability is that the steady price-level path (or rather spending-level path) is not overshot. The US growth rate however is a problem, which would be apparent to him if he focussed on the fact that output is far below the level it should be at. If he were looking at levels he would see that the Fed can only be failing when it is below the trend level path of either relevant nominal variable, and there is no excuse for setting policy such that they expect to continue to undershoot. On the other hand his analogy between 70’s stagflation and overshooting inflation during recovery is stupid, as in the former the levels of the variables were too high and rising, while in the latter they would be too high and falling, i.e. converging to their correct values. In our situation loss of employment was associated with disinflation, or tighter money, and it’s reasonable to assume we could reverse it with looser money. In that case the unemployment happened despite loose money, and looser money (raising inflation) could only worsen things. In the case of supply side unemployment, we see unemployment rise as prices (not really inflation) rise to accommodate, with no further inflation. And this is good. So we want to meet the higher unemployment with higher prices to accommodate, not to reduce it. But in the other case we want to substitute higher prices (and higher, but then falling, inflation) for higher employment. Completely different.
Man, I’m confused myself now. This is why you should always use AS/AD curves even when thinking about this stuff. Or only talk about NGDP.
20. September 2012 at 09:31
But the return will typically be small relative to the principle, no? For example, right now T-bills are issued essentially at par with almost no discount. If the Fed holds a T-bill that it bought from the public, then at maturity the Treasury must still come up with $100 to give to the Fed, either through taxes or more borrowing. Virtually none of that cash would get relayed back to the Treasury. The only way I could see it working would be if the Fed simply tore up the T-bills. That would be monetization.
20. September 2012 at 09:32
Regarding the “large shock” which Bullard refers to; has any voting member of the Fed acknowledged that the timing of the intensification of the recession in 2008 occurred prior to the financial crisis and well after the largest negative contribution of residential investment to GDP? If they don’t acknowledge the timing of the shock they don’t feel the need to explain it in terms other than housingbust/financial crisis.
Similarly, among Fed voters, has there been any public acknowledgment of the critique Hetzel made in his book? Why is Woodford’s paper influential, but Hetzel’s book not?
20. September 2012 at 09:43
Dan, interest gets reimbursed to the Treasury. Fed purchases of T-bills make the Federal debt slightly more interest-free.
I have a theory, that this does pertain to the liquidity trap. I think the liquidity trap is less-likely to bind over longer periods where the Fed has to return interest revenues to the govt. as this creates a “wealth effect” impetus to spending…
20. September 2012 at 09:45
Dan, I think Geithner would be quite happy if Bernanke bought the entire outstanding US Debt, don’t you?
20. September 2012 at 09:55
mb, I know that, but he’s not an elite monetary economist. And there are people on the FOMC who aren’t monetary economists–that’s where that comment was primarily directed.
Brendan, you asked:
“Why is Woodford’s paper influential, but Hetzel’s book not?”
Hetzel is going against the conventional wisdom, and Woodford uses more “impressive” math.
I agree with your timing comments, and they are a good response to Dan Kervick’s comment.
Saturos–yes, LEVELS.
20. September 2012 at 09:57
Or go “shopping” for the best central bankers:
http://www.theatlantic.com/business/archive/2012/04/how-much-is-a-good-central-banker-worth/256089/
20. September 2012 at 10:03
Would he actually like that? I’m not trying to be snarky, I’m just trying to follow through with a thought experiment. Bernanke buys the entire outstanding debt and keeps it on the Fed’s balance sheet. Now Geithner doesn’t have to make interest payments anymore (or rather they get reimbursed back to the Treasury), which I guess is nice, but the interest on newly issued debt is negligible right now anyway. The Treasury is still on the hook for the entire principle amount. In no way does that relieve their obligation to come up with $16 trn or so, so in what sense is the debt monetized? It’s not like the public wasn’t willing to buy the debt at a good price. The public can’t get enough of it right now.
20. September 2012 at 10:16
Dan, right now Cristina Kirchner is sending armed thugs to her central bankers’ homes (or some such thing) so that she can do just that.
Scott, if the Fed does what a consensus of economists think it should, and Woodford is the leading monetary economist, and he has long favored level-targeting and forward-looking monetary policy – does this prove that most economists haven’t actually read Interest and Prices? Including most Fed members?
20. September 2012 at 10:32
This is a great post.
Saying that increased inflation during periods of increased unemployment “does not make sense” would not even get an Econ 101 student a passing grade, so why isn’t this guy being laughed out of the room by more economists and bloggers? It’s amazing that others talk about tiny proximate causes for the recession (how much home prices changed last quarter, etc.) instead of the enormous problems staring everybody in the face.
20. September 2012 at 10:38
Saturos,
While I don’t know all the exact details, I have to imagine that her ultimate intention is for the central bank to forgive or eliminate their Argentinian gov’t debt holdings at some point. This is a fundamentally different scenario from what I’ve described, in which the Fed does not tear up the T-bills and T-bonds that it buys, but holds onto them.
20. September 2012 at 10:48
I don’t think we necessarily need professors, as long as we have people who listen to professors. Or staffs made up of professors.
Beyond that, I can think of at least two high school students who would be preferable to several current members.
20. September 2012 at 10:50
My first reaction was that Svensson has an exaggerated faith in professors””in academics. But on second thought he did want to restrict monetary policymaking to those who have “a *good knowledge* of macroeconomics [and] monetary policy” (my emphasis), and I think that means””a good knowledge *as judged by Lars Svensson*. It’s a good bet that would exclude the vast majority of economics professors.
In a similar vein, Scott wants to restrict monetary policymaking to “highly skilled monetary economists”””highly skilled *as judged by Scott Sumner*. I suspect that at most a few dozen professors would qualify.
Both proposals are quite attractive; too bad they are just pipe dreams.
20. September 2012 at 11:07
Kocherlakota seems to be changing his tune;
http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4952&ref=none
20. September 2012 at 11:25
Yes, Lars has a post. All this is really quite incredible. Reverse body-snatchers?
20. September 2012 at 11:35
Patrick, what a great find. Nevertheless, the whole time I was reading the transcript, all I could think was “These ideas would be so much more easily and clearly expressed if only there were references here to NGDP.”
Instead Kocherlakota has to clumsily insist that monetary easing will work as envisioned by reducing unemployment/boosting output and spending without affecting inflation. Yes, that’s good, but an even better way to say it would be: monetary policy will work by generating stable growth in nominal incomes.
Considering his position in the past, though, this is hopeful. Perhaps in another couple years folks like him will finally warm to the idea of the importance of NGDP as a target variable.
Like hopefully most sane people, I am uneasy at the idea of the fate of the economy resting in the hands of central bankers. But given the impossibility of a commodity standard and the reality that in a world requiring government, one of government’s roles will virtually always be determining what constitutes legal tender, we have no choice but to assign some government responsibility for determining the growth of nominal GDP.
20. September 2012 at 11:49
The regional presidents do have a role, and a role that was clearly articulated when the FOMC was formed they are supposed to provide intelligence from the ground on macroeconomic conditions to identify supply shocks and demand shocks before they are apparent in the official statistics and are supposed to protect that monetary policy is being set for all regions of the country not just the most power region bet able to tune policy optimally for it (eg Germany in the euro zone).
The issue is with the discretionary framework that congress has created that allows th FOMC to determine their own policy rules… Actually it is worse than that. The problem is there are bad ideas out there which people learned and are still learning. So long as you have an academic factory committed to supporting fiscal policy, you’ll get bad answers on the FOMC.
20. September 2012 at 11:52
Scott and Brendan, didn’t the collapse in financial asset values begin much earlier – in 2007? The financial crisis was already underway before the intensification in September 2008. The financial system had evolved in a natural, Minsky-like fashion into an unsustainable condition of Ponzi lending; and it unraveled. No “shocks” are needed to explain this.
20. September 2012 at 11:55
Dan Kervick is right. Credit cycle depressions are not caused by either supply or demand shocks. The belief that they are is due to a prevalence of irrational philosophy in economic science, which treats concepts, all concepts, as freely floating ones divorced from a common objective ground. Thus, because we observe output fall and demand fall during depressions, we see a competition between supply shock and demand shock political strategist positions. There is no connecting of the two to a logically (or temporally) prior cause.
There is this sloppy explanation by market monetarists that since “most” of the unemployment occurred during the fall in NGDP, rather than the prior financial and housing crisis, that the depression was caused by insufficient money printing. It is on this rather shallow ground that we are told that the substantial amount of unemployment was caused by the fall in NGDP.
Yet this explanation is flawed, because it doesn’t answer why NGDP fell in the first place. No, it is not a valid argument to say the cause was insufficient Fed printing, because the real question here is why did the Fed have to accelerate its money printing in order to prevent NGDP from falling. In other words, why did the Fed find itself in a position where if it didn’t accelerate it’s inflation, that NGDP would have fallen?
In response to this question, market monetarists fall back on “well, the demand for money rose suddenly, so the Fed was obligated to counter-act that fall by printing whatever quantity of money is necessary. Yet this response doesn’t answer why the demand for money would suddenly rise during 2008-2009, despite the fact that the Fed was not out there burning people’s paper notes, or blowing up their computers that stored demand deposit information.
MM is such a weakly grounded ideology. There are so many unanswered questions that it seems to purposefully evade.
20. September 2012 at 12:31
Non-lawyers should definitely sit on the Supreme Court. Lawyers have particular views and values that occasionally clash with common sense. Plus many lawyers have little useful life experience beyond hanging out with each other; they arrive at law school by default because they didn’t know what else to do except go to yet another school and their egos translated the many “you like to argue, you’d be a good lawyer” into a compliment. (It’d be great if the Democrats once again nominate a non-lawyer to presidency in my life-time (not looking for a political argument, just trashing lawyers)).
I imagine that expert-friction group think stuff happens in all fields.
20. September 2012 at 12:56
Scott… have a look at Kocherlakota’s “liftoff plan” – it is an incredible shift in the think from Kocherlakota…
http://marketmonetarist.com/2012/09/20/kocherlakotas-revelation/
20. September 2012 at 14:01
I was gonna post this link, before I was beat to it. Do we have to actually spell out Kocherlakota, or does it have an easy abbreviation?
http://ftalphaville.ft.com/blog/2012/09/20/1171181/the-kocherlakota-rule/
A 5.5/2.25 rule I guess, vs. Evans’ 7/3 rule. Specifically for Fed Funds rates, either would be a big improvement on the current “forward guidance” of having rates of zero through mid-2015. The forward guidance idea is silly and there’s no way the Fed wouldn’t raise rates if we had greater than 3% inflation, no matter the forward guidance.
The big distinction, however, is these plans say “we will leave rates at zero until…” while Market Monetarits say the Fed should say “we will keep doing more and more unorthodox measures until NGDP expectations increase.” A palatable version of NGDPLT for current Fed members would be guidance that “we will leave rates at zero until NGDP reaches this trendline.” Then be extremely specific on the trendline. Unlike Kocherlakota’s rule or even Evans’ rule, this allows for higher inflation in case we have a supply-side shock, when a higher inflation rate would be necessary to maintain full employment.
20. September 2012 at 14:09
When the FOMC was formed, rural Senators insisted on the role for the regional Presidents (and the rule for no two Fed Governors from the same region, a rule often ignored) precisely because they thought that otherwise the FOMC would be dominated by Eastern bankers who would favor deflation and too hard money. While it was to respond to local conditions, everyone understood that the rural regions always wanted looser money than the New Yorkers.
20. September 2012 at 14:15
If they had the choice, would MMs choose 1% unemployment, no offensive war inflation financed spending, and volatile NGDP, or 0% unemployment, offensive war inflation financed spending, and stable NGDP?
20. September 2012 at 14:17
In other words, fluctuating NGDP or deaths?
20. September 2012 at 15:01
Consistent with my theory that when the Fed inflates to buy X, the yield on X tends to decrease, and that we are no longer in a pedagogical model world where inflation adds to nominal yields, witness yet another empirical event: After the Fed announced QEternity, to buy 30Y MBS at a rate of $40 billion a month, guess what happened? Yup, the spread between 30Y current coupon mortgages and 10Y Treasuries has fallen…to less than 20 bps, a record low.
Once again, the market is front running the Fed, and proving market monetarism wrong for the 45,568th time.
20. September 2012 at 15:04
Props need to be given to Larry White’s new 5 min video on ending the Fed: http://mercatus.org/video/should-we-end-fed
This is best intro to the issue for laymen. And also just a fantastic template on how to communicate a complicated idea in a short time.
20. September 2012 at 15:04
Props need to be given to Larry White’s new 5 min video on ending the Fed: http://mercatus.org/video/should-we-end-fed
This is best intro to the issue for laymen. And also just a fantastic template on how to communicate a complicated idea in a short time.
20. September 2012 at 15:36
John S
Excerpt….” Faced with the kind of shock we’ve just experienced, the real price of gold would “want” to rise. But under a gold standard, the nominal price of gold would be fixed, so the only way that could happen would be through a fall in the general price level: deflation.
So if we’d had a gold standard operating in this crisis, there would have been powerful deflationary forces at work; not exactly what the doctor ordered.
Now, the gold bugs will no doubt reply that under a gold standard big bubbles couldn’t happen, and therefore there wouldn’t be major financial crises. And it’s true: under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait.
The truth is that returning to gold is an almost comically (and cosmically) bad idea.”
http://krugman.blogs.nytimes.com/2012/08/26/golden-instability/
20. September 2012 at 15:42
Chris Whalen, from Institutional Risk Analytics, calls QE3 “socialist Keynesianism” in this piece:
http://dailybail.com/home/chris-whalen-on-qe3-the-core-problem-is-fraud.html#comments
I disputed that, and provided a link to this blog. Any thoughts?
20. September 2012 at 15:52
Bullard may be a monetary economist, but alas, he’s not a very good monetary economist.
I remember seeing his top-cited paper, Bullard and Mitra (2002), in class for the first time. They did an analysis of adaptive learning when inflation is governed by the New Keynesian Phillips curve, apparently failing to recognize that the New Keynesian Phillips curve is derived under the assumption of rational expectations and does not take anywhere close to such a simple form when a different expectation-formation rule is used; so that an analysis that assumes the NKPC with adaptive expectations is fundamentally incoherent.
It took me 10 seconds to come up with this objection when I saw the paper in class. I have no idea how Bullard and Mitra managed to write the paper without ever thinking about this problem. I can only conclude that they had no idea what was “under the hood” of the New Keynesian model, or what the NKPC really meant. (Eventually Bruce Preston nailed them on it, and I think Woodford mentions it in his book as well.) I hate to be such an elitist jerk, but this experience does not exactly give me confidence in Bullard’s economic understanding or judgment.
His piece today, of course, is illogical at an even more fundamental level. Let’s put aside the well-known problems with Smets and Wouters — why the hell does he think the optimal policy now should produce trajectories that resemble the impulse responses in that paper? I just don’t see the reasoning at all. Surely he has read all the models in the New Keynesian literature that talk about optimal policy in a liquidity trap and show that this will generally involve overshooting, right?
Then again, Plosser is a much better-cited economist, and he is even worse than Bullard on these issues. But that is probably to be expected. Plosser is known for stuff like Long and Plosser (1982) and King, Plosser, and Rebelo (1988); some of the original papers in the real business cycle literature. Anyone who thinks these papers have anything to do with actual business cycles in the US should never be allowed anywhere close to a policymaking body.
20. September 2012 at 15:58
This is NOT true in a system coordinating relative prices and supplies across competing production processes of more or less length, mixed in with rivalry between consumption and production choices:
“Bullard doesn’t say, but surely we can infer it was a demand shock. After all, both prices and employment fell in late 2008 and early 2009, a supply shock would be inflationary.”
The bust is CAUSED by price and suppy shocks as the system reveals inadequate supplies and rising input prices — ie unsustainable scarcities and high prices — in the longer production processes. A supply shock.
In _relative_ price system with shifting relative prices and shifting demands and supplies and prices between production processes of differing length, some parts will have supply shocks and others will have demand shocks, and many of these shocks will crash profits, net worth, prices, and the value and liquidity of money substitutes, etc.
20. September 2012 at 16:30
Silly Greg, you’re not thinking in terms of crude aggregates that gloss over such nuances. You must not be finding much happiness and fulfillment talking about impure, boring, micro-economic stuff.
Everyone knows the magic happens when you can grasp the entire economy through a single, indivisible concept. Such a concept is not tarnished by heterogeneity, complexity, or diversity. It is holy. Worship it. Love it. Desire to control it. Understand it to be the causa sui. Target it. Level targeting.
20. September 2012 at 17:02
From Tom Brown’s link…”QE3, Deflation And The Fed’s Money Illusion”
By Whalen
http://dailybail.com/home/chris-whalen-on-qe3-the-core-problem-is-fraud.html#comments
Umm… No.
Unless you are talking about one year…1937. Was this disingenuous ?
Gee…Chris Whalen really really does not like Keynesians. And he does not seem to understand them. All through his post he mischaracterized Keynesians as thinking that Monetary policy is all that we need to do. When the truth is that Keynesians think that monetary policy is only one part of a solution that has to include Fiscal stim.
It is hard to belive he is this ignorant. What he is actually describing is Market Monetarists….but he not being fair to them either. He acts as if the M&Ms( who he calls Keynesians) have been getting their way…when the truth is they think even QE3 is far from ideal and was way too late.
I Do think Chris Whalen brings up some good points on the need address fraud, bad assets, and restructuring and breaking up banks…But I don’t know why he acts like Keynesians are against these things.
20. September 2012 at 17:03
ssumner:
Make no mistake about it, the recent QE3 announcement was the Fed admitting that “we were wrong in late 2008 and early 2009, and the market monetarists were right.”
This is wishful thinking. I guess it’s understandable, considering the standard of success of market monetarism is the attention and approval of Fed officials, and so any movement towards more inflation, despite the fact that we have had 4-5% NGDP growth since 2010, will be interpreted by MMs as a dog whistle to them. I guess the payoff to MM is so low that the Fed repeating what they did in the 1970s of high price inflation, will be viewed as admitting MM is right, you know like how they admitted MM was right in the 1970s what with all the MMs writing papers and whatnot advocating for NGDP targeting.
The Fed does not follow the consensus of economists. It’s the reverse. Economists follow the consensus of the Fed. The Fed finances economists who advocate what the Fed wants, and then those economists gain resources and prominance, then they teach new economists, and so on, until the consensus of the profession is in line with the Fed consensus. Sumner has this rather quaint view of his own profession that his ilk have control over the Fed, when in reality it is the Fed that has control over his ilk. Maybe he wants to feel empowered?
A far more plausible explanation for QEternity is political in nature. It is likely the upcoming fiscal crisis, and a clear conviction on the part of politicians not to deal with the debt issue, for both funded and unfunded liabilities. Sumner has not yet written a post on the literal mathematical impossibility of the Treasury to finance Medicare and Medicaid, Social Security, and its debt, without MASSIVE inflation. If the Fed does not cover the Treasury, then the Treasury will be forced to default on its liabilities, or, dramatically cut back on its promises, which presents a huge risk to the Fed, because with such a default, there will be a huge political backlash, and it could threaten the Fed’s “independence” if the people vote in a “radical” who is anti-Fed.
Bernanke has been talking for years, pleading to Congress to get its house in order. But they are not listening. Politicians don’t give a rodent’s posterior until it is too late.
Make no mistake about QEternity people, and don’t let Sumner mislead you. This is about the solvency of the US government itself. It has NOTHING to do with recognizing some esoteric fringe school of thought with arrogant bloggers at the helm.
War, debt defaults,
20. September 2012 at 17:06
ssumner:
Make no mistake about it, the recent QE3 announcement was the Fed admitting that “we were wrong in late 2008 and early 2009, and the market monetarists were right.”
This is wishful thinking. I guess it’s understandable, considering the standard of success of market monetarism is the attention and approval of Fed officials, and so any movement towards more inflation, despite the fact that we have had 4-5% NGDP growth since 2010, will be interpreted by MMs as a dog whistle to them. I guess the payoff to MM is so low that the Fed repeating what they did in the 1970s of high price inflation, will be viewed as admitting MM is right, you know like how they admitted MM was right in the 1970s what with all the MMs writing papers and whatnot advocating for NGDP targeting.
The Fed does not follow the consensus of economists. It’s the reverse. Economists follow the consensus of the Fed. The Fed finances economists who advocate what the Fed wants, and then those economists gain resources and prominance, then they teach new economists, and so on, until the consensus of the profession is in line with the Fed consensus. Sumner has this rather quaint view of his own profession that his ilk have control over the Fed, when in reality it is the Fed that has control over his ilk. Maybe he wants to feel empowered?
A far more plausible explanation for QEternity is political in nature. It is likely the upcoming fiscal crisis, and a clear conviction on the part of politicians not to deal with the debt issue, for both funded and unfunded liabilities. Sumner has not yet written a post on the literal mathematical impossibility of the Treasury to finance Medicare and Medicaid, Social Security, and its debt, without MASSIVE inflation. If the Fed does not cover the Treasury, then the Treasury will be forced to default on its liabilities, or, dramatically cut back on its promises, which presents a huge risk to the Fed, because with such a default, there will be a huge political backlash, and it could threaten the Fed’s “independence” if the people vote in a “radical” who is anti-Fed.
Bernanke has been talking for years, pleading to Congress to get its house in order. But they are not listening. Politicians don’t give a rodent’s posterior until it is too late.
Make no mistake about QEternity people, and don’t let Sumner mislead you. This is about the solvency of the US government itself. It has NOTHING to do with recognizing some esoteric fringe school of thought with arrogant bloggers at the helm.
20. September 2012 at 17:33
Major_Freedom’s continued presence in the comments section of this blog is the dictionary definition of a negative externality. I’m half-thinking of writing a Google Chrome extension that will just automatically hide his comments whenever I open a post here so I don’t have to scroll past them on my way to actually meaningful comments.
20. September 2012 at 21:22
I think Bullard above all needs to learn the lesson that “there’s no such thing as not doing monetary policy”.
20. September 2012 at 21:23
johnleemk, can you send me a link to that once you’ve made it? Thx.
21. September 2012 at 06:23
johnleemk
If you do I would like it too.
21. September 2012 at 11:18
Justin Wolfers sums up the discussion on Bullard’s statements: http://twitter.com/justinwolfers/status/249180669157199873
21. September 2012 at 16:30
Thanks Grad student. Notice that my list of names for the Fed includes a few with which I don’t agree, but who are first rate monetary economists.
23. September 2012 at 14:18
johnleemk:
Major_Freedom’s continued presence in the comments section of this blog is the dictionary definition of a negative externality. I’m half-thinking of writing a Google Chrome extension that will just automatically hide his comments whenever I open a post here so I don’t have to scroll past them on my way to actually meaningful comments.
Yes, please do that, because my comments are for educated eyes only.
24. September 2012 at 12:07
[…] Sumner already identified the sad mistake Bullard makes here. Essentially, Bullard has a limited sense of history – he knows of only two […]