David Stockman doesn’t know the difference between easy money and tight money

First Rick Perry warns about an easy money policy from the Fed.  Then David Stockman said he agrees with Perry.  But he goes on to show that he doesn’t know the difference between easy money and tight money: 

The Daily Ticker’s guest David Stockman agrees with Obama about Perry’s poor choice of words but also wholeheartedly agrees with Perry’s sentiment. ” I think he was dead on in his thought,” the former director of the Office of Management and Budget in the Reagan administration tells Aaron Task in the accompanying clip. “I think it’s time Republicans woke up to the fact that is the fundamental problem in our economy today.”

Stockman, who has long been a critic of the Fed’s low interest rate policy, says it is “totally wrong.” Stockman says “exceptionally low” interest rates have resulted in excessive speculation on Wall Street “that is utterly destroying our capital markets” and adding to the already unsustainable debt crisis. He goes on to say, “The fact is the Fed is the number one problem holding back this economy, punishing savers, savaging low income people trying to buy food, energy or fuel.”

Of course low interest rates are actually a sign that money has been tight, as Milton Friedman told us in 1997:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.

NGDP has risen 4% in 3 years, vs. a normal growth of 15% over three years.  That’s easy money???

Sometimes I wonder if I’m the only person left who still looks at the world the way Milton Friedman did.  I constantly get commenters telling me the housing boom was caused by easy money.  When I ask them what evidence they had that money was easy in the early 2000s, they tell me interest rates were low. 

Interest rates are the price of credit, not an indicator of easy and tight money.  Unless and until we understand that money is tight, we will never be able to develop a sound monetary policy.

BTW: I’m old enough to remember when almost everyone thought money was really tight, but it was actually really easy (1979-81.)  Have you ever noticed that inflation is high during easy money and low during tight money if you use my definition, but not if you use the conventional definition.  I wonder why that might be?

Update:  Just to be clear, Stockman and 6,999,999,990 other people.


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62 Responses to “David Stockman doesn’t know the difference between easy money and tight money”

  1. Gravatar of Quote of the Day | The Everyday Economist Quote of the Day | The Everyday Economist
    17. August 2011 at 10:39

    […] Scott Sumner Share this:StumbleUponDiggRedditLike this:LikeBe the first to like this post. This entry was […]

  2. Gravatar of marcus nunes marcus nunes
    17. August 2011 at 10:47

    OK. Stockman is an “accounting geek”. But Plosser isn´t. And Plosser, in defending his dissent, keeps saying rates “have to go up soon”!!!
    http://thefaintofheart.wordpress.com/2011/08/17/another-dissenter/

  3. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 10:59

    BULLSHIT.

    You DO NOT look at the world like Milton Friedman.

    Milton Friedman HATED government, and would have demanded the state be dialed back before Monetary came riding to the rescue.

    Since you are not the partisan Milton Friedman was you do not get to carry his water like it is your own.

    Scott say OUT LOUD right now:

    If it comes down to Perry or Obama, who do you vote for?

    That’s what matters. That’s what will tell everybody whether to pay attention to you or not.

    Not you like Romney, you get to choose between Obama and Perry, who do you choose?

    After you say SCREAM “PERRY!”

    that’s when your ideas on Monetary become interesting.

    We know who Friedman would vote for.

    Ante up.

  4. Gravatar of Ron T Ron T
    17. August 2011 at 11:05

    Davind Stockman’s biggest problem is that he doesn’t get MMT, he doesn’t know what it means that the Fed controls the rates and not the monetary base.

    http://mikenormaneconomics.blogspot.com/2011/08/david-stockmans-reluctant-and.html

    He is as confused as any mainstreamer.

  5. Gravatar of Lars Christensen Lars Christensen
    17. August 2011 at 11:09

    Scott, count me in as a Friedmanite…and yes, US monetary policy is extremely tight.

  6. Gravatar of David Pearson David Pearson
    17. August 2011 at 11:09

    Scott,

    Stockman is wrong to use words like, “money printing”. However, I think you missed the point of his critique. He is not claiming that the Fed’s excessively easy policy will lead to inflation. Rather, he argues (and has consistently argued) that Fed policy — a form of government intervention — creates price distortions that harm our capital markets and the economy.

    I would argue that the distinguishing feature of our “transparent” Fed is that its chosen transmission channel is leveraged speculation rather than bank credit. Stockman seems to share that view that this type of government intervention in market price signals comes at a significant cost. Were Friedman alive, he might well agree.

  7. Gravatar of Zamba Zamba
    17. August 2011 at 11:16

    Scott,

    When we say that the fed funds rate fell, say, in 2008, are we saying that the FOMC made OMOs(bought bonds) or are we saying that the Fed allowed the rate to fall, as private demand for funds fell. That’s a thing that always bother me as a student of economics. If there is a change in the natural interest rate, the Fed has to let the interest rate to adjust, or has to adjust it by OMOs?

    Thanks

  8. Gravatar of Andy Harless Andy Harless
    17. August 2011 at 11:19

    Your 79-81 example got me thinking. Tight and easy are relative terms. And even if one accepts NGDP as the right criterion, there’s a good case for using the second derivative rather than the first to define tightness/ease. Also, one has to take into account the lags that have historically existed. (IIRC you’ve argued that those lags are just due to bad information/communication, but in any case they have existed historically.) My intuition still says that money was tight in 79-81, and I think I can justify that intuition based on an approach that looks at the rate of change in the growth rate of NGDP, allows for a lag, and takes the previous 15 years as a frame of reference.

    To make an analogous case (in reverse) about recent experience would be more difficult. One would pretty much be limited to using the brief period from 2006 to 2008 as the frame of reference, and even then the case is pretty weak and probably has to rely on cherry-picking the long and variable lags.

  9. Gravatar of Throwback Throwback
    17. August 2011 at 11:24

    How do you define “tight” money? I would imagine you mean its marginally scarce – ie its supply is deficient relative to demand.

    If money today is tight, PLEASE explain why its price is plummeting. And no, the interest rate is not the “price of money,” its the price of credit. The price of money is that which it can be exchanged for, most obviously, foreign exchange or commodities.

    The PRICE of the Dollar is in decline, in real time, pretty much daily. I find it hard to comprehend how one could argue it is in tight supply.

  10. Gravatar of David Pearson David Pearson
    17. August 2011 at 11:30

    Lars,

    Scott does not claim that Friedman would view today’s Fed policy stance as tight. The rate of 3-mo. M2 growth is extremely strong. The whole “Reviving Japan” article proposes that QE be used to raise the growth of the money supply; Bernanke has, by that “Friedmanite” measure, succeeded.

  11. Gravatar of Andy Harless Andy Harless
    17. August 2011 at 11:32

    Zamba,

    The reality is that the Fed sets the federal funds rate mostly by announcement effects, basically by a threat to do OMOs which never actually have to happen, since the threat is perfectly credible. So it would be hard to tell from looking at the actual OMOs whether the Fed is pushing the market or being pulled by it.

  12. Gravatar of Lars Christensen Lars Christensen
    17. August 2011 at 11:32

    Andy, you are right…maybe it does not make sense to talk about tight or loose monetary policy without reference to the monetary policy objective. I think the NGDP level target make sense as the right monetary policy objective.

    If we accept the NGDP target then we should first see whether we are tight relative to that target or not. And then we should study market action to evaluate whether monetary policy is getting tighter or looser. So we need a two-dimensional definition of monetary policy “tightness”: Where are we compared to the target and in what direction are we going. Over the last month monetary policy have been tight and the markets clearly have shown us that monetary policy has become even more tight.

  13. Gravatar of Lars Christensen Lars Christensen
    17. August 2011 at 11:39

    David,

    I am sure that Scott thinks that Friedman would agree that US monetary policy today is overly tight.

    And in terms of M2 growth then I am probably myself more Friedmanite than the old Friedman. He had basically given up on the money supply (as have Scott). I however still see some value in watching what is happening to monetary aggregates. That said, Friedman would acknowledge that we should not study the money supply with out taking into account what have happened to money demand. We have seen an excess increase in money demand. Therefore, the money supply needs to grow faster than under “normal” conditions. Basically Friedman would have agreed that we should have a target on M*V growth and not just on M growth. Thats pretty close to what Scott is in favour of. But let me leave that argument to Scott;-)

  14. Gravatar of John John
    17. August 2011 at 11:49

    On a market interest rates represent different valuations between present and future goods. Scott is extremely fond of that quote by Milton Friedman but I’m not quite sure what the reasoning is behind it. If real interest rates affected by the Fed are negative, I’m not sure how much looser money can get. But I wouldn’t give away the argument that attempts to loosen money are stimulative in the long run.

  15. Gravatar of foosion foosion
    17. August 2011 at 11:51

    “Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.”

    Was Friedman talking about real or nominal or both in this quote?

  16. Gravatar of Lars Christensen Lars Christensen
    17. August 2011 at 11:56

    John, interest rates – real or nominal – says very, very little about whether monetary policy is loose or tight. That is basic Friedman so no surprise Scott quotes him often. But see here Nick Rowe has a good comment on the Neo-Wichsellian obsession with interest rates here:

    http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/03/the-return-of-monetarism.html

  17. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 11:59

    Marcus, Plosser’s to blame for the low rates. If Plosser really wants higher rates, he should argue for monetary stimulus. Instead he’s acting like a Japanese central banker. How’d that work out in Japan?

    Morgan, You asked:

    “Not you like Romney, you get to choose between Obama and Perry, who do you choose?”

    I vote Libertarian.

    Ron, I see that as his greatest strength.

    Lars, Yes, I left room for 10 of us in my population estimate.

    David, No I understand Stockman perfectly clearly, it is you who misunderstood him. He reacted to Perry by saying he agrees. But Perry didn’t complain about low rates, he complained about easy money. Stockman inferred that easy money represents low rates. And that’s false. He doesn’t understand the difference between easy money and low interest rates. That was the point of my post. I don’t care about anything else Stockman said, because if he thinks money is easy, obviously he won’t be able to offer any coherent explanation of food prices, exchange rates, etc. To understand those issues you must start by understanding that money is tight.

    Zamba, The US had interest rates before we had a Fed, so there is no doubt that rates can fall sharply, even if the Fed does nothing.

    Andy, I use expected NGDP growth. Obviously we don’t have those figures, but I recall that long term nominal rates were extremely high in early 1981, around 15%. I believe that’s the highest rate in US history. After 18 months Volcker had had zero success in reducing either NGDP, or NGDP growth expectations going forward. NGDP growth in 1981 was 11%, the same as the average rate over the previous 9 years. (Despite a sharp downturn late in the year–so growth was especially strong in early 1981.) Volcker’s first attempt to control inflation in late 1979 was a complete failure, and he only began a seriously tight money policy in late 1981. It wouldn’t at all surprise me if NGDP growth expectations in mid-1981 (going forward 10 years) were even higher than mid-1979.

    See also my next comment.

    Throwback,

    For me tight money is always a relative concept. If NGDP growth is less that the central bank target (implicit or explicit) money is tight. And vice versa. By that definition money was easy in early 1981. It’s also possible to define it in absolute terms, as NGDP growth below some arbitrary level.

    Money’s purchasing power in terms of commodities is much less important than it’s purchasing power in terms of real estate. You can buy two houses in many American cities with the same dollars that bought one house 5 years ago. But I us NGDP growth as my indicator.

  18. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 12:01

    John, Interest rates are the price of credit, not money.

    Foosion, He meant nominal rates.

  19. Gravatar of Tyler Morrison Tyler Morrison
    17. August 2011 at 12:07

    So if you don’t mean easy credit when you say money is loose, do you mean that NGDP growth is greater than 5%? Just trying to get your terminology down…

  20. Gravatar of Liberal Roman Liberal Roman
    17. August 2011 at 12:09

    “Sometimes I wonder if I’m the only person left who still looks at the world the way Milton Friedman did. ”

    It’s basically you, a dozen other economists and the cult following you have developed on this blog.

  21. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 12:11

    “I vote Libertarian.”

    I gave you two choices. Neither was “libertarian.”

    Boy you are terrified of really going on record huh?

  22. Gravatar of Charlie Charlie
    17. August 2011 at 12:13

    “I’m old enough to remember when almost everyone thought money was really tight, but it was actually really easy (1979-81.)”

    Can you give us some history here? I thought the standard story was Arthur Burns allowed inflation to go crazy and get built into expectations. Then Paul Volcker came in and targeted in the money supply directly, changed inflation expectations, and caused a recession necessary to pull inflation expectations out of the system.

    I realize that NGDP rose over the period at around 10% a year. Is it your view that if Volcker had even tighter money, so as to target 5% NGDP that the recession would have been less severe?

    Here’s Krugman on what has seemed to me to be the mainstream case:

    “Each of the slumps “” 1969-70, 1973-75, and the double-dip slump from 1979 to 1982 “” were caused, basically, by high interest rates imposed by the Fed to control inflation. In each case housing tanked, then bounced back when interest rates were allowed to fall again.”

  23. Gravatar of Tyler Morrison Tyler Morrison
    17. August 2011 at 12:15

    Sorry, reading the comments I see you’ve already answered my question.

  24. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 12:16

    Scott, man up:

    “http://trailblazersblog.dallasnews.com/archives/2011/08/perry-in-nh-questions-feds-goa.html”

  25. Gravatar of james in london james in london
    17. August 2011 at 12:21

    Morgan, he doesn’t have to vote. Choosing betweent the devil and the deep blue sea is not a choice. Perry doesn’t seem to stand for that much except himself as far as I can see. I’d vote for Ron Paul if I was there.

    However, if money is “tight” that means there must be more demand than supply. Having a monopoly supplier increase supply doesn’t seem fair and probably corrupt. I say vote Ron Paul.

  26. Gravatar of Benjamin Cole Benjamin Cole
    17. August 2011 at 12:21

    The CPI is up 2.62 percent in the last three years.

    You ever wonder how Japan became Japan? It is becoming more clear day by day.

    But riddle me this: If the Fed jacks up interest rates, then bond values will fall. Will not falling bond values also punish savers?

    Or, if someone decides to save in the form of real estate or equities. Will not higher interest rates punish those savers?

    So “savers” are only those in short-term instruments?

    Like so many “debates” going on today, first you have to unwind the false premises, before you can even get to the debate. But by that time, the camera lights are off.

  27. Gravatar of Mike Russell Mike Russell
    17. August 2011 at 12:35

    I know, I know, don’t feed the trolls, but Morgan you really are all about limiting choices aren’t you:

    “I vote Libertarian.”

    I gave you two choices. Neither was “libertarian.”

    Boy you are terrified of really going on record huh?

  28. Gravatar of Scott Sumner Scott Sumner
    17. August 2011 at 12:39

    Tyler, Yes. But it’s slightly more complicated, as I don’t look at a single quarter, but longer term movements.

    Liberal Roman. Yes, but is it really so weird to claim money was easy during the German hyperinflation (when rates were really high?) I guess so.

    Morgan, You said;

    “I gave you two choices.”

    Fortunately, we live in a democracy where I have more choices, and don’t have to do what you tell me to do.

    Charlie. I agree that short term interest rates were relatively high in late 1981 and that contributed to the 1982 recession. But money was easy in 1979-81–as I indicated in earlier comments (see above.)

    Ben, But you don’t understand, it’s not the CPI that matters, nor the price of houses in Miami, but some randomly chosen commodity like oil or gold. :)

    And not even oil any more, as that’s fallen somewhat. Now it’s just gold.

  29. Gravatar of johnleemk johnleemk
    17. August 2011 at 13:11

    Morgan,

    I think Scott means in a general election between Perry and Obama he’d vote for the Libertarian Party candidate.

  30. Gravatar of Ryan Murphy Ryan Murphy
    17. August 2011 at 13:11

    My evidence that money was loose in the early 2000s is that there was mild inflation and monetary equilibrium would have required mild deflation. I do cite the Taylor rule for exposition since it generally sits halfway between the policies I would want to see employed and what is actually employed.

    I agree that interest rates are signals for easy and tight money in the medium and long runs, but the picture is less clear in the short run because of the way the Fed conducts policy. I would rather define easy and tight money in terms of in which direction we are straying form monetary equilibrium than in terms of interest rates at all.

  31. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 13:20

    NOISE Scott (and Mike)

    Basic philosophical thought experiment taught in Phil101: you limit the variables to get a clear picture – a binary choice.

    It isn’t perfect. It isn’t in the polling booth.

    But it is a realistic situation. If coming into fall 2012 things are basically as is and it is Perry vs. Obama…

    Who do you HOPE wins?

  32. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 13:33

    johnlemeek,

    you know you’d like to hear Scott’s answer here. Particularly after yesterday. Who cares who he’d vote for in his purtiy driven third party egghead world?

    If he has to live one of these two men and even the continuation of what Obama has done, or steps taken to roll it back, which does he prefer with 2012-2016?

    Frankly, he’s tacitly admitted he expects he’d get a better audience for NGDP if a Republican is in the Presidency, but I want him to say who overall…. 30K foot view, which is better for America in his estimation?

  33. Gravatar of Martin Martin
    17. August 2011 at 13:37

    “Interest rates are the price of credit, not an indicator of easy and tight money. Unless and until we understand that money is tight, we will never be able to develop a sound monetary policy.”

    Scott, from 2003 onward, I believe the Taylor rule maintained that the Fed’s policy was too loose. However looking at NGDP growth (5,8% avg over 92-00 and 01-06 5%), looking at how year to year changes in V# were compensated by growth in M#, you’d expect that money was too tight.

    Were the low interest rates then too more of a sign that money was too tight?

  34. Gravatar of Jim Glass Jim Glass
    17. August 2011 at 13:41

    If money today is tight, PLEASE explain why its price is plummeting.

    Hello?

    The price of money is that which it can be exchanged for…

    Correct.

    most obviously, foreign exchange or commodities.

    No, most obviously *everything* it can exchanged for, as represented by the general price level and changes thereof — inflation/deflation.

    And as of today, the bond market shows an inflation expectation for the USA over the next two years of all of 0.97% annually.

    The latest market expectation for *ten year* inflation as per the Cleveland Fed was down to 1.83%. The next is released tomorrow, we shall see what that says.

    During the last 36 months the CPI has risen a *total* of 3.2% — that’s over three years, a rate of all of 1.06% annually.

    Really … how so many can in their minds square the *fact* of inflation falling to a 50-year low — and being projected by the markets to stay there as far as the eye can see — with a belief that the price of the dollar is “plummeting” is beyond me.

  35. Gravatar of flow5 flow5
    17. August 2011 at 13:41

    Friedman may have had a very good heart, but he was also very STUPID. A “tight” money policy is defined as one where the rate-of-change in monetary flows (our means-of-payment money times its transactions rate of turnover) is no greater than 2-3% above the rate-of-change in the real output of goods & services.

    Keynes’ liquidity preference curve is a false doctrine. Low rates can be indicative of both easy & tight money. Generally, “low rates” represent easy money in the short-term & tight money in the longer term.

    The housing boom was fueled by an excessively easy money policy followed by the bust (an excessively tight money policy). If you disagree you don’t understand monetarism.

  36. Gravatar of Silas Barta Silas Barta
    17. August 2011 at 14:26

    If it’s still easy to get loans for non-crack-induced business plans, then in what sense is money tight?

    People claim that the housing bubble was driving by easy money because of, yes, low interest rates, but also the *ease* with which one could finance insanely big loans. I don’t want to return to that time, and I don’t use that mania as a standard for what an economy should look like.

    People should explicitly define what “easy” and “tight” mean in the context of money whenever they use the term, because it seems to be a rather hazy concept.

  37. Gravatar of Silas Barta Silas Barta
    17. August 2011 at 14:29

    @Jim_Glass: No one who actually pays bills really feels as if inflation has been at 1% for the past three years.

    Do you pay bills? Do you see prices stagnating?

    Me, I’m just glad I bought gold before this devastating bout of “deflation” LOL

  38. Gravatar of Casey Casey
    17. August 2011 at 14:36

    Jim Glass & Scott, yields on treasuries are indeed showing exceptionally low inflation expectations for the next ten years or so. I think the majority of people are conflating the concurrent decrease in purchasing power of the US$ with inflation, which aren’t the same.

    Scott, using your framework of monetary policy being extremely tight, because of its failure to offset low money demand, isn’t it possible that central bank policy is doomed to be ineffective? I avoid calling this a liquidity trap, because I don’t think liquidity is really the issue.

    It seems abundantly clear to me that the only way to hasten recovery (which would come naturally at some point) is to stimulate growth through a mix of policy changes and debt writedowns. Bring forward t+1 in which the market clears. I don’t think traditional Keynesian government-directed stimulus spending would be effective, but ambitious changes like a from-scratch tax code (FairTax anyone?) would be. Create a clearinghouse for all of the distressed housing debt, which banks are clearing at a pace that would bore a snail. I speak from experience in this last regard: I’m waiting for a bank to approve my offer on a CA short sale (40+ days so far) and my offer is in cash!

    I’d like to hear your thoughts.

  39. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. August 2011 at 14:54

    Silas: cognitive bias. We remember the prices that go up (e.g. gasoline) with more salience than those that go down or don’t shift. Also, general pessimism about prospects probably makes people focus on downsides more too.

    Unless you can come up with good criticism of how the CPI is collected, actual measurement wins over gut feelings. Down here in Oz, the main problem with the CPI is its upward bias.

  40. Gravatar of John John
    17. August 2011 at 15:21

    Scott,

    I believe that the central bank of the Weimar Republic’s discount rate in late-1923 was around 92%. High indeed but in real terms it was somewhere around negative a billion %. It’s not a good example of high real interest rates.

  41. Gravatar of W. Peden W. Peden
    17. August 2011 at 15:31

    John,

    Then credit wasn’t very expensive in Weimar Germany. Interest rates tell you about credit; the price level tells you about the price of money.

  42. Gravatar of Benjamin Cole Benjamin Cole
    17. August 2011 at 15:58

    Let’s see, how about those natural gas prices. They are falling. Ergo, the Fed is being way too tight.

    Drawing conclusions from global commodities markets–in which two huge nations are booming and printing money steadily, India and China—is not shrewd.

    Crickey-Almighty, there are 2.5 billion people in China and India, and they are buying things.

    We should choke off our economy to fight off commodities price surges brought on by global demand?

  43. Gravatar of MikeDC MikeDC
    17. August 2011 at 16:32

    Morgan, As an academic, some things can’t be said. Scott’s spent years working his way up from receiving bare contempt from J. Bradford DeLong and Krugman through generally polite dismissal to the point where he might have his truly novel and useful ideas perverted to suit the Progressive Cause of the Month Club. You really want him to go and throw all that away? :)

    That being said, I find the focus in this post pedantic in the extreme. We all acknowledge that almost no one (including most distinguished economists) is qualified to talk monetary policy, so focusing on the language rather than the practicalities seems very odd.

    To me, it breaks down quite simply.

    The language people like Perry and Stockman have used to describe the problem is all wrong and results from not really knowing monetary economics. However, the problem is quite easy to see; Contractionary and bordering on corrupt monetary policy run for the apparent benefit of big finance, conducted with complicity of a spendthrift federal government administration in the face of persistent high unemployment and crummy private sector business conditions.

    The other side of the political divide is certainly more sophisticated. They have the language to describe the problem, but their years in power have demonstrated they fundamentally do not understand it or have other priorities and will do nothing about it.

    Historically, changing monetary regimes has never been a sophisticated and technical process. It’s probably the biggest factor underlying many, if not most of America’s populist upheavals. There’s passion, yelling, lots of anger, and rarely does the popular debate inform us of what’s actually happened. That’s just the way it is, and it sucks. Except it sucks less than the alternative of some sort of technocratic authority, which is what’s pretty much gotten us into this mess. Scott’s solution offers a way out that addresses the concerns of the populists, but is fundamentally antithetical to the technocrats.

    I mean, seriously, can anyone picture Mitt Romney hammering the Fed and telling the banks that they’re no longer going to get a free lunch in the form of IOR? My ass he’s gonna do that, and Obama clearly isn’t.

    Will Perry? I have plenty of doubts, but simply by tough criticism he changes the game somewhat, when the political process has been too deferential for probably three years too long. From my Bayesian perspective a 5% chance is better than a 0% chance.

  44. Gravatar of JTapp JTapp
    17. August 2011 at 16:36

    I did a post a while back looking at a compilation of essays written during the 80-81 years, when Stockman was delivering the Reagan Administration’s NGNP targets to Congress. Worth remembering that Stockman advocated M1 and NGNP growth at the time.

  45. Gravatar of JTapp JTapp
    17. August 2011 at 16:38

    To clarify, in 1980 Stockman and the Reagan administration projected 9% NGNP growth rate by 1986 as a result of monetary and fiscal policies.

  46. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 16:58

    ya know it is only every great once and a while a choice bauble gets burped up here:

    “Morgan, As an academic, some things can’t be said. Scott’s spent years working his way up from receiving bare contempt from J. Bradford DeLong and Krugman through generally polite dismissal to the point where he might have his truly novel and useful ideas perverted to suit the Progressive Cause of the Month Club. You really want him to go and throw all that away?”

    In my own polite way, I’m here to make sure that don’t happen.

    Altho, frankly I don’t think it takes much by way of genius to understand the ins and outs of money as this blogroll of back patters thinks.

    The mistake they all make is insisting they are an end to themselves, as if what we’re all most concerned with is figuring out this tricky economy thing.

    What we’re all concerned with is FAR MORE COMPLICATED – we have to keep the American ship from sailing to the left, until EITHER we get a Balanced Budget Amendment OR States’ Rights lets Texas be Germany while California / Illinois are the PIGS.

    Along the way, we have to pull the Europeans to the right, and give the Chinese plenty of reason to favor capitalism.

    —–

    If Scott had showed up before money got too loose in 2003 onward, and earned his chops screaming that we should be raising rates to get NGDP down under target – he’s have more of voice.

    But I can’t find those old posts.

    Silas what do you think is Scott’s answer to:

    “If it’s still easy to get loans for non-crack-induced business plans, then in what sense is money tight?”

  47. Gravatar of W. Peden W. Peden
    17. August 2011 at 17:02

    It stuns me that anyone thought that targeting M1 was a good idea. (Well, not the supply-siders, not least JTapp’s post confirms all my worst suspicions about them.)

    But previously quite sensible monetarists like Alan Walters and Milton Friedman took the likes of M1 very seriously in the 1980s. However, targeting M1 is very wrong-headed: if people’s M1 holdings are below their desired levels, they can always move money in from a broader aggregate. M1 HAS some use in interpreting what is happening in an economy, but not in such a way that it is a suitable object of a target.

    Still, it’s better than targeting M0 and infinitely less crazy than strict MB control.

  48. Gravatar of Jason Odegaard Jason Odegaard
    17. August 2011 at 17:52

    Morgan,

    I recall a video I watched where Milton Friedman did acknowledge that government may have a role in providing catastrophic health insurance for all. A high-deductible plan. Friedman was anti-government, but even he saw some role for government, even a small one in health care.

    And I doubt he would have preferred making a recession worse to try and wring out the bad government policies. How can that be asserted? Besides, don’t severe recessions as such run the risk that big government could get bigger? That regulations could end up even worse?

  49. Gravatar of joe c joe c
    17. August 2011 at 18:19

    The debate over tight and easy money never seems to end. But, this is the way I like to think about it:

    Again, Friedman said “Low interest rates are generally a sign that money HAS been tight, as in Japan; high interest rates, that money HAS been easy.” emphasis on has.

    So, if money were to easy now, we should see an increase in interest rates. But, they are not, they are decreasing and money is becoming even tighter. Once we see rates start to increase that is the point where the Fed has sees too much liquidity and they now raise rates. Money cannot, to me, be too easy or too tight for an extended period because the Fed, even when slow to react, eventually increases or decreases rates accordingly (through OMO of course).

    And, in reading Friedman’s Monetary history, he explains how, even when rates decreased during the beginning of the 30’s…money was exceedingly tight. So, low interest rates
    were an indication that money HAD been tight.

    And, I don’t fall in the camp that easy money CAUSED the housing crisis. Its simple, if everyone who bought a house had to put 20% down…the whole crisis would have been obviated pure and simple.

  50. Gravatar of Morgan Warstler Morgan Warstler
    17. August 2011 at 19:09

    Jason,

    I to support a Catastrophic plan. I even want it to be a single payer public option modeled on the VA.

    Since I can’t get unlicensed doctors, I want student doctors getting cheap education, practicing in a malpractice free government run system of clinics and hospitals.

    I call it Soup Kitchen Care. We put a global budget on it of $4K per man tied to inflation requiring a super majority to increase per patient spending.

    We say out loud, “this is not the care you want if you can afford the good stuff.” Only drugs out of patent. Cost based treatment on everything. Everyone is a number.

    And IF people want to buy that for themselves, FINE. That;s the public option.

    My reasoning of Friedman is based in part on his Negative Income tax.

    He LOVED the idea. He pushed for it hard. But when it wasn’t going to REPLACE all other forms of aid, and instead become ANOTHER government program.

    He threw it away.

    He was realistic, any idea no matter how much it makes sense, only makes sense IN TERMS OF: Does it make government bigger?

    Scott doesn’t GUARANTEE his plan won’t make government bigger, he doesn’t say IF government might get bigger, then it is a shitty idea.

    I say, we only do Scott’s idea if it gives boosts the economy after we have made some hard cuts – I’m thinking like Friedman.

  51. Gravatar of Nominal GDP has risen 4% in 3 years, vs. a normal growth of 15% over three years. Is that easy money? « Economics Info Nominal GDP has risen 4% in 3 years, vs. a normal growth of 15% over three years. Is that easy money? « Economics Info
    17. August 2011 at 20:02

    […] Source […]

  52. Gravatar of bill woolsey bill woolsey
    18. August 2011 at 03:18

    I think Scott’s statements that low interest rates are a sign of tight money is too strong. When he says that interest rates tell us nothing about the stance of monetary policy, he is being more accurate.

    Perhaps Friedman would have said that low interest rates are a sign that monetary policy was tight. However, the correct view is that low interest rates might be caused by the expectation that monetary policy will be tight–in the sense that money expenditures on output will be low.

    The connection to Friedman’s supposed view would be that past experience of money expenditures on output being low will lead people to expect that it will remain low in the future, and so the low interest rates now.

    My view is that there could be other things that would lead to low or high interest rates than monetary conditions. Further, many things can cause some interest rates to rise and others to fall at the same time–other than monetary conditions.

    I define tight money as an excess demand for money. An excess demand for money can raise interest rates in the short run under very realistic conditions. And it is really true that fixing it promptly will tend to lower interest rates. But also, if it isn’t fixed and if it is expected to persist, it can result in low interest rates. That is because it will impact output and inflation in the future. And future output and inflation impact interest rates now.

  53. Gravatar of W. Peden W. Peden
    18. August 2011 at 04:34

    On low interest rates and tight money: couldn’t interest be low because, say, the government is running huge surpluses (haha!) and to keep NGDP at a trend level of 5%, the Fed engages in very stimulatory monetary operations?

    Now, is money tight, loose or indifferent in those circumstances?

  54. Gravatar of Silas Barta Silas Barta
    18. August 2011 at 06:31

    Hey Lorenzo, am I imagining this?

    What are these major prices that have gone down? Does it actually reconcile with your actual experience?

    As for CPI bias, I don’t think the CPI should be adjusted for general improvements in technology (which don’t increase quality linearly because of diminishing marginal utility anyway), but even if so, they should be adjusting for product debasement as well, but they never do — only for improvement. That produces a ratchet effect that hides inflation.

    If not for dollar debasement, tech-related price drops would be even greater.

    Can you actually show a household budget that stretches a dollar only 3% less between this year and three years ago?

    @Morgan: I give up, what’s Scott_Sumner’s answer?

  55. Gravatar of Scott Sumner Scott Sumner
    18. August 2011 at 08:28

    Ryan, OK, but if you are going to use inflation then basically money has always been easy (over the past 50 years) except 2009. And the early 2000s were some of the least easy money over the past 50 years. But somehow we find that some of the least easy money (according to your definition) led to the Mother of All Housing Bubbles. I don’t think so.

    Morgan, I’d look at the issues then, and their policy views. Also their personalities and character (where Perry starts off at a huge disadvantage to Obama.)

    Martin I don’t put much faith in the Taylor rule, although I agree money was too easy in 2005.

    Silas, You are confusing money and credit. I agree that credit is very easy–but who cares about credit?

    I see stocks, oil, and bond yields are all plunging today on fears of hyperinflation. Any day now workers will be getting those 10% pay raises they got in the 1970s. It’s just around the corner Silas, hang on to that theory a few more months and it’s sure to come true.

    Casey, Fairtax is great, but what we really need is monetary stimulus.

    John, Great! Let’s talk about real interest rates. Let’s talk about how they rose from 0.6% to 4.2% (5 year risk free) from July to December 2008. And let’s talk about how me and perhaps a couple other economists were the only people in the world who noticed that tight money. I’d be glad to have that discussion.

    MikeDC, I’m not just calling out non-economists, I’m calling out economists. BTW, if Stockman isn’t qualified to talk about monetary policy because he’s not an economist, then he shouldn’t talk about monetary policy. Anyone in the public arena is fair game.

    W. Peden, I agree about M1.

    Bill and W. Peden, I didn’t say it’s a sign money is tight, but rather has been tight. And you are right that even that claim is debatable. I’m being provocative to get people to think about it in a different way. NGDP growth is the proper indicator–we both agree about that. But as a practical matter changes in NGDP growth and changes in interest rates are highly correlated.

    Silas, You said;

    “Can you actually show a household budget that stretches a dollar only 3% less between this year and three years ago?”

    Housing, gasoline, natural gas, and consumer electronics are all cheaper than 3 years ago. So a 3% overall price increase is very plausible. The 4 items I mentioned are a big part of the consumer budget, and some have fallen sharply in price.

  56. Gravatar of marcus nunes marcus nunes
    18. August 2011 at 09:04

    Scott
    I don´t think money was too easy in 2005. Between 2001 and 2003, NGDP was growing far below trend (3.3% vs 5+%) In 2004 and 2005 NGDP grew at 6.4% on average, which was sufficient to bring it back to the trend level. In 2006 and 2007 it remaind “on trend”, growing by 5%… and then Bernanke “lost it”.

  57. Gravatar of Martin Martin
    18. August 2011 at 11:15

    “Martin I don’t put much faith in the Taylor rule, although I agree money was too easy in 2005.”

    Scott, I am with Nunes, here, if you argue that money is tight or loose, relative to past trends (as you seem to be doing), then the period 2003-2006 cannot have been easy when compared to the previous trend, or am I missing something here?

  58. Gravatar of ssumner ssumner
    18. August 2011 at 17:52

    Marcus and Martin, It’s a judgment call, as it depends where you start the trend line. In any case, I certainly agree it wasn’t far off course, not enough to cause a housing bubble.

  59. Gravatar of What Hayekian Tight Money Looks Like « Increasing Marginal Utility What Hayekian Tight Money Looks Like « Increasing Marginal Utility
    20. August 2011 at 14:20

    […] Sumner in a recent post argued that low interest rates were a sign of tight money and high interest rates are a sign of […]

  60. Gravatar of Günstige Hausratversicherung Günstige Hausratversicherung
    25. August 2011 at 20:38

    Günstige Hausratversicherung…

    TheMoneyIllusion » David Stockman doesn’t know the difference between easy money and tight money…

  61. Gravatar of dhlii dhlii
    27. August 2011 at 14:23

    Is credit immune from the laws of supply and demand ?
    The statement that “interest is the price of credit” means variations in interest rates are a reflection of variations in either the supply or the demand for credit.

  62. Gravatar of Tom Brown Tom Brown
    9. August 2012 at 13:22

    Here’s what Milton Friedman was saying in 2006, at the height of the housing bubble, praising Greenspan and admitting that Greenspan had convinced him that his policy had been the correct one since the early 2000s:

    http://online.wsj.com/article/SB113867954176960734.html

    Notice what you don’t see? No mention of the enormous level of private debt to GDP rations (which eventually hit 301%). No mention of the ponzi-lending (ponzi in the sense of Minsky’s three categories of lending… i.e., the borrower couldn’t even pay the interest! i.e. a “negative equity” loan… and I recall 2006… there were a LOT of those!!!).

    Talk about failure to predict the calamity right around the corner. One of the ways we judge a scientific theory is it’s ability to predict the future. Neo-classicists like Greenspan and Friedman were abysmal failures in this regard… missing the most cataclysmic economic meltdown since the Great Depression.

    Some heterodox schools of economics did a much better job: post-Keynseians for example. But even some Austrians!

    About the only neo-classical predictor of the meltdown I can think of is Raghuram Rajan, who, during Alan Greenspan’s 2005 retirement party, read a paper saying as much, and was roundly criticized for it.

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