In the belly of the beast

I’ve recently done several visits to Washington DC.  The first was a Mercatus conference called “Instead of the Fed,” and more recently a Cato conference with a similar theme.  I also met 5 Heritage staffers for a discussion of monetary policy.  The title of this post could refer to the growing NSA/CIA/FBI/INS/IRS/DEA/TSA/HHS octopus that has tentacles everywhere, or the vast right-wing conspiracy, depending on your ideology.

I was pleasantly surprised by many of my discussions.  Lots of people seemed interested in my ideas, more than I would have expected.  I was also surprised by how much I agreed with the speakers at the conferences.  The head of the Cato Institute (John Allison) gave a very good talk on banking, pointing out all the unforeseen side effects of banking regulation, and ended up suggesting that we abolish all banking regulation except minimum capital requirements.  Sounds good to me.

In addition to the radical agenda for deregulation, I also agreed with much of the criticism of the Fed. George Selgin gave a very good talk on how the Fed has mischaracterized the pre-Fed banking system in America.  Others discussed Bitcoins, etc.  I even agreed with the claims that the Fed is trying to do too much: interest on reserves, credit allocation, selective bailouts, policy discretion, etc, etc.  It’s drifted far from its previous Taylor Rule approach to keeping NGDP (or something closely related) growing on target.

Charles Plosser gave the opening talk at the Cato conference, and I agreed with virtually everything he had to say, except that he favored having the Fed focus like a laser on inflation targeting, and I favor having the Fed focus like a laser on NGDP targeting.

But . . . .

When it came to the stance of monetary policy, this group which had seemed so sensible on most issues suddenly seemed to be way off track.  Not so much because they thought money was incredibly easy, almost everyone thinks that, on both the left and the right.  Rather they seemed to think that current policy was highly inflationary, which it clearly is not.

Recall that my only disagreement with Plosser is that he supports inflation targeting.  But even if I was convinced to shift to that position, I’d still totally disagree with him about the current stance of monetary policy.  If the Fed should focus like a laser on its 2% inflation target and ignore unemployment (which seems to be Plosser’s preference) then they should adopt a far more expansionary monetary policy.  But he seems to favor a tighter policy.

One speaker after another talked about policy like we were back in the 1970s, instead of seeing the slowest growth in M* V since Herbert Hoover was president.  Why isn’t Bernanke a big hero on the right?  The Fed is producing very low inflation.  Talking to individual people didn’t help much, as there was a wide range of views. Some thought inflation was actually much higher than reported (it isn’t.)  Some pointed to asset price inflation (even though they had not cried “deflation” when asset prices were plunging in 2009.) Some thought the inflation would show up later (it clearly won’t.)  In fairness, some favor no inflation at all, or even mild deflation, so for them money really is too easy tight.

But my overall reaction is that the conservative/Austrian/monetarist/classical liberal/libertarian/RBC schools of thought are too influenced by a combination of massive deficits, massive QE, near-zero interest rates, and simply assume that with all this stimulus we must have high inflation, or else it’s just around the corner.  So they end up “crying fire, fire in Noah’s flood,” as Ralph Hawtrey described similar conservative fears in the 1930s.  Another period of near-zero rates, QE, big deficits, etc.  Another period where (in retrospect) conservatives were wrong.


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36 Responses to “In the belly of the beast”

  1. Gravatar of Negation of Ideology Negation of Ideology
    16. November 2013 at 18:05

    Great post. I’ve found the same thing – when I talk to most people on the right I agree with most of what they say until they start talking about monetary policy. I think it’s a framing issue. Reducing the Federal Funds rate, increasing the monetary base, engaging in QE just sounds like an activist policy. They hear it as the government interfering with the market. That’s not an issue for the left, because the believe in government involvement in the market.

    Of course, there is no neutral monetary policy, just like there’s no such thing as a free market government currency – it’s a contradiction in terms. If people on the right understand that, then they have to make a decision on what the best monetary policy is. It’s a matter of prudence – like should we replace the stop sign at a busy intersection with a traffic light.

    If it’s framed that way, I believe conservatives will be open to a rules based NGDPLT monetary policy.

  2. Gravatar of dtoh dtoh
    16. November 2013 at 18:36

    “The head of the Cato Institute (John Allison) gave a very good talk on banking, pointing out all the unforeseen side effects of banking regulation, and ended up suggesting that we abolish all banking regulation except minimum capital requirements. Sounds good to me.”

    Scott, I think you will recall that some time ago I repetitively (ad nauseum) commented that banking regulation could be achieved by setting asset/equity ratios (a mathematically equivalent way of saying minimum capital requirements). At that time, you weren’t so enthusiastic. What caused your change of view?

  3. Gravatar of dtoh dtoh
    16. November 2013 at 18:39

    Scott,
    And oh, by the way… the reason conservatives have not taken to NGDPLT is that its proponents have not put forward a convincing explanation of the transmission mechanism. (笑)

  4. Gravatar of kebko kebko
    16. November 2013 at 20:31

    Why keep capital requirements? Federal deposit insurance plus capital requirements just pushes all banks to the maximum leverage, with no flexibility. There is no reason why private insurers or bank clearinghouse associations couldn’t provide deposit insurance. It could even be a legal requirement. Leverage would be much lower than it is today, and it would be much more robust and flexible.

    Haven’t George Selgin and Lawrence White, among others, shown that arrangements like this mitigated some of the problems caused by other regulations in the 19th century?

  5. Gravatar of Edward Edward
    16. November 2013 at 23:15

    Monetary policy is the right’s kryptonite, weakening their stance in support of the Free Market Superman. The relentless advocacy for tight money everywhere all the time, (as opposed to certain cases like the Volckerian disinflation which was the right thing to do) is hard hearted and insane.

    On Failed Predictions, people like Meltzer made astonishingly simple errors, assuming a growth of the base automatically means an increase in prices, totally ignoring velocity, idle resources and making elementary errors. I feel like Paul Krugman, saying we live in the Dark Ages of economics. Can you explain, Scott?

    On the other hand, Milton Friedman himself made those same astonishingly blind errors, assuming V is stable, K% rule, etc

  6. Gravatar of Ralph Musgrave Ralph Musgrave
    17. November 2013 at 00:41

    I agree that the brains of many “conservative / Austrian” types are dominated by psychological or psychiatric factors rather than evidence or logic. Krugman said that of Rogoff. As K put it, “So where does Ken’s call for short-run austerity come from? As best I can tell, it comes from a generalized sense that debt is dangerous…”

    Also conservative / Austrians like Rogoff have completely failed to grasp the point that there is little difference between government debt and money (monetary base to be exact).

  7. Gravatar of Ralph Musgrave Ralph Musgrave
    17. November 2013 at 01:07

    Kebko,

    Deposit insurance works fine for SMALL BANKS. FDIC does a good job there. The problem comes with large banks and systemic risks: only the state (i.e. taxpayer) can cover the risks there. And even then, some states have been near bankrupted by irresponsible banks (e.g. Iceland and Ireland).

    Re Selgin and White, they argued (with good reason) that SOME REGULATIONS, e.g. refusing to let banks in the US to diversify across the country, made those banks more fragile. But their idea that we can go back to some sort of ideal free market bank system is unrealistic: the reality is that depositors nowadays have the political power to demand 100% safe deposits. And that’s a reasonable demand, I think.

    So either we get that safety thanks to the taxpayer, which is a subsidy of banks, and I don’t care for subsidies. Or we have higher capital requirements, which is better, I think.

    In fact Laurence Kotlikoff advocates a system where ALL BANK CREDITORS (including depositors) are effectively shareholders. I like that system. See:

    http://www.bloomberg.com/news/2013-03-27/the-best-way-to-save-banking-is-to-kill-it.html

  8. Gravatar of Martin Martin
    17. November 2013 at 01:55

    Scott,

    Have you asked anyone to define when money is easy or tight and then point to counter-examples in history with very low or very high inflation? You have done this several times on this blog and I found that to be most persuasive.

    On another note what do you think of the Summers talk that seems to be making the rounds these days? http://www.youtube.com/watch?v=KYpVzBbQIX0

  9. Gravatar of Benjamin Cole Benjamin Cole
    17. November 2013 at 04:06

    I suppose meeting people, hearing words spoken as opposed to cold print, and sharing lunch etc. puts a different, perhaps better perspective on words.

    In print, Plosser sounds like a demented lunatic.

    Or maybe meeting people is bad idea. The witty exchanges, the modulated voices, the intelligent and cleanly shaven faces, the coats and ties, everyone appears so well-balanced and rational…except they are demented lunatics!

    (In my reporting days, this used to happen to me. I would attend a meeting,and everyone seemed so sensible. When I got back to the newsroom, I realized I had just participated in group insanity.

    (Did you General MacArthur proposed, nearly insisted, on dropping “30 to 50” A-bombs on China’s major cities during the Korean War–as well as a string of nuke-drops along North Korea’s northern border to get Chinese from ever crossing again? Inside his group, this was not considered inhuman and insane. The Joints Chiefs repeatedly raised the possibility of a preventive nuke war with Russia in the early 1960s, as they would lose 150 million people and be wiped out forever, and we would lose only 15 million. These were well-eduated, smart and serious people. Today the Fed has well-eduacted, smart and serious people….)

    Plosser said he would like minor deflation! Has he seen Japan? And the tenor of his comments is that the Fed has been easy and loose—even though the last five years have been record lows in terms of inflation, since WWII.

    Sumner is right—even the urbane and sophisticated economists do not get it. Money is tight, and that is why we have record low interest rates and inflation. There must be group-think or an insane norm in place at the Fed.

    If money is “loose” today, how should we define the Volcker era, which ended with 5 percent inflation? I guess we can say Volcker pursued a “reckless, wanton, debauched, even sinister and wickedly easy easy monetary policy.”

    BTW, Summers (as opposed to Sumner) is now suggesting we are in a new era of perma-ZLB-slow growth, Japan-lite.

    Sadly, Summers may be right for the wrong reason.

    The Fed is asphyxiating the economy, that is why. Maybe Summers knows that, maybe not. But he may be right.

  10. Gravatar of Erik Erik
    17. November 2013 at 05:30

    Thank your for the blog. I am becoming more and more interested in Market Monetarism. A general question, do you think it is possible for a Phd to get published in academic papers studying Market Monetarism, or is the subject still to heterodox?

    I am also curious on what you think about the Summers speech and perhaps also the Krugman enlargement. http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_r=0#more-35994

  11. Gravatar of ssumner ssumner
    17. November 2013 at 06:28

    Negation, Good point.

    dtoh, I don’t ever recall saying that getting rid of all regulations other than capital requirements is a bad idea. I think I may have misunderstood your earlier claim. I thought you were say that capital requirements could be used to control monetary policy.

    kebko, I’d be happy with getting rid of all banking regs. But Allison’s proposal is much better than the current status quo, especially if we still have deposit insurance.

    Edward, I agree that there is a lot of bad macro out there. I would add that it is on both left and the right. But Friedman never, ever claimed V is constant. He wrote a whole book on American monetary history, he knows what happened to V over the business cycle.

    Ralph, If you only knew how silly this statement was:

    “conservative/Austrians like Rogoff”

    Rogoff is not a conservative/Austrian and indeed favors much higher inflation. If you asked the typical economist at elite institutions who is the better economist, Krugman or Rogoff, you might be surprised by what you’d hear.

    You said,

    “Deposit insurance works fine for SMALL BANKS.”

    Just the opposite, the problems with FDIC are mostly at small banks, not big banks (where TBTF is the problem.)

    Martin, Yes, I’ve done that many times.

    Martin and Erik, Thanks, I’ll take a look.

  12. Gravatar of ssumner ssumner
    17. November 2013 at 06:30

    Ben, Keep in mind that Plosser is happy with the Fed’s 2% target, and is in a job where it is his duty to carry out the mandate. The fact that he also thinks deflation would be OK has no bearing on his failure as a policymaker, if he is failing.

  13. Gravatar of benjamin cole benjamin cole
    17. November 2013 at 06:54

    Scott—
    As a reporter, I knew the danger of meeting people—that I would like them, maybe even lose my objectivity. I tend to like people, especially if they are earnest. Of course, in this context, earnest is irrelevant.
    I think a central banker who rhapsodizes about deflation when his central bank is asphyxiating the economy is…well…a menace to prosperity.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. November 2013 at 07:39

    Benjamin,
    Speaking as someone who has actually met Charles Plosser in person, you would only be in danger of liking him if you think Darth Vader would be a great person to share a beer with after a long day’s work of blowing up planets.

  15. Gravatar of kebko kebko
    17. November 2013 at 08:07

    Ralph,
    That’s a feature, not a bug. If large banks wouldn’t be able to get insurance in the open market, they wouldn’t get so big.

  16. Gravatar of Dustin Dustin
    17. November 2013 at 08:26

    *All* regulation?! Surely this is constrained to banking risk / market diversification variety intended to lead to a safe and reliable financial system. I mean, foreclosing on service members’ (or anyone’s) up-to-date mortgages = not cool.

  17. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2013 at 08:38

    I dunno, on Plosser etc I think it is better to be honest about what is being said:

    “First, limit the Fed’s monetary policy goals to a narrow mandate in which price stability is the sole, or at least the primary, objective;

    Second, limit the types of assets that the Fed can hold on its balance sheet to Treasury securities;

    Third, limit the Fed’s discretion in monetary policymaking by requiring a systematic, rule-like approach;

    And fourth, limit the boundaries of its lender-of-last-resort credit extension and ensure that it is conducted in a systematic fashion”

    I don’t hear level target in there.

    So there’s a HUGE difference right away about what to do next month.

    I also think we should be honest with ourselves about a 2% inflation target, and a Price is Right mindset of get as close as you can without going over.

    Someone trying to get as close as possible but not go over, will always slightly undershoot.

    Combine those two and you have what we have now.

    ——

    Telling someone they are failing / losing / violating the law without confronting the game being played by others isn’t exactly how WE ARE FRAMING it….

    Isn’t the best way to sell something to them.

  18. Gravatar of ssumner ssumner
    17. November 2013 at 09:12

    Ben, This was not about liking people, it was a question of agreeing with most of what they had to say.

    Dustin, I don’t see what that has to do with regulation.

    Morgan, No the inflation target is symmetrical, it’s just as bad to undershoot as overshoot, indeed worse (the 1930s were worse than the 1970s.)

  19. Gravatar of Jim Glass Jim Glass
    17. November 2013 at 09:22

    Hey, I’d like to enjoy a beer with someone after a hard day’s work of blowing up planets.

    What red-blooded American male youth of the 1970s or later hasn’t had that fantasy? (See the video game market.)

    And shouldn’t we all strive to remain young at heart?

  20. Gravatar of Dustin Dustin
    17. November 2013 at 09:51

    ssumner,

    There are loads of regulations that deal with treatment of customers, such as ‘Unfair or Deceptive Acts’ or ‘Practices or Privacy of Consumer Financial Information’ (I would be surprised if these were considered contentious). Just wasn’t clear to me if the term ‘all banking regulation’, as used in econ discussions, refers to a specific class of regs.

  21. Gravatar of Morgan Warstler Morgan Warstler
    17. November 2013 at 09:53

    Scott, I’m not sure those you want to convince think the target is symmetrical.

    What makes you think they aren’t playing Price is Right?

  22. Gravatar of Dustin Dustin
    17. November 2013 at 10:06

    ssumner,

    “No the inflation target is symmetrical, it’s just as bad to undershoot as overshoot, indeed worse (the 1930s were worse than the 1970s.)”

    Exactly. It seems that some stuff I read characterizes your position on inflation, or the MM position, as something along the lines of ‘more is better’.

    “Mr R Fox:
    Yes, this is just an exercise sophistry and jargon – he defines ‘tight money’ as any circumstance that produces both low growth and low reported inflation, no matter how much money has been created and how bloated a CB’s balance sheet has become. By this reasoning, there’s nothing but lack of money printing that keeps us all from being prosperous all the time. Academics really are irresponsibly dangerous, aren’t they?”
    http://www.economist.com/blogs/freeexchange/2013/11/unconventional-monetary-policy-2

  23. Gravatar of benjamin cole benjamin cole
    17. November 2013 at 12:45

    Mark S
    Funny. Not surprising…I suspect a cult of monetary ascetics or sadomonetarists is running a cabal inside the Fed….

  24. Gravatar of ssumner ssumner
    17. November 2013 at 12:45

    Morgan, I’m trying to convince my fellow economists, who generally do see things in symmetrical terms.

    Dustin. Comment sections are always full of idiots, so I don’t worry to much when people mischaracterize my views.

  25. Gravatar of ssumner ssumner
    17. November 2013 at 12:46

    Dustin, Regarding your other comment, it doesn’t take a million regs to say “fraud is illegal.”

  26. Gravatar of dtoh dtoh
    17. November 2013 at 12:55

    Scott,
    “dtoh, I don’t ever recall saying that getting rid of all regulations other than capital requirements is a bad idea. I think I may have misunderstood your earlier claim. I thought you were say that capital requirements could be used to control monetary policy.”

    Scott, I may not be recalling this all correctly, but I think you argument was that we should just eliminate TBTF. My argument was that we will not get rid of TBTF, therefore we need to regulate asset/equity ratios.

    And… I did also argue that you could control monetary policy with asset/equity ratios, which BTW is correct….it’s fundamentally no different than tweaking IOR rates. That said, I’m so convinced of the efficacy of NGDPLT using OMO (and IOR rates) that I can’t see any reason why you would want to use asset/equity ratios for monetary policy.

  27. Gravatar of Geoff Geoff
    17. November 2013 at 13:00

    “But my overall reaction is that the conservative/Austrian/monetarist/classical liberal/libertarian/RBC schools of thought are too influenced by a combination of massive deficits, massive QE, near-zero interest rates, and simply assume that with all this stimulus we must have high inflation, or else it’s just around the corner.”

    The Fed is engaging in high inflation.

    Never reason from a price or spending change.

  28. Gravatar of Geoff Geoff
    17. November 2013 at 14:08

    Saying that money is too tight because NGDP is falling is as arbitrary as saying that money is too tight because the prices of electronics are falling.

    NGDP fails to take into account money created but held, and as a result, makes extremely poor policy prescriptions.

  29. Gravatar of Geoff Geoff
    17. November 2013 at 14:09

    Should have said NGDPLT, not just NGDP.

  30. Gravatar of Gordon Gordon
    17. November 2013 at 15:06

    I’m assuming those who fear that monetary policy is too easy and will spark inflation are ignoring the fundamentals of supply and demand when it comes to money. And they’ve not considered whether the demand for money has increased. Or do they take that into account and it’s some other issue that leads to their fears?

    If I was to make an analogy, changes in NGDP are the way to tell if you have monetary disequilibrium much in the same way that changes to my weight tell me that I have a caloric disequilibrium. I’ve upped my caloric intake over the last 6 to 8 months but it hasn’t led to any weight gain even though I would like to put on some weight. Part of the problem is that I wasn’t eating enough before then. Another part of the problem is that an increase in food intake can lead to an increase in metabolism (demand increasing in response to an increase in supply). Inflation fear mongers would probably say my caloric policy is too easy but my waist line has not been inflating.

  31. Gravatar of Geoff Geoff
    17. November 2013 at 15:36

    Gordon:

    “I’m assuming those who fear that monetary policy is too easy and will spark inflation are ignoring the fundamentals of supply and demand when it comes to money. And they’ve not considered whether the demand for money has increased. Or do they take that into account and it’s some other issue that leads to their fears?”

    There are many who are concerned with high inflation who have taken money holding into account. Indeed, it is typically those who “fear” inflation the most who are most sensitive to money holding, for it is money holding that explains why the high money supply inflation has not resulted in equivalent rates of price inflation.

    Or has it? I hope you’re not taking the BLS price inflation statistics as gospel. Many who study monetary mechanics have shown that the method of calculating price inflation has changed over the years which has conveniently resulted in a distinct pattern of gradually lower reported numbers. In other words, if the same method of calculating inflation during the 1970s was still in use today, the reported numbers would be comparable to the numbers of the 1970s.

    Hedonic adjustments, substitutions, and other innovations to reported CPI have made it seem like price inflation has lowered in general since the 1970s, when in reality it was really just a reporting change.

  32. Gravatar of Bill Ellis Bill Ellis
    17. November 2013 at 16:38

    Geoff says…”if the same method of calculating inflation during the 1970s was still in use today, the reported numbers would be comparable to the numbers of the 1970s.”

    Got a link ?

  33. Gravatar of ssumner ssumner
    17. November 2013 at 18:06

    dtoh, Yes, with no other regs we could also eliminate capital requirements.

    Gordon, That’s right.

    Bill, Pay no attention to anything Geoff says, he’s wrong about everything.

  34. Gravatar of Morgan Warstler Morgan Warstler
    18. November 2013 at 06:14

    Scott,

    You REALLY think Plosser sees 1.5% and 2.5% as the same when he thinks “Fed has a target of 2%”

    I personally think the reason nobody is talking Level Target is bc they are in fact playing price is Right, and LT instantly changes the game they are playing.

    The lack of LT is evidence I’m right, no?

  35. Gravatar of ssumner ssumner
    18. November 2013 at 07:22

    Morgan, There are two separate issues, symmetrical vs asymmetric, and level vs growth rates. I think Plosser favors symmetric and growth rates, but am not certain.

  36. Gravatar of chris chris
    18. November 2013 at 08:51

    I have seen the face…it is hidden in the bell on the new one hundred dollar bill.

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