The Fed can do more! The Fed can do more!

The previous post was too sarcastic, so perhaps people might have overlooked the essential point.  It’s been obvious to me for the past 4 years that most people, most reporters, most pundits, most Congressmen, even most economists, think the Fed can do no more, and also think that Fed has done just about all it thinks it can do.

That’s false, indeed it isn’t even debatable.  Oh you can debate whether the Fed can do more (I think the answer is obvious) but what can’t be debated is that the Fed certainly thinks it can do more, but isn’t doing so.  That’s something that no serious person can deny.  Except it’s obvious to me that most people don’t understand this.  So for nearly 4 years I’ve been running around like Paul Revere, except I’m not shouting about the British coming.

People keep telling me that market monetarism is not a popular view.  But how can there be such a thing as “public opinion,” if our society is completely in the dark about what’s going on.  For the past four years the Fed’s been capable of providing more AD, they have refused to do so, and they’ve gotten away with it because most people, even most economists I’m afraid to say, as as ill-informed as this Congressman:

Representative John Carney, Democrat of Delaware, went one step further.

“The Fed is doing everything it can to address the unemployment part of your mandate, is that correct?” he asked Mr. Bernanke.

Mr. Bernanke, momentarily startled, responded that the Fed could do more, and was considering whether it should.

I really wish I had some literary skills, so that I could do justice to what went on in that exchange.  It’s like everything I’ve been fighting four over the last 4 years, everything I’ve been trying to say, was perfectly crystallized, hanging there in mid-air.  And then I presume the hearings went on as if nothing happened.  They don’t say what happened next, but I can just imagine something like the following:

Well that’s good to hear Mr. Bernanke, I was worried by a few crazy bloggers claiming that you haven’t done all you could.

Sometimes there is mass ignorance in America about an issue for which there is genuine uncertainty, say whether Saddam had WMD.  But this is so maddening precisely because there is no uncertainty.  Bernanke’s been saying exactly the same thing for 4 years, indeed for 15 years if you count Japan.  And every time he says it America’s VSPs cover their ears and pretend not to hear.

Despite my criticism of Bernanke over the years, I’ve always liked him.  And this statement makes me respect him even more. The easy way out would be some sort of bland “yes, we are doing all we can.”  Perhaps even Bernanke, with all his patience, is getting tired of the appalling stupidity surrounding this issue.  After all, he must have to deal with unbelievable garbage from some of his his fellow FOMC members.  Maybe he’ll reach the point where he completely loses patience, and opts for something radical.

Or maybe I’m just dreaming.


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44 Responses to “The Fed can do more! The Fed can do more!”

  1. Gravatar of Brito Brito
    18. July 2012 at 17:25

    Scott, a philosophical question: what is the goal of monetary policy, not in terms of aggregate measures like NGDP, but in terms of the actions people will make? Forget banks for a moment, what are you trying to get the people to do?

  2. Gravatar of Marcus Nunes Marcus Nunes
    18. July 2012 at 18:12

    Scott, I partly agree with you on Bernanke. Professionaly over the years he´s made clear he understands. But it´s only partial understanding because he´s mired in the “credit view”. He´s also an inflation targeting/deflation avoider freak.

  3. Gravatar of Benjamin Cole Benjamin Cole
    18. July 2012 at 18:30

    What drives me crazy is that history in Japan and the United States suggests that QE does not boost the rate of inflation, though it does boost real output (and wipes out debt).

    Jeez, if ever there was the right policy, it is QE sustained and solid until we see serious growth…..and for the Fed to say that is what it intends to do, damn the torpedoes…

  4. Gravatar of Justin R. Justin R.
    18. July 2012 at 18:40

    Scott, what are your thoughts on the possibility that the Fed will drop the interest rate on reserves to zero? Specifically, do you think this would have much of an impact on lending?

  5. Gravatar of Max Max
    18. July 2012 at 19:12

    Bernanke: “I recognize that some people would advocate that we set an inflation target at, say, 4 percent and maintain that for a number of years. I don’t think first that we could do that without losing control of the inflation process. Secondly, I’m very skeptical that it would increase confidence among businesses and households that increase economic activity. I think it would create a lot of problems in financial markets as well. And so I don’t think that’s a strategy that has a lot of support on the Federal Open Market Committee.”

    That’s a strong statement that Bernanke is opposed to doing anything that might destabilize long term inflation expectations.

    This doesn’t mean that Bernanke wouldn’t tolerate temporarily higher inflation if it happened “by accident” with no change in long term inflation expectations. The Fed does have a dual mandate, after all. But the Fed isn’t going to engineer higher inflation by changing its target. Nor is it going to engineer higher inflation by lowering interest rates, because it can’t. Or in monetarist lingo: a temporary increase in the money supply has no effect, and a permanent increase has been ruled out.

  6. Gravatar of DonG DonG
    18. July 2012 at 19:55

    Rep. Hensarling really tears into Bernanke at the 56 min. mark (http://www.c-span.org/Events/Ben-Bernanke-Discusses-Fed-Monetary-Decisions/10737432397-1/). Unfortunately it is just to setup a rant on regulation. I think Bernanke was actually defensive.

    The Rep. Carney question comes at the 1:40 mark. I thought Bernanke was more tired than taken aback. Carney didn’t ask anything interesting and his angle was to get Bernanke to speak against abrupt tax increases. Yawn.

    I thought the only interesting part of the two days of testimony was the Senator that said, if you knew about Libor rigging 4 years ago, and we have good regulatory oversight, why did the investigations start 2 weeks ago?? *that* is a good question!

  7. Gravatar of DonG DonG
    18. July 2012 at 20:10

    FYI, Sen. Vitter at 1:08 mark (http://www.c-span.org/Events/Fed-Chairman-Goes-Before-Senate-Cmte-for-Monetary-Policy-Report/10737432369-1/)

  8. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 20:27

    It’s truly astonishing watching a political strategist spend 4 years of his life fighting a battle that is nothing more and nothing less than wanting a small group of men sitting in an ivory tower to press CTRL-P 3848 times instead of 3137 times.

    If I devoted my intellectual capacity, resources, time, energy, emotions, everything, to that, then I would perhaps contemplate receiving a lobotomy.

    It’s just so…ignoble.

  9. Gravatar of Brito Brito
    18. July 2012 at 20:59

    Wow, MF the line:

    “then I would perhaps contemplate receiving a lobotomy.

    It’s just so…ignoble.”

    is an unbelievably rude an offensive thing to say to anyone (I’m assuming that was directed at Sumner implicitly). I mean, most of your posts are outrageously condescending, patronising and smug, but that is offensive even for you.

    Also ironic, seeing as how you probably type a greater quantity of words on this blog in the comments section about how pressing CTRL-P 3848 times instead of 3137 times will cause hyperinflation and an economic apocalypse.

  10. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. July 2012 at 21:02

    to press CTRL-P 3848 times instead of 3137 times.
    Nice of you to express your total lack of understanding in one phrase.

  11. Gravatar of Jim Glass Jim Glass
    18. July 2012 at 21:28

    Sometimes there is mass ignorance in America about an issue for which there is genuine uncertainty, say whether Saddam had WMD. But this is so maddening precisely because there is no uncertainty.

    But it is absolutely typical for the voters and govt to take the wrong side of issues on which there is no uncertainty. Especially re economics.

    Some years ago the AER took an international survey of economists to find the issues they most agreed upon. The #1 strongest point of agreement for all was “price controls are bad, especially residential rent controls”. Has that ever delayed any of the renewals of rent controls in NYC since 1945 for even five seconds?

    Whatever the virtue of entitlement programs, there is *no* doubt that having them unfunded by over $100 trillion at present value is a very bad idea. Does that cause anyone to even try to stop that amount from continuing to grow by additional trillions of dollars each and every year?

    Here via Planet Money are six economic reforms unanimously agreed upon by economists left, right and libertarian. (Dean Baker, Russ Roberts, Louis Zingales, Katherine Baicker and Robert Frank.)

    Not only is there no chance that any of these will be enacted, but any politician who even suggested them would commit political suicide.

    So the public and govt going entirely against what is *with certainty* the best policy is an every day event.

    And those economists did unanimously agree about those policies being good — as you’ve said yourself, a consensus among economists that more monetary stimulus would be a good thing is very notably lacking.

    Politics and government deliver what the median voter wants. But nobody says the median voter is anything but massively ignorant, biased, mis-educated in what he does know, and lacking of thought about future consequences in forming his wants. Politics and govt deliver accordingly, every day.

  12. Gravatar of Benjamin Cole Benjamin Cole
    18. July 2012 at 21:56

    In how many places does the following Bloomberg story want to make you cry?

    Bernanke Says Fed Can Remove ‘Punch Bowl,’ Curb Inflation
    By Jeff Kearns – Jul 19, 2012 4:33 AM GMT+0700
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    Federal Reserve Chairman Ben S. Bernanke sought to assure lawmakers the Fed can limit inflation while providing record stimulus and won’t allow consumer prices to rise in return for faster economic growth.
    “It will be a similar pattern to what we’ve seen in previous episodes where the Fed cut rates, provided support for the recovery, and when the recovery reached a point of takeoff where it could support itself on its own, then the Fed pulled back, took away the punch bowl,” Bernanke told the House Financial Services Committee today in Washington.
    Enlarge image
    In his prepared testimony, Federal Reserve Chariman Ben S. Bernanke said inflation will probably remain at or below the central bank’s 2 percent target after energy prices reversed their gains from earlier this year. Photographer: Joshua Roberts/Bloomberg

    July 18 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke testifies before the House Financial Services Committee in Washington. (Excerpts. Source: Bloomberg)

    Bernanke, on his second day of testimony to Congress, responded to lawmakers who questioned his ability to control inflation after cutting the Fed’s key interest rate almost to zero and expanding its balance sheet to a record $2.87 trillion in a bid to boost growth.
    “There is so much money out there that this thing is going to really go and inflation is going to be a huge problem,” said Representative Stephen Fincher, a Republican from Tennessee.
    Republican Representative Jeb Hensarling of Texas questioned why the “greatest monetary and fiscal stimulus thrown at an economy in our history” has failed to reduce unemployment and boost growth, and whether the economy suffered a “profound failure of monetary policy” because of the Fed’s unprecedented actions.
    Bernanke disagreed that “there has been no progress” since the near “collapse” of the economy in 2008 and 2009.
    “It’s true that the recovery has been slower than we would have liked, but clearly we have made progress in unemployment and in job creation,” Bernanke said. “Financial crises lead to recessions that are slower to mend.”
    Inflation Outlook
    Bernanke, in prepared remarks, said economic growth is slowing and inflation will probably remain at or below the Fed’s 2 percent objective after energy prices reversed their gains from earlier this year.
    “Inflation seems to be well in check,” Bernanke said.

    –30–

    I was drowning in my own tears, so I couldn’t read the rest.

    Time to open up a bar somewhere in the Pacific, where mainland Chinese like to flock….

  13. Gravatar of Jim Glass Jim Glass
    18. July 2012 at 22:47

    UBS: The Risk Of Hyperinflation Is Largest In The US And The UK

  14. Gravatar of Jim Jim
    18. July 2012 at 23:26

    If Bernanke ever writes his memoirs, will he talk about how he secretly (or perhaps not so secretly) wished to do more? It will seem very self-serving and disingenuous at that point.

  15. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 23:35

    Lorenzo from Oz:

    “to press CTRL-P 3848 times instead of 3137 times.”

    Nice of you to express your total lack of understanding in one phrase.

    Actually that is a product of a full understanding. I suspect it hurts to hear your worldview summed up like that, but it’s the truth. I’ve been at this game for a long time, and that is the historical story of market monetarism in a nutshell.

    See, I know I’m right because you felt compelled to respond to that post, without showing the slightest hint that you have any argument against it. It was like pouring salt into a wound.

  16. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 23:49

    Brito:

    “then I would perhaps contemplate receiving a lobotomy.”

    It’s just so…ignoble.”

    is an unbelievably rude an offensive thing to say to anyone

    Even Hitler?

    I should stop shouldn’t I? Brito is feeling “offended”. I guess it isn’t “offending” that money printing is being used to finance the slaughter of innocent families who happen to live on oil fields, or sending SWAT teams to break down doors and kidnapping people for ingesting what they want to ingest, and then, after all is said and done, the poor have less real wealth than they otherwise would have had because they lost their job due to the money printers messing up economic calculation, and what’s left of their cash is worth less?

    Money printing is going to these state actions, and you have the gumption, the arrogance, the hubris, to tell me that I am offending you? Get a life. I mean it. Seriously.

    (I’m assuming that was directed at Sumner implicitly). I mean, most of your posts are outrageously condescending, patronising and smug, but that is offensive even for you.

    GOOD. It’s about time you holier than thou, smarmy, patronizing thug worshipers got a taste of your own medicine. You have been offending, and your intellectual worldviews have been harming, good honest people for literally decades.

    Also ironic, seeing as how you probably type a greater quantity of words on this blog in the comments section about how pressing CTRL-P 3848 times instead of 3137 times will cause hyperinflation and an economic apocalypse.

    I never said that. Nice “offensive” straw man. Nice to see you refuse to even engage the arguments being raised.

    Go back to sleep.

  17. Gravatar of Major_Freedom Major_Freedom
    18. July 2012 at 23:55

    Jim Glass:

    UBS: The Risk Of Hyperinflation Is Largest In The US And The UK

    So when can we expect explanations on how Caesar Lack et al don’t really believe that, and are only fear mongering in order to make a gain of some sort?

  18. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2012 at 00:32

    Marcus Nunes wrote:
    “Scott: Chris Sims thinks monetary policy effects on fluctuations are pretty weak!
    “Over the course of about 10 years, things that I did and other people followed up on managed to sort out what the effects of monetary policy changes are and distinguish those from co-movements in money and prices and income that didn’t have anything to do with policy. There’s now pretty much a consensus on how monetary policy affects the economy, and on what the size of that effect is. The general conclusion is that it accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations we see, but if you try to trace out historically, you can’t blame any recession on monetary policy”.

    Scott responded:
    “Marcus, That’s right, the 50% fall in NGDP between 1929 and 1933 can’t have had any causal role in the 30% drop in RGDP. I can’t even imagine what he’s thinking.”

    The Chris Sims quote comes from an interview transcrip recently posted at the Atlanta FRB and was featured yesterday in a post at Economists’ View:

    http://economistsview.typepad.com/economistsview/2012/07/accepting-the-effectiveness-of-monetary-and-fiscal-policy.html

    I have a lot to say about this (continued)

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2012 at 00:33

    (continued)

    Chris Sims:
    “The general conclusion is that it accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations we see, but if you try to trace out historically, you can’t blame any recession on monetary policy.”

    There are two claims in this statement and they each need some context:
    1) “…[monetary policy] accounts for maybe somewhere between zero and 20 or 25 percent of the fluctuations..”
    2) “…you can’t blame any recession on monetary policy.”

    To my knowledge only one paper has ever attempted to explicitly estimate the proportion of variation in real output attributable to monetary policy. That paper is:

    What are the effects of monetary policy on output? Results from an agnostic identification procedure
    By Harald Uhlig
    (2005)

    Abstract:
    “This paper proposes to estimate the effects of monetary policy shocks by a new agnostic method, imposing sign restrictions on the impulse responses of prices, nonborrowed reserves and the federal funds rate in response to a monetary policy shock. No restrictions are imposed on the response of real GDP to answer the key question in the title. I find that ”contractionary” monetary policy shocks have no clear effect on real GDP, even though prices move only gradually in response to a monetary policy shock. Neutrality of monetary policy shocks is not inconsistent with the data.”

    http://www.benoitmojon.com/pdf/Uhlig%20JME%20sign%20agnostic%20identification.pdf

    Uhlig notes in a footnote on the first page his gratitude to Chris Sims and a long list of other economists (including Bernanke) for their helpful discussions and comments.

    On page 384 Uhlig notes:

    “”Contractionary” monetary policy shocks have an ambiguous effect on real GDP. With 2/3 probability, a typical shock will move real GDP by up to +/- 0.2 percent, consistent with the conventional view, but also consistent with e.g. monetary neutrality. Indeed, the usual label ”contractionary” may thus be misleading, if output is moved up. Monetary policy shocks account for probably less than 25% of the variance for the 1-year or more ahead forecast revision of real output, and may easily account for less than 2% at any given horizon.”

    On page 392 he states:

    “I have followed the empirical approach in Bernanke and Mihov (1998a, b), who have used real GDP, the GDP deflator, a commodity price index, total reserves, nonborrowed reserves and the federal funds rate for the U.S. at monthly frequencies from January 1965 to December 1996.

    He explains his results in greater detail on page 398-399:

    “According to the median estimates, shown as the middle lines in this figure, monetary policy shocks account for 5 10% of the variations in real GDP at all horizons, for up to 20% of the long-horizon variations in prices and 15% of the variation in interest rates at the short horizon, falling off after that. Explaining just two or so percent of the real GDP variations at any horizon is within the 64% error band: it thus seems fairly likely, that monetary policy has practically no effect on real GDP. This may either be due to monetary policy shocks having little real effect, or due to a Federal Reserve Bank keeping a steady hand on the wheel, as argued by Cochrane (1994), Woodford (1994) or Bernanke (1996).”

    Examination of the graph on page 400 reveals that the peak proportion of variation in real GDP attributable to monetary policy shocks occurs at the 2 month horizon. It also reveals that 16% of the time the proportion of variation is greater than 40% at the 2 month horizon. In a 32 year period that would mean that would have occurred in approximately 61 months.

    (continued)

  20. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2012 at 00:34

    (continued)

    In 1998 Sims wrote the following working paper that was later published (2006) in Macroeconomic Dynamics. The answer to the title’s provocative question is no in Sims’ view:

    Does Monetary Policy Generate Recessions?
    Christopher A. Sims and Tao A. Zha

    Abstract:
    “The issue of uncovering the effects of monetary policy is far short of resolution. In the identified VAR literature, restrictions have been imposed to identify the effects of unpredictable monetary policy disturbances. We offer critical views on the unreasonable assumptions in the existing work and argue for careful economic argument about identifying assumptions. We display a structural stochastic equilibrium model in which our VAR identification would produce correct results while drawing attention to the serious lack of time series fit in most of the DSGE literature.”

    http://www.frbatlanta.org//filelegacydocs/wp9812.pdf

    On page 24 they note:

    “We were inspired by Ball and Mankiw [1992] to consider more disaggregated data on prices in modeling business cycle behavior. They showed that measures of asymmetry in price changes across sectors have predictive power for inflation. Our own experiments with a measure like theirs suggest that the extra predictive power they find is entirely captured by the conventional breakdown of the producers’ price index into crude, intermediate, and finished components. Our model, then, uses quarterly data over 1964-1994 on the following variables:”

    [List of Variables]

    “These variables correspond to those used elsewhere in this literature, except for the disaggregated price variables, for which the motivation was discussed above, and the bankruptcy variable. The bankruptcy variable was introduced on the basis of theoretical reasoning by one of
    us (Zha [1995]), and it appears to sharpen estimates of dynamics.”

    So the “bankruptcy variable” is totally new and is denoted Tbk. He explains in greater detail on page 30:

    “The Tbk shock that accounts for much of output, price and interest rate movements might be interpreted as a supply shock. Interest rates, commodity prices, and intermediate goods prices drop immediately after one of these shocks, followed by deflation in the general price level, output increases, a decline in bankruptcy, and a rise in the money supply. This is all what one would expect from an anticipated reduction in scarcity of inputs, resulting in deflationary pressure offset partly by expansionary monetary policy. It is clear that these shocks are sharply distinguished from monetary policy shocks by their different effects on subsequent inflation.”

    So a Tbk shock can be interpreted as an aggregate supply (AS) shock. His discussion of its effects and of monetary policy’s response is in the case of a positive AS shock leading to increased real GDP and reduced inflation. Monetary policy responds by loosening up in order to increase the rate of inflation but in doing so should raise real GDP still further. This is right if one views monetary policy’s main function as inflation targeting. But if stabilizing either real GDP or nominal GDP is the goal this is the exact opposite of what monetary policy should be doing.

    And on pages 31-32:

    “As can be seen from Figure 7b, output did decline in response to money supply shocks alone after the 1969 date, but the recessions around the 1974 and 1978-79 dates are attributed almost entirely to Tbk shocks. Both MS and Tbk shocks contributed to output decline subsequent to the 1988 date. A comparison of the MS line of Figure 7b with the Tbk line of Figure 7c shows that the latter is more important source of output fluctuation.”

    An examination of Figure 7 reveals that the Tbk variable contributed more to real GDP variability than any other variable. And based on their description of monetary policy’s response to Tbk shocks this should come as no surprise.

    (continued)

  21. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. July 2012 at 00:37

    (continued)

    Sims wrote an earlier paper that is very similar in methodology and conclusions:

    What Does Monetary Policy Do?
    By Eric M. Leeper, Christopher A. Sims and Tao Zha
    (1996)

    http://www.brookings.edu/~/media/projects/bpea/1996%202/1996b_bpea_leeper_sims_zha_hall_bernanke.pdf

    What’s most interesting about this paper is not the paper itself but the Comments by Ben Bernanke and Robert Hall and the Discussion which included Greg Mankiw and Milton Friedman. All have praise and criticism but allow me to turn to a portion of Bernanke’s criticism which I found most interesting:

    “And even if one agrees that monetary policy shocks explain a small portion of the variance in output and prices over the past thirty years, this is only one of several interesting questions that might be asked about postwar U.S. monetary policy. First, the within-sample variance decompositions say nothing about the potential real effects of monetary policy which experiences like the Great Depression and the Volcker disinflation suggest are large. To use a perhaps strained analogy, nuclear explosions account for approximately 0 percent of output variation in the U.S. economy over the past thirty years, but that fact is not informative about what would happen if nuclear weapons were actually used. To assess the potential of monetary policy to move output, one should focus on impulse response functions rather than variance decompositions (and perhaps consider the effects of “large” rather than “typical” innovations in monetary policy). Second, the result that monetary policy shocks have played a small role in output variation does not prove that policy was conducted well during the sample period (al-though a small degree of unpredictability is a feature of good monetary policy). In particular, as is well known, this exercise says nothing about the effects of anticipated monetary policy-or, equivalently, of the monetary policy rule-on the economy. Figuring out how to analyze policy rules in a framework of this sort remains an important unsolved problem.”

    So the “nuclear bomb,” that Bernanke seemingly so prophetically forecast, ironically fell on his watch. And given Bernanke’s addiction to Inflation Targeting as a policy goal, he naturally passively tightened monetary policy in the face of a supply side shock, which reading between the lines in Sims’ recent paper, which totally exonerates the Fed’s past conduct of monetary policy, has actually been a major contributing factor in every single recession he examined. Amazing.

  22. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 01:17

    I think I have just been overtaken for the lead in wordiness.

    [shakes fist at Mark]

    Sadowskiiiiiiiii!!!!

  23. Gravatar of Tom Tom
    19. July 2012 at 02:23

    me: “2001-2006, definite bubble. How would NGDP [targeting] have reduced that?”

    Scott: I’m not sure it would have, but why should I care? The housing mess isn’t what caused the recession.

    If you want the Fed to do more, you have to explain the cause and the depth of the Great Recession. Not only must folks, including me, support NGDP — but politicians must explain why NGDP targeting won’t lead to another boom bust, or at least a much shorter bust.

    Every recession is caused by “too much” prior malinvestment. Every year there is some malinvestment, and some successful investment (measured by Return on Investment). Malinvestment causes losses to the investor, which reduce their invest-able capital funds, as well as consumption. The recession trigger is usually when a lot malinvestment is realized, without enough good investment to counter-act the losses.

    NGDP targeting probably won’t be reducing malinvestments, and if it had explicitly been followed 2001-2006, the housing bubble would still have occurred, perhaps a bit sooner at a lower peak (following a Taylor rule, [an NGDP targeting competitor] would have had tighter money sooner). Neither do I believe the Fed could have done so much after the bust, but a 5% NGDP target that is not being met, sooner, implies stronger and more radical action sooner, which almost certainly would reduce the length and depth of the Great Recession. That’s what is good about it.

    As Central Bankers flounder, calls for NGDP targets will get stronger. Were NGDP advocates able to offer a good answer for how the housing boom – bust happened, and a policy to avoid it in the future, politicians and the Fed would move to NGDP sooner.

    That’s why you’re wrong not to care about the housing mess, if you want NGDP targeting to be adopted.

  24. Gravatar of Matt Matt
    19. July 2012 at 02:31

    I propose a new drinking game for college students, the rules are as follows:

    Read the Major_Freedom comments of Scott’s blog.

    Consume two fingers of your beverage every time:

    MF mentions printing money in some form.
    MF uses an ad hominem attack.
    MF uses an association fallacy.
    MF uses the tu quoque fallacy.
    MF invokes Hitler in some manner.
    MF attacks a straw man.
    MF implies that higher aggregate demand leads to more people dying somewhere.
    MF attempts to shift the burden of proof.
    MF suggests that someone is using logical fallacies against him.
    MF takes pain to point out that he doesn’t care about anyone’s feelings.
    MF implies or states that, ‘money will become worthless’, ‘hyperinflation is eminent’ or ‘the US will become like Argentina/Zimbabwe/Weimar Germany’.

    Consume your entire beverage if:

    MFs comment suggests that everyone is stupid apart from him, and that another commenter hasn’t responded to his arguments anyway (even though the original post and the response holds no arguments and was simply personal attacks), which just proves how ignorant you are.

    It is recommended to stop if MFs posts start to make sense – you’re drunk enough.

    *Please Drink Responsibly*

  25. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 03:03

    There’s gonna be some mildly buzzed people playing that game.

    For the things I do in the list you provided are: mentioning printing money (which you guys call “monetary policy” and/or “inflation”), suggest that someone is committing a logical fallacy (people here do that a LOT), I think I mentioned Hitler once or twice (to great effect mind you), and that’s pretty much it.

    So that’s one, two, and MAYBE three that would be suitable for a drinking game.

    As for the rest in your list, you forgot some of the other argumentative fallacies you are flinging off the top of your head. There’s spoiling the well fallacy, there’s affirming the consequent (I caught Sumner doing that once or twice), there’s all kinds of cool ones that you can list that will keep you merely buzzed from my mentioning printing money. Did I say printing money? Printing money.

    You’re fun.

  26. Gravatar of marcus nunes marcus nunes
    19. July 2012 at 03:43

    From Ezra Klein:
    “Scary takeaway: What are the chances that Ben Bernanke does not actually believe he can do much more but he doesn’t want the market to know that?”

  27. Gravatar of dwb dwb
    19. July 2012 at 04:57

    I am pretty tired of hearing how QE does not do anything, or does little (especially from PK who should know better). If it does not do anything, then why am i paying all these taxes and why are we worrying about the debt? Just buy it all back and save 450 bn a year in interest. yes, we are just replacing it with reserves. lets fund the government entirely with reserves paying 25 bps.

    and please don’t tell me about the costs and risks. the Fed “manipulating” the treasury market is like a company buying back its own stock. so what? People who claim to be afraid of this adhere to the “low interest rates are sending the wrong message to congress that we need to balance the budget” philosophy.

    fine, lets send the right message to congress and monetize some debt until interest rates rise with inflation. then it’ll be the right time to fix the deficit.

  28. Gravatar of dwb dwb
    19. July 2012 at 05:01

    It is recommended to stop if MFs posts start to make sense – you’re drunk enough.

    its far better to start drinking before you read his comments. i am a lightweight these days so i doubt i’d get through “MF mentions printing money in some form.” thats like an entire bottle of scotch right there.

  29. Gravatar of Russ Anderson Russ Anderson
    19. July 2012 at 05:50

    Scott wrote So for nearly 4 years I’ve been running around like Paul Revere, except I’m not shouting about the British coming.

    You’ve been like Paul Revere if he rode around shouting, “The Quakers are not complaining enough about the British!” while mainly ignoring the Tories asking for more British intervention.

    You rip Representative John Carney for not being hard enough on Bernanke, while being quiet about Ron Paul and other conservatives that want TIGHTER monetary policy, and then wonder why you are not as effective as Paul Revere was.

    And then Scott adds, Despite my criticism of Bernanke over the years, I’ve always liked him. And this statement makes me respect him even more. The easy way out would be some sort of bland “yes, we are doing all we can.”

    The easy way out would be for Bernanke to DO HIS JOB! To PROVIDE MORE EASING! If Bernanke did what Bernanke suggested the Japanese do, provide more easing after droving rates to near zero, we would not have to have a discussion about whether the Fed could do more.

    Perhaps even Bernanke, with all his patience, is getting tired of the appalling stupidity surrounding this issue. After all, he must have to deal with unbelievable garbage from some of his his fellow FOMC members. Maybe he’ll reach the point where he completely loses patience, and opts for something radical.

    If Bernanke DID HIS JOB he would not have this problem!

    You keep making excuses for Bernanke, keep ignoring conservatives/republicans pushing for tighter monetary policy, keep complaining that liberals/democrats/Keynesians are the problem for not pushing Bernanke harder, and then wonder why you are not as effective as Paul Revere. Really.

    (I know, at this point someone will point to one of Scott’s rare criticisms of John Taylor or someone on the right, as if that balances the whole thing out.)

  30. Gravatar of Saturos Saturos
    19. July 2012 at 05:54

    Sometimes there is mass ignorance in America about an issue for which there is genuine uncertainty, say whether Saddam had WMD.

    Come on please Scott.

  31. Gravatar of johnleemk johnleemk
    19. July 2012 at 06:12

    Russ Anderson,

    In a multiparty democracy, the point of having opposing parties is for one party to call out another on its mistakes (whether perceived or real). The Democrats are not doing their job. Instead of laying into Republicans for opposing monetary stimulus, they lay into Republicans for:

    * outsourcing jobs
    * opposing Obama’s health policies
    * opposing fiscal stimulus (though even this has been more quiet recently)
    * opposing higher taxes on the rich

    Nary a word about monetary policy — and the one chance they get to really show Bernanke they want him to act, the NYT reports that:

    1. They congratulated him;
    2. “Democrats made no similar effort to convince Mr. Bernanke that he should take additional action.” (verbatim from the NYT)

    The Democrats are not doing their job. The GOP is evil, the Dems are morons, the public is screwed. What’s going to be easier to do — convincing the GOP that monetary stimulus is desirable, or convincing the Democrats that there hasn’t been enough monetary stimulus? Is it really so shocking that Sumner is bewildered at how hapless the Democrats have been?

  32. Gravatar of Jason Odegaard Jason Odegaard
    19. July 2012 at 06:41

    MF,
    Sadowskiiiiiiiii!!!!

    I heard that in Captain Kirk’s “KHAAAAAAAN!!!” voice, right??

  33. Gravatar of ssumner ssumner
    19. July 2012 at 07:00

    Brito, To behave as they would if wages and prices were flexible. Also keep NGDP growth fairly low, to reduce the tax rate on capital.

    Marcus, What’s clear is that Bernanke thinks the Fed can boost AD, but they haven’t done so.

    Ben, We’d get a bit more inflation, but the key is that we’d get higher real growth, as you say.

    Justin, First of all the goal should not be to boost lending. Whether it has an effect depends what else the Fed does. By itself I think it would have a modest positive effect.

    DonG, Thanks for the links.

    Max, I agree with him that a 4% inflation target is a bad idea. Indeed any inflation target is a bad idea. We need a 5% NGDP target. Or at least 4.5%

    Brito, I’m sure MF knows all about lobotomies, it would explain a lot. . . .

    Jim Glass, I’m claiming that even most economists don’t understand this.

    Jim, That’s a very good question.

    Mark, Interesting. Of course the big problem is identification. Neither the money supply nor the interest rate are reliable indicators of monetary policy.

    Tom, You said;

    “If you want the Fed to do more, you have to explain the cause and the depth of the Great Recession. Not only must folks, including me, support NGDP “” but politicians must explain why NGDP targeting won’t lead to another boom bust, or at least a much shorter bust.”

    The recession was caused by unstable NGDP growth. When NGDP fluctuates, so does RGDP. With stable NGDP, RGDP will be more stable. Mal-investment has NOTHING to do with this recession. There was a massive housing construction crash between January 2006 and April 2008, and unemployment merely edged up fom 4.7% to 4.9%. Then NGDP crashed and we got a severe recession.

    matt, I’m sure many people believe I am secretly paying MF, just so I’ll look good by comparison, but I swear it’s not true.

    dwb, The real problem is that the sort of QE that the Fed does is not enough to make a big difference. But it certainly helps a little bit. Now if they were to get serious . . .

    Russ, You said:

    “You rip Representative John Carney for not being hard enough on Bernanke, while being quiet about Ron Paul and other conservatives that want TIGHTER monetary policy, and then wonder why you are not as effective as Paul Revere was.”

    Quiet!!!!! I just called them EVIL. What more do you want?

    Saturos, I was referring to chemical weapons, not nukes.

  34. Gravatar of RJ RJ
    19. July 2012 at 08:03

    Jesus, Matt, are you trying to get people killed!?!?

  35. Gravatar of dwb dwb
    19. July 2012 at 08:09

    The real problem is that the sort of QE that the Fed does is not enough to make a big difference.

    right, its really not QE at all but their inability to manage expectations. There is a contingent out there however that thinks that they are impotent. In fact, they have a very fearsome weapon. It’s silly to think they lack the tools. What they lack is will.

  36. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 08:22

    Mark Sadowski:

    I heard that in Captain Kirk’s “KHAAAAAAAN!!!” voice, right??

    Haha, yup.

  37. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 08:56

    ssumner:

    The recession was caused by unstable NGDP growth. When NGDP fluctuates, so does RGDP. With stable NGDP, RGDP will be more stable. Mal-investment has NOTHING to do with this recession. There was a massive housing construction crash between January 2006 and April 2008, and unemployment merely edged up fom 4.7% to 4.9%. Then NGDP crashed and we got a severe recession.

    Well that’s just wrong. Aggregate demand does not finance wages. Aggregate demand is in part a function of spending out of wages.

    “Demand for commodities is not demand for labor.” – John Stuart Mill.

    You cannot infer a particular causation of “If NGDP then employment” from a positive correlation between the two. Both theoretically and empirically you have no case.

    And malinvestment had everything to do with the problems that were revealed when the problem causing inflation ended.

    http://research.stlouisfed.org/fredgraph.png?g=8T6

    This disjoint sectoral adjustment phenomena is not consistent with the fall in aggregate demand story. It is consistent with a sectoral misalignment, where the most interest rate sensitive highest capital intensive industries (construction, durable goods) suffered the most post-2008 and were relatively overextended during the prior boom, and where the least interest rate sensitive lowest capital intensive industries (service, retail) suffered the least post-2008 and where relatively underextended during the prior boom. You know, all the “boring” microeconomic stuff you hate so much. The part that is not so pure and singular and abstracted away from individual action.

    —————

    A key question you’re not asking is: since artificially low interest rates played a key role in the housing boom, is it really so difficult to understand that maybe artificially low interest rates also affected other parts of the economy besides housing, parts that are also relatively sensitive to interest rates? After all, interest rates are a price that virtually every business utilizes. Would it be difficult to understand that MORE than housing had to correct, but because human action takes place in time, because projects are interconnected, that not all corrections occur at the exact same time, and behave sequentially, one domino falling leading to another?

    Relative overinvestment did not exist in just housing. As the chart makes visible, there was relative overinvestment and relative underinvestment across the major sectors.

    —————

    Another key question you’re not asking is: WHY would people suddenly reduce their spending, despite the Fed not ceasing its money creation, and despite the Fed not destroying people’s money? Why would an absence of accelerated monetary inflation lead to such a reduction in spending? The Fed didn’t force people to reduce their spending. They did it on their own. The Fed didn’t force relatively more unemployment in the construction sector and relatively less in service sector. People did that on their own.

    —————-

    matt, I’m sure many people believe I am secretly paying MF, just so I’ll look good by comparison, but I swear it’s not true.

    Well, it’s certainly not too hard for me to look good by comparison.

  38. Gravatar of Mike Sax Mike Sax
    19. July 2012 at 09:00

    Brito, I certianly think we should do nothing but encourage Major to have a lobotomy or shock therapy or whatever might deal with his neurological disorder.

  39. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 09:23

    Max:

    Brito, I certianly think we should do nothing but encourage Major to have a lobotomy or shock therapy or whatever might deal with his neurological disorder.

    Internet diagnosis, FTW.

    Yes, it’s a “neurological disorder” to not support an institution that sends SWAT teams to plant smoker houses, and killer drones to families living over oil.

    I’m not “normal” like you looney tunes.

    One day you’ll realize that I was the sane one in the hall of nutters.

  40. Gravatar of Major_Freedom Major_Freedom
    19. July 2012 at 09:26

    Well the ECB looks to be doing more more more:

    http://i.imgur.com/p8g71.png

    Is there any market that isn’t rigged? Inquiring minds like to know.

  41. Gravatar of Russ Anderson Russ Anderson
    19. July 2012 at 15:06

    johnleemk wrote In a multiparty democracy.

    I really don’t like looking at economic issues through a political lens. The proper monetary policy which increases NGDP and reduces unemployment should be determined by economics, not politics. I believe Scott is correct that monetary policy has been too tight and the Federal Reserve can do more easing.

    From that perspective, while the people that believe the Fed can do no more are wrong, the people that believe the Fed should tighten are MUCH MORE WRONG.

    From a political perspective, I agree democrats should be doing more to stop the Republicans. Ironically, at the same time the democrats are too quiet on the need for monetary easing, republicans/conservatives on talk radio are accusing them of “debasing” the currency. Democrats are not the ones equating monetary easing with treason.

  42. Gravatar of Justin R. Justin R.
    20. July 2012 at 13:27

    “Justin, First of all the goal should not be to boost lending. Whether it has an effect depends what else the Fed does. By itself I think it would have a modest positive effect”

    What is the mechanism by which the removal of interest on reserves affects the economy if not through increased bank lending?

  43. Gravatar of ssumner ssumner
    22. July 2012 at 08:11

    Justin, Reducing the demand for base money, and hence boosting NGDP.

  44. Gravatar of Saturos Saturos
    22. July 2012 at 08:20

    Justin, the banks take their reserves earning zero nominal interest, and use them to buy assets whose prices are expected to rise, putting the money into circulation. Asset prices are expected to rise because the Fed is targeting a higher NGDP path. That path intersects some future time period where equilibrium nominal interest rates are positive. At that time there will be an excess supply of base money in the economy at the previously expected NGDP level, thus forcing that level upwards via asset prices, thus causing present asset prices to rise in anticipation.

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