Archive for April 2009


How did Friedman and Schwartz persuade us?

This is ambitious post.  Quite frequently people ask me to provide data supporting my hypothesis that the Fed (and ECB and BOJ) caused the crash of 2008.  Whenever I get that question I always have a sinking feeling, a feeling that people don’t really understand what I am driving at.  In the first part of this post I will try to explain the success of Friedman and Schwartz’s Monetary History of the U.S. But the real goal will be to use that explanation to help you see why if you are asking for data, you probably don’t see the problem as I do.

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Further Thoughts on Utilitarianism

Originally I had planned on a post arguing that the best way to understand liberalism in all its various permutations is by equating it with utilitarianism.  But I thought it might be better to break it into two posts, to keep the length more manageable.  I’ll do the liberalism part next Sunday.  Keep in mind that today’s post is intended to be a defense of utilitarianism from the liberal perspective; it is not aimed at objections that non-liberals might have.  Thus I don’t address dogmatic libertarian arguments against progressive taxation.

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Nick Rowe on Interest Rate Control

Nick must have come back from his American adventure even smarter than when he left, as he has just posted an excellent essay on the problem with relying on interest rate targets.  First I’ll point out a few passages that I particularly liked, and then I’ll provide my thoughts on a few questions that he raised at the end.  Let’s start with how he concludes his discussion of the classical dichotomy.

If you take this homogeneity insight, and add the assumption that the supply of money is exogenous, you get the Quantity Theory of Money (a change in the supply of money will cause an equi-proportionate change in all nominal variables), and the Neutrality of Money (a change in the supply of money will affect no real variable).

Post-Keynesian horizontalists (and we are all horizontalists now, unfortunately, because that’s the underlying problem) reject the Quantity Theory because they reject the assumption that the supply of money is exogenous. But that misses the point. A revised Quantity Theory can be re-formulated taking any nominal variable as exogenous — the price of gold, or nominal GDP futures, for example. The homogeneity insight does not depend on any definition of money supply being exogenous.

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Is the Fed even trying to reflate?

This might seem like an odd question.  Everyone seems to agree that Bernanke has done everything humanly possible to boost the economy.  But there is a difference between doing a lot, and doing things that are effective.  My hunch is that we will get a recovery soon, or perhaps I should say that is my reading of market expectations.  But I see little reason to believe it will be adequate.  Last month the Fed promised to buy up to a trillion dollars in bonds as a form of quantitative easing.  The monetary base is higher than a month ago, but it is still lower than at the beginning of the year.  The single most important thing the Fed can do right now (in addition to an interest penalty on excess reserves) is to clearly communicate its intentions to raise the five year expected inflation rate from 0.8% closer to its target of 2%.  See if you think this passage from an April 14 speech by Bernanke effectively conveys the Fed’s determination to reflate:

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Responsible liberals

This post was motivated by a recent piece by Tyler Cowen on why fiscal stimulus is not popular among social democrats in Europe.  I am worried than any liberals will come away thinking that my message is simply:

1.  Northwest European social democrats–good

2.  American liberals–bad

Well, it’s not quite that simple.  I am somewhat libertarian and even vote that way.  But I would be horrified by the thought of the current libertarian party coming to power.  Why do I vote for them?  Because I suppose I assume they would become somewhat more responsible as they got closer to power–as did the German Green party.  So don’t view this as an ad hominem attack on liberals (some of my best friends are . . . ) but rather an inquiry into how politics shapes ideologies.

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