When you read old economic journals you come across lots of empirical studies of things that no longer interest us.  In the interwar period there are lots of studies of the world gold market; estimates of newly-mined gold, industrial use, dishoarding from the Indian subcontinent, etc.  I also seem to recall lots of studies of money demand being published in the 1980s; money demand in Turkey, money demand in South Korea, etc.  My impression is that people are no longer interested in those studies.  They are reread about as often as yesterday’s newspapers.  I wonder whether the same will be true of recent macro studies using techniques such as vector autoregression (VAR.)

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Yes, if you give his remarks a very charitable interpretation.  I am referring to the remarks discussed by Arnold Kling here and here, which have received a lot of attention recently.

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

As everyone knows by now the once kooky and discredited Austrian business cycle model has now become conventional wisdom.  Easy money creates bubbles, which inevitably cause depressions when they pop.  It’s Greenspan’s fault.  Paul and I are still not on board the Vienna express, but we are in an awkward position.  (Thank God I didn’t have a blog in 2002!)

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Apologies to Emile Zola fans for the sophomoric title, but I wanted to get people’s attention as this is important.  In the past I had sort of given the Fed a pass on its behavior in the 3rd quarter of 2008, partly because we didn’t get a major stock market crash until the first 10 days of October, and partly because I hadn’t looked closely at the data.  A couple months back I looked at some graphs and realized that policy was already drifting off course in the third quarter.  I don’t know why it took me so long to look at daily data, but when I did so yesterday I was shocked by what I saw.  There are no excuses for the Fed’s behavior.  Last September they had all the information they needed to act decisively, and blew it.

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The following quotation from Nouriel Roubini seems to express a commonly held view:

Asked to grade the central bank’s job, Roubini gave the Fed a “D” for missing the crisis altogether and downplaying its possible impact, but a “B-plus” after the credit debacle had unfolded.

“I give them credit for being very creative and very aggressive,” he said.

I just don’t get this view.  All the major investment banks with their million dollar Ivy League employees missed this crisis (and its eventual impact), and yet the Fed was supposed to have predicted it?  The Fed pays much lower salaries than Wall Street.

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The Bank of England wants to raise inflation expectations, as it is one way of escaping from a liquidity trap.  But the public is skeptical, and inflation expectations remain below the long run trend for Britain.  The solution is to invest BOE employee assets into “linkers,” the British version of TIPS.

From the Daily Telegraph

Last week’s revelation that the Bank of England had switched 70pc of its own pension fund into index-linked gilts has raised the question of whether these government IOUs could be the answer to savers’ inflation worries.

The bank’s pension fund is the nearest thing to a legal insider trader, because the bank also sets the interest rates that control inflation. If the pension fund thinks inflation will rise, maybe we should all sit up and take notice.

(Thanks to Current for the link.)  A few months ago I discussed the issues raised when the central bank was an “insider trader.”