A slightly off-center perspective on monetary problems.
My impression is that most right-wingers in America are deeply suspicious of the European Union. And fearful that the model will spread here. But I think they are looking at things exactly backward; in fact the EU model is so good that we should adopt it right now in the US of A.
I probably picked on Anna Schwartz enough last winter, but since readers keep sending me her new editorial in the NYT, I suppose I should say something. Here is her explanation for why monetary policy was easy last fall:
Let me begin with the former. It is standard practice for a central bank like the Federal Reserve to ease monetary policy to combat a recession, and then to tighten it as recovery gets under way. Mr. Bernanke so far has only had to do the first half, and has conducted a policy of extreme ease. The Fed’s Open Market Committee cut the federal funds rate in October to 1 percent from 1.5 percent, and then in December to a range of zero percent to 0.25 percent.
Extreme ease? If this quotation sounds familiar, it may be because the argument used is essentially identical to an earlier Joan Robinson analysis of the German hyperinflation:
“An increase in the quantity of money no doubt has a tendency to raise prices, for it leads to a reduction in the rate of interest, which stimulates investment and discourages saving, and so leads to an increase in activity. But there is no evidence whatever that events in Germany [in the early 1920s] followed this sequence.”
I ended my previous post by pointing to a striking correlation:
It’s interesting to consider the small group of economists who have suggested that monetary policy can and should have done more, and/or the payment of positive interest on reserves was a mistake: Thompson, Hall, myself, Woolsey, Glasner, Svensson, Jackson, etc. Every one of them was in the even smaller group of economists that focused on forward-looking monetary regimes of one form or another. Once you start looking at monetary policy in a forward-looking fashion, everything seems different.
To give you an idea just how striking this pattern is, consider the following two facts:
1. In addition to this short list, I know of only two other economists who wrote papers advocating that monetary policy “target the forecast,” Robert Hetzel and Kevin Dowd. That’s just nine people.
2. The ideas that I have promoted on this blog are widely viewed as quite heterodox, departing from the prevailing views of economists on both the right and the left. Indeed, very few economists have publicly argued that Fed errors in late 2008 made monetary policy much more contractionary that it appeared, and that these errors (perhaps just errors of omission), contributed to a severe intensification of the recession.
Here is a very interesting WSJ article on Lars Svensson.
STOCKHOLM — One of the architects of inflation targeting — now a widely used central-bank policy — says central banks should encourage expectations that they will let prices overshoot their target, and then do so.
That would help combat rising unemployment and aid economic activity around the world, Lars E.O. Svensson, deputy governor of the Swedish Riksbank, said in an interview.
At first glance, the overshooting would seem to violate my proposal to “target the forecast.” But on closer examination it is exactly the same idea. We both support the concept of “level targeting” which would make up for any shortfall in one period, by having the target variable grow extra fast the next period:
Mr. Svensson stressed that underlying price levels were a more effective target than inflation rates for a central bank in the long run.
This is my most requested post so far (and thanks to JKH for the idea for the title.) I hope it’s not as “awful” (to quote Bill) as my previous post.
Here’s how Bernanke started off his recent editorial in the WSJ:
The depth and breadth of the global recession has required a highly accommodative monetary policy. Since the onset of the financial crisis nearly two years ago, the Federal Reserve has reduced the interest-rate target for overnight lending between banks (the federal-funds rate) nearly to zero. We have also greatly expanded the size of the Fed’s balance sheet through purchases of longer-term securities and through targeted lending programs aimed at restarting the flow of credit.
These actions have softened the economic impact of the financial crisis. They have also improved the functioning of key credit markets, including the markets for interbank lending, commercial paper, consumer and small-business credit, and residential mortgages.
Isn’t this basically what Herbert Hoover’s Fed did? Didn’t they also cut rates to near zero levels? Didn’t they also massively expand the Fed’s balance sheet, causing rapid growth in the monetary base? Didn’t Hoover also bail out the banking system with taxpayer money through his Reconstruction Finance Corporation? So does that mean the Fed was also “accommodative” in the early 1930s? And if so, what’s the difference between ‘accommodative’ and ‘expansionary.’
