Here’s a disturbing story from the Associated Press:

WASHINGTON (AP) — Republican leaders of the House and Senate are urging Federal Reserve policymakers against taking further steps to lower interest rates.

On the eve of the Fed’s two-day policy meeting, the leaders sent a letter to Fed Chairman Ben Bernanke warning that the Fed’s policies could harm an already-weak U.S. economy.

The letter, sent Monday, was signed by Senate Republican Leader Mitch McConnell of Kentucky, Senate Republican Whip Jon Kyl of Arizona, House Speaker John Boehner of Ohio, and House Majority Leader Eric Cantor of Virginia.

The letter followed criticism from several Republican presidential candidates that the Fed efforts to boost growth are raising the risk of inflation.

“The American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy,” the lawmakers wrote.

It is rare for lawmakers to try and sway policy action at the Fed, which operates independently of Congress and the White House. It was also sent at a time when Bernanke, a Republican, has faced growing criticism from members of his own party.

Former Fed official Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, called the letter “outrageous. It’s incredible.” He said it’s been several decades since such high-level politicians tried so directly to influence the Fed.

“The fact that it’s in print and signed by the leaders of the House and minority leaders of the Senate raises it up a notch,” Gagnon said.

David Jones, head of consulting firm DMJ Advisors and the author of four books on the Federal Reserve, said he cannot remember another time when members of Congress had made such a direct approach to the Fed in the week that the central bank was meeting.

I think Congressmen have the right to speak out on monetary policy.  As long as their advice is not politically motivated.  Ask yourself the following question:  Would these men be pressuring the Fed to adopt a tighter monetary policy if:

1.  Unemployment were over 9%.

2.  Inflation had averaged 1% over the past three years.

3.  George Bush were president.

Were these men criticizing monetary policy under Bush, when inflation was higher than today?  I don’t recall that happening.

Unlike Rick Perry, I don’t think it is treasonous to advocate easy money or tight money.  Treason is advocating policies that you know will hurt the country, because you hope you can derive political gain from America’s misfortune.  I’ll leave it to my readers to decide who should be charged with treason.

PS.  This was especially ironic:

The letter expressed serious concerns that the Fed’s actions could weaken the foreign exchange value of the dollar or encourage excess borrowing by consumers who are already carrying too much debt.

Does anyone recall what happened to the dollar under Bush? 

PPS:  I used to frequently bash the NYT, but even they are waking up.  Check out this excellent story by Joe Nocera.

One of my first posts was entitled President Obama: You need to talk to Christy.  Little did I know that they had already had a rather spicy conversation.  Here is Ann Althouse:

It was Romer’s first meeting with the President-elect in November 2008. According to Ron Suskind’s book  “Confidence Men: Wall Street, Washington, and the Education of a President,”Obama had “a woman problem: too few of them in key jobs” and he was trying to bring in Christina Romer. And “It’s clear monetary policy has shot its wad” is what Obama said to her before even “hello.” Is that how you talk to a woman?

She then quotes the following passage from Suskind:

It was a strange break from decorum for a man who had done so outstandingly well with women voters. The two had never met before, and this made the salty, sexual language hard to read. Later it would seem a foreshadowing of something that came to irk many of the West Wing’s women: the president didn’t have particularly strong “women skills.” The guy’s-guy persona, which the message team would use to show Obama’s down-to-earth side, failed to account for at least one thing: What if you didn’t play basketball or golf? Still, for the moment, the comment didn’t faze Romer. She was curious to hear what he thought.

“What do you mean?” she asked.

Obama extended his hand, now ready to greet her. “I guess we need to focus on fiscal policy,” he said.

“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily, even with the historically low interest rates.”

I have to say, in the past 24 hours my opinion of the President has been completely transformed.  I may even owe Larry Summers an apology.  And here’s what’s most amazing of all.  Even Ben Bernanke keeps insisting the Fed can do much more on the AD front.  Just try to imagine those meetings between Obama and Bernanke.  We were all envisioning Obama pressing Bernanke to do more.  Now it looks like Bernanke was telling Obama that the Fed could provide much more monetary stimulus if it wanted to, Obama was insisting it couldn’t, and that in any case the real problem with the economy was rapid productivity growth.  I’m speechless.

PS.  My first link to Ann Althouse, a blogger from my hometown.  She handles the sexual innuendo angle far better than I can—so please take a look at her amusing post.

HT:  MikeDC

A couple days ago I suggested that Obama might not be particularly well-informed about economics:

It seems increasingly clear that Obama doesn’t have a good understanding of economics.  He approaches issues like a very bright non-economist using his common sense.

It now appears that it’s even worse than I thought.  I found this quotation from Ron Suskind over at DeLong’s blog. 

Both, in fact, were concerned by something the President had said in a morning briefing: that he thought the high unemployment was due to productivity gains in the economy.  Summers and Romer were startled.

“What was driving unemployment was clearly deficient aggregate demand,” Romer said.  “We wondered where this could be coming from.  We both tried to convince him otherwise.  He wouldn’t budge.”

I recall reading similar statements by his former colleagues at the University of Chicago.  They’d make arguments to him, and he just wouldn’t seem to get the point.  He’s obviously very bright, but it’s also clear that he falls into that relatively large group of Americans who have their own very strong views on economics, and couldn’t care less what professional economists think.  (An issue recently discussed by Noahpinion, Robin Hanson, and Sean Carrol.) 

Update.  I took another look at Richard Epstein’s comments that I was thinking about when I wrote the passage above.  He claimed Obama was a sort of blank slate.  When discussing issues you couldn’t tell what Obama thought, as he wouldn’t put his ideas out there.  I think the way I wrote the comment above left the impression the Chicago people thought he wasn’t bright, which isn’t necessarily correct.  The first 2:30 here are interesting, see what you think.

So for 200 year rapid productivity growth didn’t cause any serious unemployment problems in America, but now, right after NGDP collapses, we are to believe it is producing mass unemployment, even though recent productivity gains have been rather low.  I’m at a loss for words.  We elected a Luddite as President of the United States.

PS.  Regarding the three links above, I’m not a big fan of physics vs. economics debates.  To me it’s like arguing; “Which is the most important part of a newspaper, ink or paper?”  Without both you have nothing.  Without the physical sciences we are back in the Stone Age.  Without sound economic policy we are North Korea–which means back in the Stone Age.  Physicists can predict well when the problems are ultra-simple, like a rocket to the moon.  Ditto for economics.  Applied physics does horribly when asked to predict the weather, earthquakes, tsunamis, and other complex events.  That’s the sort of applied physics that would be valuable—going to the moon was a waste of money. 

In the end I think physics is a vastly superior field, but for aesthetic reasons not practical reasons.  Both (in their applied versions; engineering and economic policy) are essential to modern life.

From Yahoo.com:

Online gamers have achieved a feat beyond the realm of Second Life or Dungeons and Dragons: they have deciphered the structure of an enzyme of an AIDS-like virus that had thwarted scientists for a decade.

The exploit is published on Sunday in the journal Nature Structural & Molecular Biology, where — exceptionally in scientific publishing — both gamers and researchers are honoured as co-authors.

Their target was a monomeric protease enzyme, a cutting agent in the complex molecular tailoring of retroviruses, a family that includes HIV.

Figuring out the structure of proteins is vital for understanding the causes of many diseases and developing drugs to block them. 

But a microscope gives only a flat image of what to the outsider looks like a plate of one-dimensional scrunched-up spaghetti. Pharmacologists, though, need a 3-D picture that “unfolds” the molecule and rotates it in order to reveal potential targets for drugs.

This is where Foldit comes in.

Developed in 2008 by the University of Washington, it is a fun-for-purpose video game in which gamers, divided into competing groups, compete to unfold chains of amino acids — the building blocks of proteins — using a set of online tools.

To the astonishment of the scientists, the gamers produced an accurate model of the enzyme in just three weeks.

Put those gamers on the FOMC!  I wonder what gamers would predict if we asked for the amount of QE required to boost NGDP by 5%?

Steve Waldman has a post discussing the problems involved in making monetary stimulus effective.  He ends up by claiming that “helicopter drops” would certainly work, but the Fed isn’t authorized to do them:

To the degree that our problem is on the demand-side and stems from private-debt-overhang-induced risk aversion or a desire to hoard money, we know the solution. That problem, if it exists, will go away if we give everyone money. But giving everyone money is not conventional, authorized, monetary policy. It requires new law.

In macroeconomics the term “helicopter drop” refers to combined fiscal and monetary stimulus, essentially have the Fed print money to finance a budget deficit.  In recent years the phrase “print money” has become slightly misleading, as the Fed has turned bank reserves into interest-bearing debt.  But with or without interest on reserves, a “helicopter drop” is not a foolproof escape from a liquidity trap.  To see why, consider why conventional monetary policy is often ineffective.

In the early 2000s the BOJ printed lots of money, and the Japanese government issued lots of debt.  That should have been inflationary, if helicopter drops really worked.  But it wasn’t, because the BOJ also hinted that they’d eventually pull the money back out of circulation, to prevent prices from rising.  And in 2006 they did just that, and prices didn’t rise.

Many people assume this “expectations trap” (popularized by Krugman) applies only to conventional monetary stimulus.  Actually, it also applies to a combined fiscal and monetary stimulus, as we saw in Japan.  Temporary monetary stimulus won’t be effective.  It won’t work if rates are zero.  It won’t work if rates are positive.  It won’t work if combined with fiscal stimulus.  It simply won’t work, if temporary.

The Fed has also promised their monetary injections will be temporary, and hence they haven’t worked, just as in Japan.  You might argue “what else could they do, if they promised the tripling of the base was permanent, we could end up with hyperinflation.”  Yes, they can’t say it’s all permanent, but they could tell us how much.  But Steve Waldman says they won’t do that.  In that case there is no reason to expect any stimulus from more money, helicopter drop or not.

And yet, the market reaction to hints of QE2 suggests that open market purchases can be successful, even at the zero bound.  The most likely explanation is that the markets weren’t reacting so much to the action itself, but rather to the implied signal it sent about Fed determination to prevent deflation.  And the Fed action succeeded (so far) in preventing Japanese-style deflation.

And now for the perplexing title of this post.  When I put “helicopter drop” in quotation marks, I mean money financed deficits.  When I don’t use quotation marks, I mean real cash and real helicopters.  An elite macroeconomist would tell you it makes no difference, and in a purely technical sense that’s true.  But in terms of expectations it makes all the difference in the world.  An actual helicopter drop, Ben flying across America dumping hundred dollar bills out of a helicopter, would almost certainly raise inflation expectations sharply.  Especially if he dressed up like Peter Pan and kept announcing through a megaphone “if you believe you can inflate.”  The imagery would be powerful and evocative.  Indeed so much so that it would probably require only a tiny amount of actual $100 bills–just make sure the news cameras were there.  Better yet, do it over minority neighborhoods, to triggers subliminal concerns among Fox News viewers.

Of course all this would be crazy, and I am not advocating it.  But these thought experiments illustrate that we’d be much better off if the Fed simply told us where it wanted to go, and how it was going to get us there.  I get frustrated when Waldman says the only reasonable policy is a non-starter, because it’s not what the Fed wants to do:

The Fed is not going to target NGDP or a price level path over any relevant time frame without a change in governance structure or mandate. People on the left and right and especially the technocratic center who like to see the Fed as a loophole through a dysfunctional Congress are kidding themselves. The Fed is a political creature, not some haven for philosopher-economists in togas who will openly consider your ideas. Get over it and get your hands dirty.

Look, we’ve already established that what the Fed “wants to do” won’t work, it will fail.  It’s our job as pundits to suggest policies that actually will work.  If our society is suicidal then there’s nothing we pundits can do about it.  If we are told that every single suggestion that will work is politically unacceptable, there is nothing we can do about it.  Except keep trying to educate people.

Now I have to go iron my toga for a party tomorrow night.