[If you haven’t already, read the previous post first.]

In this post I plan to define mini-recessions and then discuss why they are so mysterious and why they might offer the key to macroeconomics.  Then I’ll offer an explanation for the mystery.

To understand mini-recessions we first need to understand the monthly unemployment data collected by the Bureau of Labor Statistics.  This data is based on large surveys of households.  It seems relatively “smooth,” rising and falling with the business cycle.  Month to month changes, however, often show movements that seem “too large” by 0.1% to 0.3%, relative to the other underlying macro data available (including the more accurate payroll survey.)  So let’s assume that once and a while the reported unemployment rate is about 0.3% below the actual rate.  And once in a great while this is followed soon after by an unemployment rate that is about 0.3% above the actual rate.  Then if the actual rate didn’t change during that period, the reported rate would rise by about 0.6%.

I searched the post war data, which starts at 1948, and covers 11 recessions.  During expansions I found only 12 occasions where the unemployment rate rose by more than 0.6%.  In 11 cases the terminal date was during a recession.  In other words, if you see the unemployment rate rise by more than 0.6%, you can be pretty sure we are entering an recession.  The exception was during 1959, when unemployment rose by 0.8% during the nationwide steel strike, and then fell right back down a few months later.  That’s not called a recession (and shouldn’t be in my view.)  Oddly, unemployment had risen by exactly 0.6% above the Bush expansion low point by December 2007 (when the current recession began) and by 0.7% by March 2008, and yet many economists didn’t predict a recession until mid-2008, or even later.

What’s my point?  That fluctuations in U of up to 0.6% are generally noise, and don’t necessarily indicate any significant movement in the business cycle.  But anything more almost certainly represents a recession.

Now here’s one of the most striking facts about US business cycles.  When the unemployment rate does rise by more than 0.6%, it keeps going up and up and up.  With the exception of the 1959 steel strike, there are no mini-recessions in the US.  The smallest recession occurred in 1980, when the unemployment rate rose 2.2% above the Carter expansion lows.  That’s a huge gap, almost nothing between 0.6% and 2.2%.

It’s often said that nature abhors a vacuum.  I’d add that nature abhors a huge donut hole in the distribution of “shocks.”  Suppose there were lots of earthquakes of zero to six magnitude.  And occasional earthquakes of more than seven.  And even fewer earthquakes of more than 8 magnitude.  But nothing between 6 and 7.  Wouldn’t that be very odd?  I can’t imagine any geological theory capable of explaining such a gap.  We normally expect shocks to become less and less common as we move to larger scales.  And to some extent that’s true of recessions.  The Great Depression is unique in US history.  Big recessions like 1893, 1982, and 2009 (roughly 10% unemployment) are rarer than common recessions.  So why no mini-recessions? (Or almost none, if we are going to count the 1959 downturn as a mini-recession.)

I don’t see why other macroeconomists are not obsessed with this issue.  Why isn’t there a Journal of Mini-Recessions?  I suppose some smart-alec commenter will say; “because there’s nothing to study, stupid.”  But he’d be missing the point; just like the dog that didn’t bark in that Sherlock Holmes tale, the lack of mini-recessions may provide the explanation to the business cycle.

(Or is there such a field, and I just don’t know about it?)

Let’s start with real theories of the cycle.  I can’t imagine any plausible real theory that didn’t predict lots more mini-recessions than actual recessions.  After all, aren’t modest size real shocks (i.e. those capable of raising the unemployment rate by 1.0% to 2.0%) much more common than really big real shocks, capable of raising unemployment by more than 2.0%?

Of course one could say the same thing about nominal shocks, wouldn’t you expect modest-sized nominal shocks to be more common than big nominal shocks?  Yes, but I still think the lack of mini-recessions points to nominal shocks (or monetary policy) as being the culprit.

Let’s try to construct a “just so story” to explain why recessions are always fairly big, and then look for evidence to support the story.  Suppose you have the following conditions:

1.  There is a data lag of a couple months.

2.  There is a recognition lag of a few months.  This is the time between when the data comes in and the Fed recognizes that a new trend is developing.

3.  When the Fed does recognize problems, it reacts in a “responsible and deliberative fashion,” it doesn’t change policy drastically, in a move that appears panicky.

4.  The Fed targets nominal interest rates.

5.  When the Wicksellian equilibrium rate is below above the market rate the economy expands at trend or above.

6.  The Fed can’t directly observe the Wicksellian equilibrium rate, and tends to gradually nudge rates higher as the economy approaches full employment, and seems in danger of overheating.  Or as inflation rises above target, and appears in danger of affecting inflation expectations.

7.  At some point the target rate is nudged above the Wicksellian equilibrium rate, but the Fed doesn’t know this initially.

8.  When the economy turns into recession the Wicksellian equilibrium rate falls fairly rapidly.  Even after the Fed begins cutting rates the market rate will be above the equilibrium rate for several months.  Hence monetary policy stays “contractionary” for several months after the Fed realizes a recession may be developing.

Put all that together and you get contractions that could easily last for 9 months to a year, even if Fed policy is attempting to be countercyclical.  BTW, you could tell a similar story with money supply targeting, as velocity tends to fall on its own accord during contractions.

OK, but is there any evidence for my just so story?  Maybe a bit.  Let’s start with the peculiar 1980 recession, the mildest in the post war period.  I recall in mid-1980 thinking that Carter was toast, and that the recession would be as bad as 1974-75.  The Fed had raised rates to about 15% in late 1979.  Unemployment soared in the spring of 1980.  But then it suddenly stopped rising, leaving the recession the mildest on record.  What explains this turnabout?  There are two possible answers.  First, this was one of the few periods where the Fed wasn’t targeting interest rates.  But I don’t think that tells the whole story.  Rather it was the Fed’s willingness to do an extraordinary about face in policy, and ignore interest rates.

We know from the Fed minutes that they generally don’t like to suddenly reverse course; it makes them look bad.  It makes the previous decision look foolish.  So during recessions they cut rates gradually, in a “responsible and deliberative fashion.”  But not in 1980.  The 3 month T-bill yield plunged from 15.2% in March to 7.07% in June.  That’s more than 800 basis points in 3 months!  And that immediately ended the recession.  The unemployment rate had ended 1979 at 6.0%, and then soared to 7.8% in July 1980.  But that was it; the rate immediately started falling, as the Fed stimulus (which pushed nominal interest rates well below the inflation rate) caused NGDP to soar at an annual rate of 19% in late 1980 and early 1981.

So that explains why the 1980 recession was so short.  But what of the longer than average recessions like 1982 and 2009?  In mid-1981 Volcker realized that the previous “tight money” policy had failed and more draconian medicine was needed.  So the Fed tightened policy and kept it tight even after it was clear we were in recession.  Volcker kept it tight until inflation fell to about 4%.  So the 1982 recession was longer and deeper than normal because it was a rare case where the Fed wanted a longer and deeper recession.

In 2009 the Fed would have preferred a milder recession, but they weren’t able to use their preferred interest rate instrument to spur the economy.  So the “liquidity trap” can explain this one.  But most contractions are about 9 to 12 months, which I think fits my model just so story pretty well.  In some cases like 1974, the first part of the recession is arguably not a recession at all, as unemployment rose only a tiny amount.  Rather it was a sluggish economy produced by the oil shocks and price controls.  The severe phase of the recession (when unemployment soared) was in late 1974 and early 1975, and was pretty short.

To summarize, I can’t even imagine a non-monetary theory that explains the lack of mini-recessions.  RBC, RIP.  Bye bye to blaming ObamaCare.  So much for the sub-prime bubble.  But I can imagine a plausible theory of how inertial central banks that target nominal rates and observe the macroeconomy with a lag might occasionally produce short contractions, typically 9 to 12 months.  I recall that in both the 1991 and 2001 recessions it wasn’t until about 6 months in that the consensus of economists even forecast a recession.  A few months later the contraction was over.  And I believe this theory can also account for the occasional recession that is slightly shorter or longer.

Also note that it’s a post-war US theory only.  I’d expect mini-recessions in small, less diversified economies, and perhaps even in the US prior to WWII, when we had a different monetary regime.  Unfortunately we lack comprehensive monthly unemployment data from before WWII.

PS.  Grad students who are interested might want to compare this theory to the Romer and Romer narrative of Fed decisions.  There might be some overlap.

PPS.  The two occasions where the U-rate rose by 0.6% with no recession were 1957 and 1960.  In both cases we were officially in recession within 2 months.  So maybe 0.5% is the limit of randomness.

PPPS.  I discussed one short recession (6 months) and three long ones (16, 18, 18 months)  in this post.  The other 8 post-WWII recessions were all within 8 to 11 months long.  There’s probably a reason for that, and I’d guess it has something to do with monetary policy.

This is part one of two posts on business cycles.  Both posts will examine one of the greatest mysteries on all of economics:  Why no mini-recessions?

I’ll get into mini-recessions in the next post, but first I’d like to examine another issue; why are US recessions always accompanied by nominal shocks?  And I’ll consider that issue by first examining recent events in Japan.  Here is the unemployment rate since July 2010:

A few issues:

1.  The graph is slightly off, the last two months are September/October, not October/November as it might appear.

2.  The figures from March to August do not include the regions devastated by the quake of March 2011.

Nevertheless, for two reasons I believe the evidence strongly suggests the quake did not significantly impact Japan’s unemployment rate.  First, because when the devastated regions were added to the total in September, the national unemployment rate actually fell from 4.3% to 4.1%.

And second, it was widely believed that the quake would cause lots of unemployment in Japan’s industrial heartland (Osaka to Tokyo), as supply lines were disrupted.  But it clearly did not.

Keep in mind this was a mindbogglingly large real shock.  The death toll was more than 10 times larger than Hurricane Katrina, and Japan is a much smaller country than the US.  The devastation was enormous.   Even today most nuclear plants are shutdown throughout Japan (only 11 of 60 are operating?), and electric power is rationed in some places. If this real shock didn’t affect the unemployment rate, what kind of real shock would?   Industrial production did drop sharply, but quickly recovered.  I’m not arguing that real shocks don’t affect output, I’m arguing they don’t affect jobs (very much.)

Some might argue that Japan is different, that Japanese firms don’t lay off workers.  OK, but let’s see what happens when Japan is hit by a demand shock:

It sure looks like Japanese firms do lay off workers, at least when demand falls.  The unemployment rate rose from 3.8% in October 2008 to 5.6% in July 2009.  That’s a big jump by Japanese standards.

And I’d argue the same for the US.  Almost all of the big jumps in unemployment in US history are due to demand shocks.  I only know of one clear exception in the post-war period: 1959, when a steel strike caused the unemployment rate to rise by 0.8%, and then fall sharply.  And guess what, 1959 also happens to be the only mini-recession in modern American history (that I could find.)  One real shock and one mini-recession.  Coincidence?  I don’t think so, but I’ll examine the mini-recession issue in the next post.

PS.  In fairness, there is one ambiguous case in the US; 1974.  NGDP growth did slow significantly during 1974 (compared to 1973.)  But NGDP growth was still fairly high, so it might be a stretch to call 1974 a nominal shock.  In my view the gradual removal of price controls during 1974 distorts the data, and the negative nominal shock in the latter part of 1974 was much bigger than it looks from reported NGDP data.  Others may disagree.  Thus 1974 remains a possible example of a real shock boosting unemployment sharply.

PPS.  The huge (20%) wage shock of July 1933 sharply reduced industrial output.  But it didn’t seem to affect employment, as it was implemented along with a rule that reduced the workweek from 48 hours to 40 hours, leaving weekly wages unchanged.

I studied three languages in school, but don’t speak any of them.  And I’m afraid that I’m shamefully unaware of the trends in European monetary economics, including the inner workings of the ECB.  (Although people better informed than me also seem a bit puzzled by the ECB, so maybe that’s nothing to be ashamed of.)

Nicolas Goetzmann  sent me the following article that he wrote for a French news site.  I”ll provide a translation of the final three paragraphs:

In the U.S., unlike the ECB, the proponents of monetarism stopped taking the fight against inflation as the only objective of economic policy

It should be noted that the debate introduced by the “market monetarists” is now very strong in the United States, the very nature of the mandate given to the central bank. Supporters of a policy based on demand, and more specifically on nominal GDP (ie GDP including inflation) are becoming more numerous.

It is not aimed at setting up an inflationary policy, but rather a policy dealing equivalently with price stability and the level of demand.  The remarkable work done by Scott Sumner, professor of economics at the University of Bentley, on the objective of nominal GDP, is now quite influential in the United States. The subject is being discussed within the U.S. Federal Reserve, following discussion by Christina Romer, former economic advisor of the first Obama administration (New York Times), Paul Krugman, Nobel Prize (the New Blog York Times) and Jan Hatzius, chief economist at Goldman Sachs. This major academic contribution, allowing an understanding of the monetary crisis, is still absent from the European debate.

I started with Google translate, and tweaked it here and there.  (I love the “University of Bentley” phrasing.)  I apologize to my French readers if I butchered the translation.  Here’s the original of those three paragraphs:

Aux États-Unis, contrairement à la BCE, les tenants du monétarisme ont cessé de prendre la lutte contre l’inflation comme seul objectif de la politique économique

Il est à noter que le débat introduit par les « market monetarists » est aujourd’hui très vif aux Etats-Unis, sur la nature même du mandat octroyé à la banque centrale. Les soutiens à une politique basée sur la demande, et plus précisément sur le PIB nominal (c’est à dire un PIB incluant l’inflation) se font de plus en plus nombreux.

Il ne s’agit pas ici de mettre en place une politique inflationniste, mais une politique traitant de façon équivalente la stabilité des prix et le niveau de la demande, donc de l’emploi. Le travail remarquable réalisé par Scott Sumner, professeur d’économie de l’Université de Bentley, sur l’objectif de PIB nominal, prend une ampleur considérable aux Etats-Unis. Le sujet étant actuellement discuté au sein de la Réserve Fédérale américaine, et ce, notamment suite aux articles de Christina Romer, ancienne première conseillère économique de l’administration Obama (New York Times), de Paul Krugman, prix Nobel (blog du New-York Times) et Jan Hatzius, chef économiste de Goldman Sachs. Cet apport académique majeur, permettant une compréhension monétaire de la crise, est encore absente du débat européen.

Nicolas said the website started in early 2011, but is already quite popular.

Update: Marcus Nunes has a better translation, and of the entire article

More than 100 years ago Tolstoy got to the heart of what’s wrong with Keynesianism.  I don’t know why it took me so long to figure it out.

An effective monetary policy will steer NGDP growth at a fairly steady rate, such as the roughly 5% growth we experienced during the Great Moderation.  But suppose we don’t have effective monetary policy, what then?  Then we have Keynesian economics.

Keynesian economics purports to explain how all sorts of stuff will impact AD, which is roughly NGDP.  (NGDP and AD aren’t always defined as being identical, but in most standard Keynesian models than move in the same direction.)

Thus a change in business animal spirits, fiscal policy, consumer optimism, mortgage lending, the trade balance, etc, etc, will impact AD, according to the Keynesian model.  But if we have an effective monetary policy it will not affect AD.  I don’t think that’s very controversial.

Here’s where it gets controversial.  Many people will say; “but we don’t have an effective monetary policy, so the Keynesian model is valid.  The Fed won’t offset those real demand shocks; hence the shocks will end up moving AD.”

There are three problems with this Keynesian view.  First, as we saw during the Great Moderation, one cannot assume the Fed won’t offset the “non-monetary” demand shocks.  Quite often they did so, and very effectively.

But let’s say I’m wrong, and monetary policy is incompetent.  Even that doesn’t save the Keynesian model.  Because their next step is to assume “other things constant.”  They hold monetary policy constant when considering the impact of some expenditure shock in one of the economy’s sectors.  But you can’t hold monetary policy constant, because the entire concept is meaningless.  You can hold interest rates constant, or exchange rates constant, or M2 constant, or the monetary base constant, or TIPS spreads constant, or you can assume we constantly adhere to the Taylor Rule.  But there is no such thing as “monetary policy held constant.”  The term is hopelessly vague, and means different things to different people.

And of course even if you could hold monetary policy constant, any estimates of the impact of expenditure shocks would be worthless, because monetary policy in the real world would not be held constant, according to any criteria.  The Fed doesn’t hold interest rates constant.  It doesn’t hold M2 constant; it doesn’t hold the exchange rate constant.

There is only one effective monetary policy (stable NGDP growth), but there are a billion ineffective policies.  Policy can fail in a dizzying variety of ways.  And for each inept monetary policy, there is a completely different impact from a given expenditure shock.  That means there are a billion Keynesian models:

1.  There is the Keynesian model if Bernanke runs the Fed, and has three hawks on the FOMC.

2.  There is the Keynesian model if Volcker runs the Fed.

3.  There is the Keynesian model is G. William Miller runs the Fed.

4.  There is the Keynesian model if Bernanke runs the Fed, and there is one hawk on the FOMC.

and so on.

So when people talk about the effect of some “shock to AD, from a redistribution of income from low savers to high savers,” my response is “Huh?”  What are you talking about?  That isn’t science, it’s witchcraft.  How should I know how Bernanke would respond to that?  You convinced me he’s not following effective monetary policy.  So I’ve bought into that part of the Keynesian model.  But I have no idea which ineffective policy he is following.  And when I talk to others I realize that they are absurdly overconfident in their particular Keynesian model, mostly because they are blithely unaware of the problems I just laid out in this post.  And I’m calling out pretty much all the top macroeconomists in my field, including a certain unnamed Nobel Prize winner.

There is one Nobel prize winner I will name; Paul Krugman.  He does sort of understand this problem.  And his particular Keynesian model, his particular “ineffective monetary regime,” is nominal rates stuck as zero and no unconventional monetary stimulus.  Too bad that doesn’t describe our current Fed, or else Krugman’s version of the Keynesian model might have something useful to tell us about the impact of various expenditure shocks.

Just wait till we exit the liquidity tap, then you’ll see me really go ballistic in response to all the Keynesian drivel you see in the press.

PS:  Brad DeLong recently had this to say:

A Wicksellian is a believer that the key equation in macro is the flow-of-funds equation S = I + (G-T), savings S equals planned investment I plus government borrowing (G-T), and that the money market exists to feed the flow-of-funds an interest rate that has a (limited) influence on planned investment I. A Fisherian is a believer that the key equation in macro is the money market’s quantity theory equation PY = MV(i), and that the flow-of-funds exists to feed the quantity theory an interest rate that has a (limited) influence on velocity V.

Thus they have a hard time communicating. From the Fisherian viewpoint, the Wicksellians are talking nonsense because they spend their time on things that have a minor impact on velocity while ignoring the obvious shortage of money. From the Wicksellian viewpoint, the Fisherians are talking nonsense by ignoring the obvious fact that movements in money induce offsetting effects in velocity unless they somehow alter the savings-investment balance.

And it is we Hicksians, of course, synthesize both positions into a single unified and coherent whole…

I’m not sure DeLong is completely fair to Wicksell, but let’s say he is.  Then I’d say the Wicksell view is the view of people who are blithely unaware of the ideas in this post.  People who don’t even realize there is a “money reaction function problem.”  Some Fisherians underestimate the instability of velocity, but at least their framework is sound.  DeLong sounds like the sensible guy who combines the best of two extreme views.  I’d say that when you combine a sound theory with an unsound theory you end up with a half-baked model of the economy.

PPS.  These ideas were addressed from a slightly different perspective in this very early post, which appears to be Marcus Nunes’ favorite.

HT:  Thanks to John Papola for triggering this post with a thoughtful question.

The Fed is clearly ignoring its dual mandate.  After the last meeting they basically admitted as much:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

In a previous post, this is how I responded:

We expect to fail, but we’ll keep a close watch on things just to make sure.

Yet the inflation rate is close enough to their informal target that lots of average people are being fooled into thinking the Fed is “doing its job.”  But not the experts.  Here is James Hamilton’s reaction:

In almost identical language that it used November 2, the Fed is saying that it expects unemployment will remain higher than it wants, inflation will likely be lower than it wants, and that it has significant concerns about where events in Europe might lead. In normal times, that trio would surely signal that policy would become more expansionary.

But the Fed opted instead to keep things more or less on hold, again using almost identical language as in its previous statement:

I vaguely recall similar statements made at various times by progressives like Krugman, DeLong, Yglesias, etc.  It’s very clear what’s going on here.

Unfortunately there is a long delay in releasing the minutes from Fed meetings.  When the minutes for the November 1937 meeting were released, we learned that the Fed was almost criminally negligent.  They had doubled reserve requirements earlier in the year.  Now the economy was clearly sliding into a deep slump.  But they did not reverse course.  One governor indicated that if they cut reserve requirements the Fed would be embarrassed, as its previous decision would look incorrect–thus putting his “feelings” ahead of the welfare of millions of cold, hungry and unemployed men and women.

I expect similar revelations from the minutes of the past four years.  Just consider the slump in NGDP between June and December 2008.  There was the August meeting where Fisher voted for tighter money.  The meeting after Lehman failed in mid-September, where the Fed refused to cut rates out of fear of inflation, even as TIPS spreads (correctly) showed 1.23% inflation over the next five years.  The decision to raise the interest rate on reserves to roughly 1% in November 2008, in a successful attempt to keep excess reserves bottled up in the banking system.  All the various decisions not to use their ammunition, despite the obvious need for more demand.

Some will argue the Fed’s doing a good job; that it’s all about low inflation.  Unfortunately, the Fed itself does not agree.  Frequent commenter Benjamin Cole has an eloquent post over at Lars Christensen’s blog.  Here he points out that there’s never been anything magical about 2% inflation:

The United States economy flourished from 1982 to 2007″”industrial production, for example, doubled, while per capita rose by more than one-third””while inflation (as measured by the CPI) almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct.  It is irrefutably the historical record.  If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic?

The Fed has frequently eased monetary policy when inflation was well above 2%, most recently in late 2007 and early 2008.  You might argue that those easings were done in response to fear of a banking crisis.  That’s right, they’re willing to ease to help the banks, but not to help the unemployed.  BTW, employment is part of their dual mandate, banks aren’t.

You might wonder how I can be so sure that the Fed minutes will expose all sorts of embarrassing admissions.  It’s not hard at all, just look at what Fed officials are saying publicly.  Marcus Nunes directs us to a recent speech by Richard Fisher.  Here’s a passage he didn’t quote:

My colleague Sarah Bloom Raskin””one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English””recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away.

From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house.

Fisher would have been quite at home on the Herbert Hoover Fed.

Fisher’s speech produces two reactions.  First, how could he be so clueless about monetary policy.  But when you stand back and start to think about what it all means, a second question begins to emerge.  Why are such fools allowed on the FOMC?  How is it that the world’s greatest economic policy institution, the central bank that tends to set the tune for world aggregate demand, is managed by people who are so obviously incompetent?  Let’s see where we can connect the dots:

1.  Stiglitz develops a theory that unemployment is caused by rapid technological change, which makes workers redundant.  This in some mysterious way reduces aggregate demand.

2.  Stiglitz meets with Obama, to offer a Nobel Prize winner’s expert advice on our predicament.

3.  Christy Romer and Larry Summers are horrified to find Obama spouting theories that the unemployment problem isn’t lack of demand, rather it’s ATM machines stealing  jobs.  Christy Romer can’t convince Obama that the Fed still has ammunition.

4.  Obama never pays any serious attention to the Fed.  When the Dems had a filibuster-proof majority in the Senate, he fails to even nominate people for several positions for a period of 18 months.  Even today he is ignoring the problem, several seats remain empty.

The following quotation is from Fisher, but it might just as well have been Stiglitz:

My reluctance to support greater monetary accommodation has been based on efficacy: With businesses’ cash flow””driven by record high profits and bonus depreciation””at an all-time high, both absolutely and as a percentage of GDP; with every survey, including those of small businesses, indicating that access to capital is widely available and attractively priced;[6] with balance sheets having been amply reconfigured; and with bankers and nondepository financial institutions sitting on copious amounts of excess liquidity, I have argued that further accommodation was unlikely to motivate the private sector to put people back to work. It might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet. This inevitably raises concerns we are creating distortions in the fixed income markets that inhibit proper market functioning, or concerns that””despite our protestations to the contrary””we are given to monetizing the government’s debt, an impulse that ultimately destroys a central bank’s credibility.

I have argued that other, nonmonetary factors are inhibiting the robust job creation we all seek.

Monetary policy is one of those areas where the fringe right and the fringe left meet and shake hands.  And right now they are influential enough to prevent the Fed from doing what it knows needs to be done.  Not powerful enough to prevent all action—the Fed will prevent deflation, I have no doubt about that.  But powerful enough to prevent the Fed from fulfilling their dual mandate.  History will see all this very clearly, and judge the Fed harshly.  How ironic after Bernanke promised Milton Friedman that the Fed would never repeat the errors of the Great Depression.  How ironic after Bernanke eloquently spoke out against the passivity of the Bank of Japan (an institution that also cut rates to zero and did massive QE.)

On a positive note, Fisher will be off the FOMC in January.

HT:  Morgan Warstler