Last month I inaugurated a new series of blog posts, to be done once a month.  We will see if the Fed is fulfilling it’s dual mandate.  Here’s what I wrote last month:

Fed dual mandate watch

The previous post was too sarcastic, so perhaps people might have overlooked the essential point.  It’s been obvious to me for the past 4 years that most people, most reporters, most pundits, most Congressmen, even most economists, think the Fed can do no more, and also think that Fed has done just about all it thinks it can do.

That’s false, indeed it isn’t even debatable.  Oh you can debate whether the Fed can do more (I think the answer is obvious) but what can’t be debated is that the Fed certainly thinks it can do more, but isn’t doing so.  That’s something that no serious person can deny.  Except it’s obvious to me that most people don’t understand this.  So for nearly 4 years I’ve been running around like Paul Revere, except I’m not shouting about the British coming.

People keep telling me that market monetarism is not a popular view.  But how can there be such a thing as “public opinion,” if our society is completely in the dark about what’s going on.  For the past four years the Fed’s been capable of providing more AD, they have refused to do so, and they’ve gotten away with it because most people, even most economists I’m afraid to say, as as ill-informed as this Congressman:

Representative John Carney, Democrat of Delaware, went one step further.

“The Fed is doing everything it can to address the unemployment part of your mandate, is that correct?” he asked Mr. Bernanke.

Mr. Bernanke, momentarily startled, responded that the Fed could do more, and was considering whether it should.

I really wish I had some literary skills, so that I could do justice to what went on in that exchange.  It’s like everything I’ve been fighting four over the last 4 years, everything I’ve been trying to say, was perfectly crystallized, hanging there in mid-air.  And then I presume the hearings went on as if nothing happened.  They don’t say what happened next, but I can just imagine something like the following:

Well that’s good to hear Mr. Bernanke, I was worried by a few crazy bloggers claiming that you haven’t done all you could.

Sometimes there is mass ignorance in America about an issue for which there is genuine uncertainty, say whether Saddam had WMD.  But this is so maddening precisely because there is no uncertainty.  Bernanke’s been saying exactly the same thing for 4 years, indeed for 15 years if you count Japan.  And every time he says it America’s VSPs cover their ears and pretend not to hear.

Despite my criticism of Bernanke over the years, I’ve always liked him.  And this statement makes me respect him even more. The easy way out would be some sort of bland “yes, we are doing all we can.”  Perhaps even Bernanke, with all his patience, is getting tired of the appalling stupidity surrounding this issue.  After all, he must have to deal with unbelievable garbage from some of his his fellow FOMC members.  Maybe he’ll reach the point where he completely loses patience, and opts for something radical.

Or maybe I’m just dreaming.

From today’s NYT, read it and weep:

Other Republicans cautioned that an expansion of the Fed’s existing efforts could deepen the nation’s financial challenges by postponing a necessary reckoning and eventually accelerating the pace of inflation.

Democrats made no similar effort to convince Mr. Bernanke that he should take additional action. They congratulated the Fed chairman in the manner of people confident that they are speaking with an ally.

“I want to thank you for your steadfast commitment to taking action as you deem appropriate,” said Representative Michael E. Capuano, Democrat of Massachusetts. “Thank you for not giving up.”

Representative John Carney, Democrat of Delaware, went one step further.

“The Fed is doing everything it can to address the unemployment part of your mandate, is that correct?” he asked Mr. Bernanke.

Mr. Bernanke, momentarily startled, responded that the Fed could do more, and was considering whether it should.

Sometimes I don’t know whether to laugh or cry.  But there can no longer be any doubt that I was right all along.  The GOP is evil, the Dems are morons, and the public is screwed.

PS.  Love the “momentarily startled” line.  Can you even imagine what Bernanke is thinking when he testifies in front of those people?

PPS.  How may more years do we have to wait for that “necessary reckoning?”

PPPS.  The NYT piece is entitled “House Members Press Bernanke to Shun Further Action.”  I’m picturing an equivalent headline in 1896:  “William Jennings Bryan Encourages Government to Avoid Removing Workingmen From Cross of Gold Until Necessary Reckoning Is Accomplished.”

HT:  Christopher Mahoney.

Here’s Paul Krugman:

Second, a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression. Here’s household debt as a percentage of GDP

What do you see?  I suppose it’s in the eye of the beholder, but I see three big debt surges:  1952-64, 1984-91, and 2000-08.  The first debt surge was followed by a golden age in American history; the boom of 1965-73.  The second debt surge was followed by another golden age, the boom of 1991-2007.  And the third was followed by a severe recession.  What was different with the third case?  The Fed adopted a tight money policy that caused NGDP growth to crash, which in turn sharply raised the W/NGDP ratio.  Krugman has another recent post that shows further evidence of the importance of sticky wages.  Forget about debt and focus on NGDP.  It’s NGDP instability that creates problems, not debt surges.

I favor all sorts of public policy changes that would reduce consumer and business debt, such as tax reform and reducing moral hazard in banking.  But the Fed needs to focus like a laser on NGDP.

Imagine a developed economy with a highly regarded central bank and a long and distinguished tradition of progressive, state-of-the-art monetary policy-making.  Imagine that central bank has been given a mandate of high employment and price stability.  Imagine that it interprets “price stability” as 2% inflation, and it regards the natural rate of unemployment as being around 6%.  Sound familiar?

Now imagine that the current unemployment rate is 7.8%, and inflation is expected to run below 2% over the next few years.  They have a policy meeting, where a couple people advocate greater monetary stimulus, while the majority decides to stand pat, despite the fact that their mandate would pretty clearly call for additional easing.  Why does the majority favor doing nothing?

There are limits to what monetary policy can achieve. Many of the problems on the labour market are of a structural nature. The structural problems include the possibility for new groups joining the labour force to find work, matching of vacancies to job-seekers and the flexibility of the wage formation process.

In addition, the policy recommended by the doves would better fulfill their mandate, but there are vague “risks” involved in doing the right thing, and “uncertainty” is holding back the economy, not monetary policy:

Although a larger cut, as advocated by Ms Ekholm and Mr Svensson, could bring inflation up to the target more quickly, and the forecast would thus “look better”, Ms Wickman-Parak’s assessment was that the effects on the real economy would not be particularly significant and that there were risks associated with such a policy.

It is not an excessively high interest rate that is holding back investment; this is due to the high level of uncertainty about the future course of the economy.

And let’s not forget that the low level of interest rates show that policy is already accommodative:

Ms af Jochnick pointed out that the Riksbank is currently conducting an expansionary monetary policy.

Sounds exactly like the Fed.  But it’s not, it’s the Riksbank, with Svensson playing the role of Charles Evans.   And here’s what’s most important, the current level of short term interest rates in Sweden is 1.5%, and the debate is over whether rates should be cut.  They aren’t at the zero bound.  Sweden faces a situation similar to that of the US, which calls for monetary easing to hit their dual mandate.  A few members of their central bank favor a rate cut, but most are opposed.  That tells me that the problem probably isn’t the zero bound, rather it’s excessive caution at the Fed.  We need to accept that fact that exiting the zero bound won’t end our malaise.  The Fed will still be too tight, worried about inflating new bubbles (another worry mentioned in the Riksbank’s minutes.)  Like the Riksbank and the BOJ and the ECB, the Fed will raise rates too soon and then have to cut them again.

As usual the markets figured all this out long before I did.  The 2.6% yield on 30 year bonds is basically a forecast of future premature tightening by the Fed.  What I don’t understand is how markets can be so damn smart when they are composed of individuals who are individually quite stupid.  I suppose for the same reason that Albert Einstein’s brain was quite smart, despite being composed of neurons that are individually quite stupid.

HT:  Stefan Elfwing