I just saw a film about the Chinese artist/dissident Ai Weiwei.  (Great film, BTW.) And it got me thinking.  I’m also a sort of dissident, and I also use electronic media.  But he’s a much greater man.  I am doing this at zero personal and professional risk, and wouldn’t even be willing to accept the risks that Ai takes.

I get very frustrated for a number of reasons.  I may be wrong in my outrage, but I’d like people to explain to me why I’m wrong:

1.  We know that in the past the Fed has done great harm to the country.  And we know from the Fed minutes that at times they’ve done this knowingly.  They’ve refused to change course after a bad decision for fear of losing face.  They’ve admitted as much.

2.  We know that the Fed generally does what the consensus of economists think they should be doing.  This means the consensus of economists will virtually never blame the Fed for economic disasters in “real time.”  Yes, decades later they’ll blame the Fed for the Great Depression, or the Great Inflation.  But they are supportive of policy in real time, because it’s basically their policy.

3. We know that the Fed takes credit for successes like the Great Moderation.  But that can mean one thing, and one thing only.  The Fed drives NGDP over time.  If the Fed can’t drive NGDP over time, they have no mechanism for creating a “Great Moderation.”

4.  We also know that the Fed NEVER, EVER, regards any (undesirable) negative demand shock as being caused by tight money.  Never.  And they provide no metric for us to look at in order to tell how well they are doing.  They talk as if any unfortunate move in NGDP is some sort of act of nature.  Even when (as in 2007-08) it was accompanied by a sudden halt in the growth of the monetary base.  Or when (as in late 2008) it was accompanied by a huge surge in real interest rates on safe government bonds.  Nope, it’s never tight money.  Because that would mean they’d made a mistake.  Not cutting interest rates two days after Lehman failed?  Why would that have been a mistake?  In good times they do produce clear metrics, ways of holding the Fed accountable.  As in 2003 when Bernanke said that NGDP growth and inflation are the only reliable indicators of the stance of monetary policy.  But those metrics are no longer operative when the Fed fails.

5.  We know that the Fed strongly discourages harsh criticism from within.  I’ve personally heard several reports from insiders that testify to a climate of fear. They should be encouraging dissent.  Bernanke should open every meeting asking why there aren’t more Beckworths and Hendricksons and Sumners within the Fed.

6.  We know that American economists as a group mocked the BOJ for their absurd claim that they were unable to boost inflation, at a time when inflation ran a fraction of a percent below the BOJ’s 0% target and unemployment in Japan was a couple percent above the normal level (for either structural or cyclical reasons.) We also know that American economists as a group have not been particularly critical of the Fed, despite inflation running 0.9% below their 2% target over the past 4 years and despite unemployment being far above the historical norm (for either structural or cyclical reasons.)  A transparently obvious double standard. And yet most American economists meekly assert that the Fed has done all it could.

7.  We know that the slowest growth in NGDP since Herbert Hoover would be expected to cause massive unemployment, above and beyond any that occurs for structural (housing) reasons.

8.  We know the Fed could have prevented that drop in NGDP, or at the very least reversed it far more aggressively than it did.

9.  We know that the unemployment triggered by the fall in NGDP has led to hundreds of thousands of babies never being born.

10.  Someone sent me the following from Milton Friedman:

Friedman (1970) wrote:

[I]t was believed [in the Depression] … that monetary policy had been tried and had been found wanting.  In part that view reflected the natural tendency for the monetary authorities to blame other forces for the terrible economic events that were occurring.  The people who run monetary policy are human beings, even as you and I, and a common human characteristic is that if anything bad happens it is somebody else’s fault.

In the course of collaborating on a book on the monetary history of the United States, I had the dismal task of reading through 50 years of annual reports of the Federal Reserve Board. The only element that lightened that dreary task was the cyclical oscillation in the power attributed to monetary policy by the system. In good years, the report would read “thanks to the excellent monetary policy of the Federal Reserve…”  In bad years the report would read “Despite the excellent policy of the Federal Reserve…”, and it would go on to point out that monetary policy really was, after all, very weak and other forces so much stronger.

So Brad DeLong complained in the comment section of a recent post that I was being rude.  (Insert joke in comment section.  My feeble imagination can’t get beyond pots and kettles.)  If so I’m sorry.  It’s not personal; I’m frustrated with the entire profession, not any one economist.  But perhaps this post gives you some idea of why I feel strongly about this issue.  I think if you hooked up all the top macroeconomists to a lie detector, at least 90% would say we could use some more demand in America (and Europe.)  And if they don’t realize that a fiat money central bank can boost NGDP, then that’s just sad.   Ironically Brad DeLong is one of the relatively few macroeconomists in America who is not part of the problem right now.

Even Obama’s six Fed appointees are refusing to press for more monetary stimulus.  And yet I’ll bet at least a couple of them are quietly critical of the evil Republicans for blocking additional fiscal stimulus.

There are no “costs and risks” to monetary stimulus.  The tight money that produced the slowest NGDP growth since 1932 also produced the near zero rates, and caused the base to jump from 6% of GDP to 18%. All the costs and risks are in doing nothing and seeing fiscal deficits continue to pile up, in following the road paved by Japan.

Friedman and Schwartz produced a fierce critique of interwar Fed policy, and Bernanke produce a heartfelt and passionate critique of passivity at the Bank of Japan.  I’m just echoing what they said. Nothing more.

PS.  I promise to never again mention missing babies.  That’s low even for me.

Update:  I forgot this recent Evan Soltas post, which made the point much more eloquently:

It’s one thing to say that the Fed understands and accepts that without real action and policy commitment, real GDP growth will be slow and the unemployment rate will remain high. That would be an intellectually legitimate, though I think economically inappropriate, course for policy, especially if the marginal cost of NGDP growth at this point is perceived as high. It’s another thing to pretend that the sun is coming out tomorrow, use that as a pretense for no further action, and then dodge responsibility when the real economy fails to improve. What the Fed has done for the last three years makes a mockery of central bank credibility and accountability and avoids true consideration of policy required to meet the dual mandate.

Also check out his graphs.

I am constantly amazed that so many highly intelligent economists and finance-types seem incapable of understanding something as simple as an asset price bubble.  There seems to be a common perception that bubbles are inconsistent with the EMH, and that you identify a bubble by noticing when an asset price has risen sharply, and then fallen.  But suppose that asset prices never fell back after large advances?  Suppose that at worst they leveled-off.  In that case investors would have a surefire way of making money.  Buy assets that were soaring in value.  In that case only one of two outcomes could occur:

1.  No price change.

2.  Further increases in price.

A no lose proposition.  That means that if bubbles are big price advances followed by substantial declines, then a world without bubbles would violate the EMH.  Which means asset price bubbles do not violate the EMH.

People have trouble discriminating between prices going down, and prices going “back down” to a specific earlier level.  A good example occurred in 2005, when bubble-mongers all over the world proclaimed bubbles in the residential real estate markets.  Since that time a few markets have seen prices plunge.  Others have seen prices move much higher.  And in many markets prices have moved sideways since 2005.  This is exactly the pattern one would expect if the housing market were efficient.

A commenter named Wadolowski recently asked:

What if prof. Keen’s analysis is correct, and you’re making mistake by totally ignoring the level of private debt and there will be bubble burst in Australia:

http://www.debtdeflation.com/blogs/2012/08/02/australian-house-prices-update-june-2012/

Would you change your mind, if the facts change?

My answer is as follows.  If prices in Australia drop, then I will consider that a vindication of the EMH, which predicts that house prices should fluctuate, and not go straight up.  If prices in Australia drop back down below 2005 levels, which the bubble-mongers thought were excessive at the time, then I will admit that the Australian housing market circa 2000-15 is one data point in favor of bubble theory, and one data point against the EMH.  That’s not to say any single example is dispositive, but it would help the bubble argument.

My fear is that we’ll see a 10% or 20% drop in Australian housing prices, which is perfectly consistent with the EMH, and people will see it as confirming their anti-EMH prejudices.

Now if people want to define the highest price before a substantial decline as a “bubble,” then we have entered the land of tautologies.

David Beckworth has a new post showing that Fed doves like Charles Evans of Chicago, Eric Rosengren of Boston, and John Williams of San Francisco are almost pleading for monetary stimulus.  But what I don’t see many people discussing is the curious position of the Obama appointees to the Fed.  Not one member of the Board of Governors voted for monetary stimulus at the August meeting.  And Obama appointed 6 of the 7 board members.  Perhaps one could make excuses for the two Republicans that Obama picked.  But the Dems?  Not a single vote?  This is a real puzzle that needs to be explained.  I suppose some will argue that they’ve been absorbed into the “FedBorg.”  But that explanation won’t wash, as it doesn’t explain all the regional presidents loudly calling for more aggressive monetary stimulus.  There was one dissent (for tighter money) and last year there were often 3 or 4 dissents, in both directions.

I don’t have an answer, but I’ll say this:  Obama will probably be re-elected.  But if he loses there will be precisely 6 reasons for his loss.  No more, no less.

I don’t know about you, but I’m seeing a surge in market monetarist ideas on the internet.

One of our most famous claims is that tight money caused the recession, not a collapsing housing market.  I’ve often pointed to the fact that the unemployment rate showed almost no change during the great 27 month housing crash of January 2006 to April 2008.  Now Matt Yglesias and Evan Soltas are making similar arguments.  Both have excellent graphs that make the argument even stronger.

PS.  Some commenters point to the fact that the unemployment rate misses the return of illegal Mexican construction workers back to Mexico.  I have two replies:

1.  It’s still true that the housing crash did not cause the big rise in our unemployment rate that began in late 2008.

2.  Evan’s graph shows real GDP continued growing, and that is a variable that should have picked up the decline in construction done by illegal workers.

David Beckworth and Lars Christensen have new posts discussing Jim Pethokoukis’s recent support for some key some market monetarist positions.  Yesterday I did a nearly hour long interview with Jim.  The link is here.

Also check out Jim’s piece on Robert Hetzel’s excellent new book.