Archive for February 2013


That’s not your job Mr. Bullard

Here’s James Bullard:

The Federal Reserve’s “very aggressive” easy money policy is going to stay that way for a “long time,” St. Louis Fed President James Bullard told CNBC on Friday.

“This is a monetary policy that packs a punch,” said Bullard, who’s a voting member on the Federal Open Market Committee (FOMC).

Uncertainty about the future of the central bank’s bond buying program has weighed on the stock market in recent days.

But the St. Louis Fed president said in Friday’s “Squawk Box” interview, “I think policy is much easier than it was last year because the outright purchases are more potent tool than the ‘Twist’ program was …

Yes, but only because Twist was very weak.

. . . I don’t think markets have fully absorbed that switch.”

That’s not Bullard’s job.  He hasn’t been hired to outguess the markets.  If he wants to do that he should go run a hedge fund.  His job is to be led around by the markets like a stupid ox with a steel nose ring being dragged along by a farmer.

For the year, Bullard predicted gross domestic product (GDP) growth at 3.0 percent.

It’s not going to happen.  Ironically one of the reasons it’s not going to happen is because James Bullard thinks it is going to happen.

For the 100th time: No subsidized NGDP futures market = criminal negligence.

PS.  Nickik asked the following question:

I agree that NGDPLT may not be appropriate for small and/or emerging economies that are relatively undiversified.

I’m from Switzerland and while its not a emerging economy it’s small. What kind of policy would you advocate for a country like that?

[Update: I misquoted Nickik, the first sentence there is him quoting me.]

I haven’t studied Switzerland, but if they don’t want to use NGDP, then might consider targeting total wage and salary income.  I prefer that aggregate targets such as NGDP or national income be done on a per capita basis, or per working age adult (although I often omit that fact to save time.)

If they want to stick with inflation targeting, I’d suggest:

1.  Use an index that includes only domestically produced goods.

2.  Use an index that nets out all sales/VAT/excise taxes.

3.  Do level targeting.

I think that sort of price index would work fine for Switzerland.

Maybe it was NGDP all along

Phoenix is growing again:

At the height of Phoenix’s excess, in 2005, homebuilders were constructing 4,000 homes a month, bulldozing one acre of land every hour. By 2008 the city was the epicenter of the country’s housing market crisis. Prices rose more precipitously and fell faster than most anywhere else. It was among the most overbuilt of the overbuilt sand cities, optimistic right up until the collapse. Home values fell by 55 percent from 2006 to 2011.

Today the city finds itself in a more encouraging situation, one that’s becoming more common around the U.S. Housing prices in metropolitan Phoenix climbed 22.9 percent in 2012, the highest in the nation, according to research firm CoreLogic. Homebuilders are rushing to buy land for new subdivisions or resume construction in ones they had abandoned.

Phoenix’s nascent boom has many causes. The city has long counted on jobs to lure home buyers: The population of the Valley of the Sun has nearly doubled since 1990 and is now close to 4.3 million. Job growth was 3 percent last year, almost twice the national rate. There’s another reason prices are going up: Inventory is low. During the bust, foreclosures went on the market quickly, and eventually prices fell enough that investors with cash came in. They turned many homes into rentals, which meant fewer for sale. Meanwhile, underwater owners are hoping for prices to rise before they sell.

The housing market in Phoenix presaged and magnified the collapse in real estate. Now its recovery could reveal much about the prospects for a nationwide turnaround. Mortgage rates are low everywhere. In many places, so too is inventory. Home prices increased in 88 percent of metropolitan areas around the country in the last three months of 2012, including Las Vegas, Miami, and even Detroit, according to the National Association of Realtors.

“Phoenix is the most advanced market,” says Stan Humphries, the chief economist at real estate website Zillow (Z). “It was one of the first to go into recession, and one of the first to emerge from recession. Phoenix has been a lab where we’ve gotten to see the effects of a high foreclosure rate and high negative equity,” which is when homeowners owe more on their mortgage than their houses are worth.

Of course the recession in Phoenix that began in early 2006 had little to do with the (severe phase of the) national recession, which began in mid-2008.  Indeed 2007 was a period of very low unemployment for the national economy.  And as long as NGDP keeps chugging along at 4%, a housing recovery in AZ will not produce a national recovery, as the problems are unrelated.  It’s the difference between microeconomics (allocation of resources for a given aggregate output) and macroeconomics (determination of nominal and real aggregate output.)

Starting last March, builders realized they had a problem: Demand was growing faster than their supply. That’s provided opportunities for land brokers such as Nate Nathan, who’s been handling land acquisitions for investors, developers, and homebuilders in Phoenix for 36 years. Nathan has sold 14,000 lots in the past eight months, a billion dollars’ worth of deals. An acre in the southeastern part of the valley, where Intel and other companies are based, sold for $35,000 in 2010. Now, he says optimistically, a prime acre can go for more than $200,000. “I’ve lived through five downturns, and this has been the best goddamned eight months of my life,” he says.

But wait, didn’t the bubble-mongers tell us Phoenix had to be a bubble?  After all, look at all that empty desert land in Arizona.  There was no “rational” reason for high land prices.   Yes, but try finding land in good locations (close to Tempe/Paradise Valley) that is not currently occupied by either Indian reservations or the federal government.  It’s expensive.  Arizona is not Texas.

PS.  This is interesting:

Group of 20 policy makers discussed a broad rethinking of monetary tools at their meeting in Moscow last week, including strategies to support growth by targeting nominal gross domestic product, Russia‘s envoy to the G-20 said.

A proposal for the monetary authorities to adopt a target of nominal GDP, aired by Bank of England Governor-designate Mark Carney in December, was discussed on the sidelines of the G-20 meetings, said Russia’s G-20 sherpa, Ksenia Yudaeva. Russia holds the group’s rotating presidency this year.

“Maybe it’s an appropriate instrument for developed countries with reserve currencies, but for developing and small economies, it absolutely doesn’t answer their problems,”Yudaeva said in an interview in Moscow.

I agree that NGDPLT may not be appropriate for small and/or emerging economies that are relatively undiversified.

From market monetarist blogs to the G-20 in 4 years.  Not bad.

Hollande needs to talk to Nicolas Goetzmann—immediately

As bad as the monetary debate has been in the U.S., it’s even worse in Europe.  In the eurozone even the left doesn’t seem to understand that easier money is desperately needed.  Ryan Avent points to a depressing new report:

Latest Flash PMI data indicated that the downturn in French private sector output deepened in February. January’s Markit Flash France Composite Output Index, based on around 85% of normal monthly survey replies, slipped from 42.7 in January to 42.3, its lowest reading since March 2009.

The steeper fall in overall output was driven by an accelerated decline in the service sector, where activity contracted at the fastest pace in four years. Manufacturers signalled a slightly slower decrease in production compared with one month previously, albeit still sharper than signalled in the service sector.

New business placed with private sector companies in France fell again in February, extending the current sequence of contraction to one year. The rate of decline quickened slightly since January and was only marginally slower than December’s 45-month record.

NGDP growth is far slower than in the US; almost non-existent.

A recent Neil Irwin article showed that the Fed has been consistently over-optimistic over the past 5 years.  There have been nearly 40 Fed meetings since mid-2008, and the FOMC decision turned out to be excessively contractionary in every single meeting.  Nearly forty in a row!  If policy is efficient, errors should be symmetrical.

Both Paul Krugman and the market monetarists have been warning the Fed that their policy was inadequate.  Krugman has focused on the difficulties of monetary stimulus at the zero bound, and that policy needs to move expectations.  Market monetarists have focused on the need to target the forecast, and the fact that market signals tell us that money is too tight.  Both of us have pointed to the US in the 1930s, and Japan since the 1990s, as showing that errors were far more likely to be made in one direction than the other.

In contrast, the Richard Fishers of the world have been wrong every single day, every single week, every single month, for nearly 5 years.  Who should the Fed be listening to now?

PS.  Here’s Nicolas Goetzmann’s blog, which is the primary market monetarist blog in France.  I took three years of French—but it was back in the 1960s.  And I got a C.

PPS.  Hollande also needs to talk to Art Laffer.

PPPS.  Policy decisions were far too contractionary in the second half of 2008, when we were not at the zero bound.  So fear of “unconventional policy” is no excuse.  Of course that’s doubly true in Europe, where the ECB has raised rates on several occasions during the Great Recession.

There’s a reason why children aren’t allowed to play with matches

Here’s yesterday’s stock report:

HONG KONG (MarketWatch) “” Asian stocks tumbled Thursday after minutes from the latest Federal Reserve policy meeting stoked concerns that central-bank policy-tightening moves will reduce global liquidity, which has supported stocks in recent months.

Hong Kong’s Hang Seng Index /quotes/zigman/2622475 HK:HSI -1.72% dropped 1.7%, while the Shanghai Composite Index /quotes/zigman/1859015 CN:000001 -2.97% plunged 3%, with worries about liquidity tightening by the central bank adding to the selling pressure.

The Fed, along with other global central banks, has provided massive amounts of liquidity to markets since the onset of the global financial crisis “” liquidity which has worked its way through to various asset classes.

Perpetual Investments head of investment research Matthew Sherwood said that while stocks had gained aggressively over the past eight months, in part due to central-bank largesse, “all of a sudden” that pillar of market gains may be at risk.

Crédit Agricole strategist Frances Cheung said Asian investors were concerned that “a smaller-than-anticipated size of the Fed balance sheet … would imply less funds available to purchase [assets] than what is currently priced in.”

This can’t be right, because economists assure us that QE has no effect.  Bond prices rose on the news, as reported (or should I say “admitted”) in this WSJ article:

Treasurys pulled off minor gains after details from the Federal Reserve’s latest policy meeting initially caused some jitters about less bond-buying support from the central bank. . . .

After battling between gains and losses immediately following the release of the minutes, prices drifted higher as bond investors took comfort in the Fed’s presence. Benchmark 10-year notes rose 4/32 in price to yield 2.01%, according to Tradeweb. The 30-year bond gained 4/32 to yield 3.199%

I have a question for bond market aficionados; what does “took comfort” mean?  And what does “Fed’s presence” mean?  Why not just say; “Tighter than expected money lowered interest rates, just as Milton Friedman claimed.”

In fairness to the WSJ, things have improved dramatically since the dark days of 2001, when a much more expansionary than expected Fed announcement sent the S&P up 5% and long term bond prices crashed by more than 2%.  The (1/4/01) WSJ explanation was laugh out loud funny.  Here’s the headline and then the explanation:

Treasury Prices Plummet as Stock Prices Soar On Earlier-Than-Expected Fed Interest-Rate Cut

. . . .Traded said the selling in bonds also reflected the fact that the market had been anticipating an easing of Fed policy soon and had already rallied on the expectation.  When the Fed actually cut rates, people were, in bond market terms, “selling the fact.”

That had to be the explanation, because everyone was taught in school that easy money means lower interest rates.

Lots of people were excited when the Fed improved its communication last September, and even I called the move “baby steps” in the right direction.  But there’s still far too much discretion, far too much room for mischief.  If the Fed takes 1000 years to get unemployment down to 6.5% it will have fulfilled its promise not to raise rates until that target was reached (or until inflation rose above 2.5%.)  But that’s still way too much discretion, and the wrong targets.  They need a NGDP level  target so that loose cannons within the Fed can’t roil the markets with reckless statements.  There’s too much at stake.  The Fed is gradually improving, but relative to where they need to be they are still just a bunch of children playing with matches.

The Fed tightened policy yesterday.  Bernanke ought to be outraged by his colleagues.

HT:  kebko

Let the circle be broken

Here’s Carola Binder:

In the New York Times, Binyamin Applebaum writes that Stein’s speech “underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth.” In fact, the Fed’s concern about bubbles is not so new. After the Great Depression, it was widely believed that the stock market overheated in the 1920s, leading to the Great Crash in 1929 and the onset of the Depression. In those days, the word for bubbles or overheating was speculation, and it became a dirty word indeed. After the Great Depression, speculation remained a major concern of the Fed. The Fed very explicitly regarded bubbles as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth.

For example, the United States economy was in a recession in 1953-54. In 1955, as the economy was recovering, the minutes from the Federal Open Market Committee refer multiple times to concerns about “speculative developments” or “speculative excesses.”

Yikes, it’s happening even sooner than I expected.

Governor Strong targeted prices and output in the 1920s, and opposed attempts to stop the stock market bubble.  After he died in 1928 the Fed ratcheted up rates until they drove the economy into depression. The Fed blamed the Depression on speculative excesses because . . . well . . . because otherwise it would be their fault. And that’s just not possible.

Ms. Binder then explains that the old fogies were still in charge of policy as late as the early 1950s, but by the 1960s the Depression generation took over:

In 1958, William Phillips published “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom.” This really kicked off the now-common idea that inflation is the most likely negative consequence of the Fed’s efforts to reduce unemployment. If the Fed is now starting to regard bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment, this is not a new trend. It is history of thought repeating itself.

This generation rightly ignored bubbles, and oddly (or not so oddly if you understand Market Monetarism and the EMH) they did not create any major bubbles despite a single-minded focus on easy money and jobs.  Unfortunately they also ignored inflation and NGDP growth, which was a big mistake.  Of course they blamed the Great Inflation on fiscal stimulus, unions, OPEC, wheat prices, and Peruvian anchovy production (I kid you not), even though none of those things had anything to do with 11% NGDP growth from 1972 to 1981, and indeed fiscal policy was not even expansionary. But what other choice did the Fed have? One could hardly expect them to blame themselves.

By 2006 the “Great Inflation” generation was in charge of monetary policy.  They quite rightly ignored bubbles, and they quite rightly saw the need for a nominal anchor.  At least they did so until they were distracted by the Great Financial Crash, when they let money get so tight that NGDP growth expectations plunged into negative territory.  There were probably several reasons for this policy failure, including an excessive reliance of backward-looking Taylor Rules, and too much focus on inflation rather than NGDP growth.  Of course they blamed the Great Recession on excessive speculation, and how could you blame them?  Otherwise they would have to acknowledge that money was way too tight in 2008-09, and that the Fed caused the Great Recession.

And so now we come full circle.  Do DSGE models incorporate Nietzsche’s Eternal Return?

PS.  Last week I attended a conference on the Great Depression at Princeton.  All the other participants were from elite schools, and they included historians, political scientists, and economists.  I noticed that many non-economists don’t share our view that the Depression was caused by tight money and that the Great Inflation was caused by central banks printing lots of money.  In fairness, I’m even more ignorant of fields like history than they are of monetary economics.

PPS.  Stephen Brien sent me this link, showing that starting in April the UK government will have real time data showing the entire nominal wage bill of the British economy.  Let’s hope they post it online, where it would provide invaluable real time information on the state of the British economy (a subject of great confusion today.)  Indeed in some ways this data is even more useful than NGDP, which is distorted by declining North Sea oil output, a trend that has little impact on employment.

HT:  Saturos