Archive for July 2020


Nowcast bleg

I just received in my email box the latest “Nowcast” from the New York Fed. Unfortunately, I cannot understand what they are trying to say. It seems like they are predicting (as of July 31, 2020) that Q2 growth will be minus 13.75%, at an annual rate. But one day earlier, growth was officially estimated to be minus 32.9%. So what is this Nowcast telling me? Is this an estimate of how the GDP number will eventually be revised?

After receiving suggestions, I may add some further comments below. But I don’t want to waste time if I’m misinterpreting the Nowcast:

Banana republic watch

Yesterday we saw Trump ask whether it might be better if the election were delayed.

Today we have another example, from the FT:

What would happen if President Donald Trump took his rhetoric about “making China pay” for Covid-19 to its logical conclusion? Leading Republicans like senator Lindsey Graham say the US should consider cancelling the $1tn-plus China holds in US Treasury obligations to seek reparation.

I suppose that none of this will actually happen, at least for now. Even so, it can’t be a good sign when our political leaders are talking like authoritarian populists in Latin America. (This Trumpista is also worried.)

We were told that we couldn’t let in immigrants from Latin America because they’d corrupt our political system. So why is our anti-immigrant party the one that is hell bent on copying the worst of Latin America?

Robert Hetzel on Fed policy and moral hazard

The Mercatus Center has just published an excellent paper by Robert Hetzel entitled COVID-19 and the Fed’s Credit Policy. Here’s the abstract:

In March 2020, with the realization of the enormity of the threat posed by the COVID- 19 virus, financial markets exhibited unusual volatility. According to the Federal Reserve’s narrative, financial markets became dysfunctional; that narrative implies the belief that market participants could no longer assess risk appropriately. However, nothing in market volatility implies that private markets can no longer assess risk or allocate credit; nevertheless, the Fed responded with numerous programs to intervene in private credit markets. This paper examines the causes of the financial market volatility, discusses the moral hazard entailed by intervening in private credit markets, and explores whether credit market interventions could undermine the Fed’s political independence. The Fed promoted its 13(3) programs as providing resources to sectors of the economy where markets have failed to do so, but the Fed’s credit programs can only allocate credit, not increase real resources. It was monetary policy actions that calmed financial markets, not the announcement of future credit market interventions. Involvement in credit policy drags the Fed into the political arena; therefore, to maintain independence, the Fed should return to the sole job of monetary policy.

The paper is full of examples of how the Fed has increased moral hazard by bailing out financial sectors that get into trouble:

The Wall Street Journal quoted Aaron Klein, a former Obama administration Treasury official, who pointed out that “there was widespread agreement following the [2008] financial crisis that money-market funds would bear losses in the future, and post-crisis regulatory changes were meant to impress upon investors the risks they were taking” (Davidson and Michaels 2020). Klein added that “the Exchange Stabilization Fund was created to stabilize the value of the dollar, not to be used for domestic purposes.”

That didn’t last long:

To again bail out the prime money market funds, the Fed announced the Commercial Paper Funding Facility (CPFF) and the Money Market Mutual Fund Liquidity Facility (MMLF). In a Wall Street Journal article, Jonah Crane, a Treasury Department official in the Obama administration, said, “It is déjà vu. At this point, investors in money funds can just assume that the Fed is going to backstop them” (Kiernan, Ackerman, and Michaels 2020). Sheila Bair, former head of the FDIC, said, “It’s just frustrating that we never really fixed this stuff. . . . The industry lobbyists came in and persuaded regulators to do half measures. And we’re back in the soup again.”7

There are many similar examples, involving REITs and other risky investments.

Unfortunately, the economics profession seems to be increasingly dismissive of the problems created by moral hazard. My response is that economists may not care about moral hazard, but moral hazard cares about the economy.

Off topic: Craig Fratrik directed me to some interesting comments on NGDP targeting by Claudia Sahm (in a recent interview of David Beckworth):

Sahm: I think it has a lot of potential-

Beckworth: Oh, I agree with you. Absolutely.

Sahm: On that point. I will say as a little Fed factoid, I mean you were really close to getting-

Beckworth: Oh really?

Sahm: …nominal GDP targeting in the real world and I think it was in 2011 when the European crisis was brewing up and the Federal Reserve, I have the utmost respect for them in that they’re never out of ammo. Whenever their toolkit was kind of like, “Oh, we’ve tried this, we’ve tried that,” Ben Bernanke would send out a blue sky email and be like, “Okay, what’s next?” I can remember a senior officer who wasn’t supposed to tell us this but it was like a readout on an FOMC meeting, said basically if Europe had really struggled, the nominal GDP targeting was next.

Beckworth: Wow.

Jonathan Turley on Trump Derangement Syndrome

Today’s good post on the economy is over at Econlog. Here’s my bad post:

Matt Yglesias directed me to an April 25 article by Jonathan Turley in The Hill, where he derided Biden’s claim that Trump would “try” to delay the election:

Biden left little doubt of such a plan by Trump. He said, “Mark my words, I think he is going to try to kick back the election somehow, and come up with some rationale why it cannot be held.” It is just the type of thing that a crazed guy in a tightly buttoned raincoat whispers to you on the subway.

And today:

With Universal Mail-In Voting (not Absentee Voting, which is good), 2020 will be the most INACCURATE & FRAUDULENT Election in history,” the president tweeted Thursday morning. “It will be a great embarrassment to the USA. Delay the Election until people can properly, securely and safely vote???

If I had heard Biden make that prediction, I probably would have assumed he was being a bit over the top. But now that Trump has suggested that perhaps the election should be delayed, I owe Biden an apology. I wish I’d made the prediction.

I’m sorry Joe.

For TDS to actually exist, there’d have to be theories of Trump that are so over the top that they could not possible be true. In fact, there’s literally nothing Trump wouldn’t do if he could get away with it. If 10 million Americans had to die of Covid-19 for him to get re-elected, and could do so secretly, he’d make that deal with the devil in a heartbeat. He’s a self-pitying sociopath.

PS. Please don’t leave comments telling me that Biden is a buffoon. I knew that before you were born. This post is about TDS.

PPS. Speaking of derangement, check this out.

The Democratic Party’s hard right views on marijuana

OK, maybe they are a bit less bad than the GOP, but this is truly inexcusable in the era of Black Lives Matter:

It’s 2020 and the leadership of the Democratic Party still cannot get it together on marijuana legalization, which two-thirds of Americans support. . . .

Marijuana Moment reports that on Monday the Democratic National Committee rejected an amendment to put a plank supporting marijuana legalization into the party’s platform. The final vote against, 50-106, is almost a perfect inversion of the two-thirds of the public who want legalization.

This issue is like a thousand times more important than Confederate statues.

On the state and local level, marijuana offenses still account for 40 percent of drug-related arrests. And the vast majority of those arrests (more than 90 percent) are for possession, not manufacture or sale.

Biden stands with the 32% of Americans with especially stupid and mean-spirited views.

What a disgrace. Let’s see how progressives react to this news. Can delegates vote to overrule the Platform Committee? Would they even wish to?