Bernanke and Mishkin on helicopter drops

There are two serious approaches to dealing with the zero bound, and one deeply unserious approach.  The two serious proposals are:

1.  Unconventional policy tools (quantitative easing, qualitative easing, negative IOR)

2.  A new policy target (price level targeting, NGDPLT, 4% inflation, etc.)

And one deeply unserious proposal:

1.  Helicopter drops

In this video, Frederic Mishkin points out that the Fed is not even authorized to do helicopter drops.  And the idea that the GOP Congress would go along with this sort of scheme is ludicrous.  (And people somehow think I’m unrealistic for talking about NGDP futures markets.)

And yet helicopter drops seem to be all the rage at the WSJ, the Economist, and Bloomberg.

Back in 2004, Ben Bernanke (in a paper with Vincent Reinhart and Brian Sack) discussed the real issue:

The greater the confidence of central bankers that tools exist to help the economy escape the ZLB, the less need there is to maintain an inflation “buffer,” and hence the lower the inflation objective can be.

Helicopter drops are not even an option.  Either you use unconventional tools aggressively enough to hit your target (and there is no limit to how aggressively they can be used) or you set a policy target where the zero bound does not occur (or does not create problems if it does occur, as with level targeting).

It’s a sad commentary on the media that they are buying into this notion that central banks are out of ammo, even as central bankers insist they are not out of ammo, and the Fed is raising interest rates despite inflation being below 2%, and expected to remain below 2%.

Also note this suggestion from the same paper:

Despite our relatively encouraging findings concerning the potential efficacy of nonstandard policies at the ZLB, we remain cautious about making policy prescriptions. Although it appears that nonstandard policy measures may affect asset yields and thus potentially the economy, considerable uncertainty remains about the size and reliability of these effects under the circumstances prevailing near the ZLB. Thus we still believe that the best policy approach is one of avoidance, achieved by maintaining a sufficient inflation buffer and easing preemptively as necessary to minimize the risk of hitting the ZLB. [emphasis added]

The Fed obviously ignored that advice in 2008, and they are ignoring it today.  The question is why?

HT:  Ben Klutsey, Patrick Horan

 


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64 Responses to “Bernanke and Mishkin on helicopter drops”

  1. Gravatar of Peter K. Peter K.
    24. March 2016 at 07:09

    The Fed is overly concerned about inflation. Obama’s central bankers are no longer worried about “runaway inflation.” The excuse now is that there will be an unforeseen burst of inflation which will force them to raise rates and cause a recession.

    This is one reason why NGDP targetting is better. Although I am in favor of helicopter drops. It is funny that the corporate media is focused on a policy that was once considered taboo.

  2. Gravatar of Christian List Christian List
    24. March 2016 at 07:14

    I assume helicopter money would still be better than the usual, recent and ongoing ECB (and FED) policy of doing not enough, right?

    But helicopter money is complicated in Europe and the US for legal reasons, I guess. So maybe Draghi should just promise that he does not withdraw parts of the QE money. You could call this helicopter money through the banking system if you want.

  3. Gravatar of Ray Lopez Ray Lopez
    24. March 2016 at 08:24

    First off, Sumner is as unclear as the other economists (including Freedman) on what they mean by ‘helicopter drop’. It’s not the same as “printing money to buy bonds” since by definition bonds were paid with existing money, so the only “new” money is the interest rate given on government bonds by central bankers (think this one through and you’ll see my point). The only true American “helicopter drop” was last done by both sides in the US Civil War, and the North got 70% inflation but the bonds paid off, mainly because the North won and the South lost. Printing money and giving it to the government would also be a ‘helicopter drop’, and illegal.

    But, the way a lot of economists seem to use the term “helicopter drop” is more akin to a “tax cut” or “tax holiday”. If the government said you only need to pay 50% of the taxes you paid last year, is that a “helicopter drop”? No, since no ‘new money’ is involved. But I bet Sumner is using ‘helicopter drop’ to cover this contingency as well.

    BTW, since money is neutral, a classic “helicopter drop” involving “new money” is worthless, and won’t have any effect except to raise nominal prices via inflation. It’s NOT the same as the new money via interest given by the government on existing government paper, since this new money has value: it’s the time value on the government debt.

    Sorry Don Geddis if I’m talking over your head, lol.

  4. Gravatar of Ray Lopez Ray Lopez
    24. March 2016 at 08:29

    @myself – I am aware btw of the Fed tripling its balance sheet since 2008 by buying commercial paper (that’s largely worthless now, junk mortgages) instead of buying the usual outstanding US government debt. This commercial paper however has collateral behind it (junk houses, but it’s still collateral) so technically it’s not helicopter drop money that was paid for this commercial paper, it was just a form of taxpayer bailout of junk bond mortgages held by crony banks that are Federal Reserve banks. Helicopter drop money has no collateral behind it.

  5. Gravatar of Britonomist Britonomist
    24. March 2016 at 09:08

    It might be ‘unserious’ from a political point of view, but that’s because politicians are of course ‘unserious’ about doing what is necessary in times of crisis.

    From an economics point of view however, Helicopter Drops are a perfectly serious proposal that enjoy seriously mainstream support from, for instance, Michael Woodford.

  6. Gravatar of Anthony McNease Anthony McNease
    24. March 2016 at 09:19

    How about the Fed do QE and buy gold and silver? Maybe then the Ron Pauls and other cranks would agree or at least be neutral.

  7. Gravatar of collin collin
    24. March 2016 at 09:21

    The Fed obviously ignored that advice in 2008, and they are ignoring it today. The question is why?

    1) US Core inflation poke its head above 2% and unemployment rate is 4.9%. And the core inflation areas going up are rents and healthcare. The US does not need monetary expansion at this point.

    2) It seems to me the global slowdown is that the rest of world is on the “Dollar Standard” and not getting enough Dollars for expansion. So how do we perform helicopter drops in China, Middle East, Europe and South America? (Also doesn’t the expansion of other nations mean more exporting to the US?)

  8. Gravatar of ssumner ssumner
    24. March 2016 at 09:22

    Peter, I don’t think it’s so much that they are overly concerned with inflation, as that they have no strategy. In 2004 Bernanke said they needed a strategy to deal with the zero bound problem. OK, where is it? Why don’t we have it yet? Why have they discarded the suggestions offered by Bernanke? What is wrong with his suggestions?

    There are no answers from the Fed, just silence.

    Christian, Helicopter drops did not work in Japan, and I doubt they’d work in Europe.

    Ray, You said:

    “@myself – I am aware btw of the Fed tripling its balance sheet since 2008 by buying commercial paper (that’s largely worthless now, junk mortgages) instead of buying the usual outstanding US government debt.”

    @Myself, I am aware btw that Ray continues to abuse LSD

    Anthony, There are worse things to buy than gold, but also far better things.

  9. Gravatar of ssumner ssumner
    24. March 2016 at 09:24

    Collin, You said:

    “US Core inflation poke its head above 2%”

    The Fed does not care about the CPI, core or headline. That’s another thing I wish people would stop talking about.

    https://research.stlouisfed.org/fred2/series/PCEPILFE

  10. Gravatar of Dustin Dustin
    24. March 2016 at 10:07

    Isn’t QE with permanent injection (i.e., roll over the purchases into perpetuity) effectively a ‘helicopter drop’.

  11. Gravatar of Don Geddis Don Geddis
    24. March 2016 at 10:46

    @Ray: “Sumner is as unclear … on what they mean by ‘helicopter drop’

    Sorry, Ray, but there’s a big big difference between “Sumner was unclear”, vs. “Ray didn’t understand”. When the pet turtle is confused about a human discussion, we usually just toss it another leaf of lettuce. There really isn’t any point to trying to explain.

    since by definition bonds were paid with existing money

    LOL. No. Sorry, which “definition” was that? (As usual, if you take the complete opposite of Ray’s statements, you’re more likely to stumble across the truth.)

    the interest rate given on government bonds by central bankers

    Wrong again. Central bankers aren’t the ones paying interest on government bonds. Geez Ray, so many errors … and that’s just the first two sentences!

    […lots more Ray confusion ignored…]

    Sorry Don Geddis if I’m talking over your head

    I’d be happy if you could just reach my knees, but alas, some dreams are destined to remain unfulfilled.

  12. Gravatar of Don Geddis Don Geddis
    24. March 2016 at 10:50

    @Dustin: “Isn’t QE with permanent injection (i.e., roll over the purchases into perpetuity) effectively a ‘helicopter drop’.

    No. The key feature of a helicopter drop is that it doesn’t remove (financial) assets out of the economy. It increases individual net worths, whereas QE is (essentially) neutral about net worths. Permanent QE is not a helicopter drop.

  13. Gravatar of Dan W. Dan W.
    24. March 2016 at 11:20

    @Don,

    What do you mean by “QE is neutral about net worths”? That certainly does not appear to be the case as QE elevates asset prices. Those who are invested in financialized assets will and have seen their net worths increase far greater than those who are not.

  14. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    24. March 2016 at 12:25

    I bet Mishkin-sensei already have an answer about the question “Why”.
    Because they are…

    https://wikileaks.org/plusd/cables/09TOKYO459_a.html

    >NIKKEI (Page 3) (Abridged)
    Eve., February 28, 2009

    “They are goddamn stupid!” These were the words used by former U.S.
    Federal Reserve Board (FRB) Governor Frederic Mishkin on Feb. 27 in
    a speech in New York to criticize Japan’s fiscal and monetary
    policies during the prolonged recession there in the 1990s.

  15. Gravatar of ssumner ssumner
    24. March 2016 at 12:40

    Dustin, It’s as effective as one, but unlike a helicopter drop it does not increase the national debt.

    Wasshoi, Yikes, that wasn’t very polite.

  16. Gravatar of myb6 myb6
    24. March 2016 at 13:51

    Scott, am I understanding correctly that you perceive a helicopter drop as increasing the national debt because the money created for the drop is a Fed liability? Thanks.

  17. Gravatar of Gordo Gordo
    24. March 2016 at 14:16

    Scott, isn’t the discussion of helicopter drops happening because some economists at the ECB raised it as a possibility within the last couple of weeks? From one of the articles I read, there was disappointment that excess reserves in the Eurozone keep increasing despite the negative IOR. So the ECB economists were floating helicopter money as a possibility if negative IOR failed to spur banks to do something with their excess reserves.

    Poking around the ECB website, I found some data that shows excess reserves grew from 79 billion euros at the end of 2014 to 380 billion euros by the end of 2015.

    http://sdw.ecb.europa.eu/reports.do?node=100000135

  18. Gravatar of myb6 myb6
    24. March 2016 at 14:31

    Honestly, I’m not sold on whether the method of money-injection is truly distributionally-neutral:

    -Whatever the mechanism, the mechanics have to be paid. Wall Street gets paid a lot more than gov’t check-printers.

    -Incumbent asset-holders have a very low propensity-to-consume. So when the Fed buys their assets they’re using the money to create new ones, and a higher utility, no? Someone’s on the other end, taking advantage of their new borrowing power (they’d probably rather have the drop). The people who really eat it have a low propensity-to-consume but are not incumbent asset-holders. In the end, it would seem fairly neutral in a aggregate/macroeconomic sense once everyone adjusts, yet not be neutral in an individual/distributional/incidence sense.

    This is your wheelhouse, so I’m assuming I’m just missing something or many things and would love to be corrected.

    If the injection method isn’t distributionally neutral, is there no alternative that is but avoids the uncovered liability? Or is that asking for an inherent contradiction?

  19. Gravatar of Don Geddis Don Geddis
    24. March 2016 at 15:18

    @Dan W: The direct impact of QE, is to exchange new dollars, for a financial asset of equivalent value — at market prices. The seller of that asset does not experience any (more than trivial) change in net worth, because of the transaction.

    You make a claim that “QE elevates asset prices“. That is not at all a necessary consequence, and if so, would only occur because QE is part of a monetary framework that is stimulating the nominal (at least, and maybe real too) economy (NGDP and/or RGDP). Asset prices reflect the net present value of the future revenue stream of the asset, and if QE improves the economy sufficiently such that the future revenue stream is expected to be greater, then asset prices may indeed increase because of NPV fundamentals.

    The primary monetary transmission mechanism of QE is via the hot potato effect. Any asset price change is a secondary side effect. With a helicopter drop, in contrast, the initial transaction immediately increases the net worth of the counterparty. This will be true whether or not expectations of future NGDP change or not, and whether or not any asset values change.

  20. Gravatar of Britonomist Britonomist
    24. March 2016 at 16:00

    >unlike a helicopter drop it does not increase the national debt.

    As I’ve said many times and will continue to do so: nothing that increases the national debt (in practical terms) should be considered a helicopter drop, since that goes against the initial analogy.

  21. Gravatar of Dan W Dan W
    24. March 2016 at 18:11

    @Don

    Our godfather of monetarism, Scott Sumner, cites as evidence the power of monetary policy the immediate increase in stock market futures. Call it a hot potato. Call it whatever you want. What everyone knows on wall street is if the central bank loosens monetary policy that it is beneficial to stocks. And if the central bank says it is going to buy bonds then such policy is favorable to stocks & bonds.

    QE and looser monetary policy favor those who hold financial assets. The distribution of wealth is not equal. You don’t need a theory to know this. You just have to look at reality.

  22. Gravatar of JCM JCM
    24. March 2016 at 21:58

    Scott and Don,
    Could you give some further explanation of how you see the “hot potato” effect operating in the current environment? Traditionally, hasn’t the hot potato effect referred to cash or excess reserves for which you don’t receive any interest? But with interest on excess reserves paying 0.50% (vs say 0.30% for 3-month T-bills), isn’t some further argument needed as to whether this kind of hot potato effect is still operative?

  23. Gravatar of Postkey Postkey
    25. March 2016 at 02:08

    ” “QE elevates asset prices“. That is not at all a necessary consequence . . . ”

    This is what the ‘Friedmanite’ Monetarist has to say re QE.
    “Strange though it may sound, monetary expansion could occur even if bank lending to the private sector were contracting.”
    “What is the likely sequence of events? First, pension funds, insurance companies, hedge funds and so on try to get rid of their excess money by purchasing more securities. Let us, for the sake of argument, say that they want to acquire more equities. To a large extent they are buying from other pension funds, insurance companies and so on, and the efforts of all market participants taken together to disembarrass themselves of the excess money seem self-cancelling and unavailing. To the extent that buyers and sellers are in a closed circuit, they cannot get rid of it by transactions between themselves. However, there is a way out. They all have an excess supply of money and an excess demand for equities, which will put upward pressure on equity prices. If equity prices rise sharply, the ratio of their money holdings to total assets will drop back to the desired level. Indeed, on the face of it a doubling of the stock market would mean (more or less) that the £150 billion of extra cash could be added to portfolios and yet leave UK financial institutions’ money-to-total-assets ratio unchanged. 
    Secondly, once the stock market starts to rise because of the process just described, companies find it easier to raise money by issuing new shares and bonds. At first, only strong companies have the credibility to embark on large-scale fund raising, but they can use their extra money to pay bills to weaker companies threatened with bankruptcy (and also perhaps to purchase land and subsidiaries from them). 
    In short, although the cash injected into the economy by the Bank of England’s quantitative easing may in the first instance be held by pension funds, insurance companies and other financial institutions, it soon passes to profitable companies with strong balance sheets and then to marginal businesses with weak balance sheets, and so on. The cash strains throughout the economy are eliminated, asset prices recover, and demand, output and employment all revive.”
    http://www.standpointmag.co.uk/node/1577/full

  24. Gravatar of Postkey Postkey
    25. March 2016 at 02:11

    There are only ‘potatoes’, not ‘hot potatoes’?

    “Thank you for posting a reply, Marcus. Again, however, I’m afraid I don’t see a direct answer to my question. I asked what mechanism in the real world the Fed has available to raise money supply above money demand (something that you said above is necessary if inflation is to occur). Money supply can rise if the Fed buys assets or if loans are made from available reserves. To my way of thinking, neither of these can occur without the full and conscious participation of the other side of the transaction. Hence, the supply of money cannot be increased in the absence of demand.
    Yet you say (above) that inflation only occurs when money supply is in excess of money demand. You have defended this with analogies, but not with real-world examples of the underlying process. I am a huge fan of using analogies to get the essential idea across; however, unless these mirror something that is going on in the real world (and in a very real and tangible sense), then recommending policies based on such stories is dangerous to say the least.
    I hope you don’t think I’m being rude, but I think this is a key question and one that I have never found a monetarist able to answer: how is it in the real world that the central bank raises money supply above money demand? Can you please tell me this and in the context of actual Federal reserve policy tools?
    This is not a trivial question. The entire monetarist superstructure rests on it. If the answer is that in reality this cannot happen, then I’m not sure how the rest of the monetarist analysis survives.”

    http://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/4/#6e38191ef9f8

  25. Gravatar of derivs derivs
    25. March 2016 at 03:04

    ““QE elevates asset prices“”
    Don, do you believe QE was designed to lower interest rates? If so, by your own definition (using NPV), it was designed to increase asset prices.

  26. Gravatar of Postkey Postkey
    25. March 2016 at 04:13

    Not ‘hot’ potatoes?

    “The big worry right now in Japan is that cash is piling up in record amounts. No one wants to spend it: Not corporations, not individuals.”
    http://mishtalk.com/2016/03/25/economists-increasingly-worried-about-people-having-too-much-cash/

  27. Gravatar of Ray Lopez Ray Lopez
    25. March 2016 at 08:41

    @Sumner, @Don Geddis – you do realize that both of you are contradicted by none other than your hero Narayana Kocherlakota?

    See: http://www.bloombergview.com/articles/2016-03-24/-helicopter-money-won-t-provide-much-extra-lift

    He says there’s no big difference between Helicopter Drop and traditional government financing, when the government is doing the spending, see:

    The Treasury can sell $100 billion in bonds to investors.

    The Treasury can issue $100 billion in bonds to the Fed, which pays for them by creating new money.

    “…there is absolutely no economic difference between the two forms of financing . In the first case (where investors buy the bonds), the Treasury pays interest on an added $100 billion in debt. In the second case (where the Fed creates money), the Fed pays exactly the same interest on an added $100 billion in bank deposits — which means that it can remit that much less money to the Treasury. (Fed liabilities grow only in the second case. That’s because, in the first case, the increase in liabilities generated by government spending is exactly offset by investor withdrawals to buy the Treasury debt issue.) ”

    How can you two be so smug and ignorant? Though I can find some holes in Narayana Kocherlakota’s logic (it assumes no crowding out by government spending, which is actually reasonable, and note the helicopter drop is spent by the government, not sent to consumers) the fact that both of you missed his point boggles the mind, especially LSD-obsessed Sumner, who pretends to be a professional economist.

    I expect an apology. I expect Sumner to blog on this, pretending he understood it when he posted this erroneous post.

  28. Gravatar of bill bill
    25. March 2016 at 09:51

    Scott,
    Can you share a link that lays out the difference between a helicopter drop and QE?

    My “wish list” today is that Congress pass a law that says, “We’d like to clarify our dual mandate. We are simplifying things. Until we are convinced by future research of another target, the single mandate will be 4.5% NGDPLT as it’s the best candidate to date of achieving the two worthy goals in the dual mandate.”

  29. Gravatar of Don Geddis Don Geddis
    25. March 2016 at 12:27

    @Ray: “you do realize that … How can you two be so smug and ignorant?

    When the pet turtle actually misunderstands the points of all three (me, Sumner, Kocherlakota), and in his fevered imagination thinks he’s found some kind of smoking gun “contradiction” … well, what else is there to say, except: have another leaf of lettuce, Ray.

    You don’t even understand what the adults are talking about, so it’s cute to see you try to put together quotes which have nothing to do with each other. Hint #1: Kocherlakota was talking about helicopter drops vs. fiscal stimulus. We were talking about helicopter drops vs. QE. Hint #2: You were either too stupid to notice, or so evil that you did it deliberately, but the critical words just before the section you quoted are: “I get to make completely false assumptions just to make a point. In this hypothetical world…” You’re pretending that it’s a comment on how the real world actually works, but you’ve confused (again) a thought experiment, for an empirical statement.

  30. Gravatar of Don Geddis Don Geddis
    25. March 2016 at 12:34

    @Dan W: “Sumner, cites as evidence the power of monetary policy the immediate increase in stock market futures

    Yes, but you misunderstand why. The immediate QE transaction has no effect on the stock market. But monetary policy, as a whole (including expectations) can determine the future path of the entire macro economy. If expectations improve about the economic future, then the highly liquid stock market will reflect those changed expectations immediately.

    You’re confusing symptom with cause. Higher asset prices is not the mechanism used by monetary policy in order to achieve economic outcomes. Asset prices are a sensor, reporting the changed future caused by monetary policy updates (which have direct effect via other, non-asset, mechanisms.)

    Asset prices only rise, in so far as the whole economy is expected to get better. There is no such thing as monetary policy narrowly targeting increased asset prices, while the rest of the economy collapses.

    You don’t need a theory to know this.

    It’s abundantly clear that you don’t have one. Your confidence in your conclusions is impressive, given your lack of knowledge.

  31. Gravatar of Don Geddis Don Geddis
    25. March 2016 at 12:39

    @derivs: “Don, do you believe QE was designed to lower interest rates?

    Not when interest rates are already at zero, no!

    Interest rates are the price of credit, not money. The entire banking sector should be left out of discussions of monetary policy. QE (primarily) operates through the hot potato effect on the money supply, which isn’t particularly related to interest rates (or banks). Interest rates should be left to float to market equilibrium, and not targeted at all. It doesn’t matter what level they happen to float to.

  32. Gravatar of ssumner ssumner
    25. March 2016 at 15:15

    myb6, Because when interest rates rise they must either pay interest on that money, or pull it out of circulation by selling bonds, and hence increasing the debt.

    Gordo, Maybe that’s why, but it’s certainly not a good reason.

    JCM, It would be much more effective if they reduced the IOR to zero.

    Ray, You are confused by Kocherlakota, He is saying that there is no big difference between two types of helicopter drops, or perhaps between helicopter drops and ordinary fiscal stimulus. He’s not comparing helicopter drops to OMOs. But I agree his post is confusing, maybe I’ll do something on it.

    Bill, A helicopter drop is just QE plus fiscal stimulus.

  33. Gravatar of Bob Murphy Bob Murphy
    25. March 2016 at 19:51

    Scott, if Trump becomes president and then appoints you as Yellen’s replacement because he likes NGDP targeting, that would be so hilarious that it would compensate (in my book) for having Trump as president and you as Fed chair.

  34. Gravatar of Benjamin Cole Benjamin Cole
    26. March 2016 at 01:46

    Michael Woodford sure seems open to the idea of helicopter drops, perhaps disguised as tax cuts mated to QE:

    http://www.voxeu.org/article/helicopter-money-policy-option

    “I believe that one could achieve a similar effect, with equally little need to rely upon people having sophisticated expectations, through a bond-financed fiscal transfer, combined with a commitment by the central bank to a nominal GDP target path (the one that would involve the same long-run path for base money as the other two policies). The perfect foresight equilibrium would be exactly the same in this case as well; and as in the case of helicopter money, the fact that people get an immediate transfer would make the policy simulative even if many households fail to understand the consequences of the policy for future conditions, or are financially constrained. Yet this alternative would not involve the central bank in making transfers to private parties, and so would preserve the traditional separation between monetary and fiscal policy.”–Michael Woodford.

    Sure seems to me that running QE and a federal deficit, and the Fed says we have no plans to reduce our balance sheet, is an close cousin to helicopter drops.

    My idea of a national lottery with more winners than losers is Trumpian idea, and my time may yet come, dudes. Given who Trump selects as “advisers” maybe you will see me in the Oval Office soon….

  35. Gravatar of Dan W. Dan W.
    26. March 2016 at 04:51

    @Don

    Your initial claim was “QE is neutral about net worths” This claim is false as QE directly rewards those currently invested in stocks and bonds.

    When the lower 80% see the upper 20% getting increasingly wealthy it does not matter what economic theory explains it. What people observe is central bank interventions reward the investor class first and at a much greater amount than any trickle down to main street. It is what it is and that some, like you, feel it necessary to obfuscate this connection is puzzling. Are you ashamed the rich get richer? Why? If central bank intervention is what is best for everyone than stand tall and proud and defend it! Don’t equivocate and pretend that it is something other than what it is!

  36. Gravatar of ssumner ssumner
    26. March 2016 at 07:23

    Bob, I hope you know that I would turn down the job, regardless of who appointed me. I’m not even close to being qualified.

    Normally at this point I’d also say there’s no chance I’d be appointed, but with Trump I could see him appointing someone as unqualified as me, if not more so.

    Ben, Yes, he is more fond of the idea than I am.

  37. Gravatar of myb6 myb6
    26. March 2016 at 07:31

    OK thanks for the reply Scott. But then you’re talking about the Treasury paying interest to the Fed which remits it back to Treasury, no? If I’m understanding correctly, that seems pretty meaningless, unless the underlying concern is indeed covering the Fed’s new liabilities. If that’s the case, I’m sympathetic but 100% coverage seems overkill.

    Am I totally mangling this?

  38. Gravatar of Derivs Derivs
    26. March 2016 at 08:34

    “Not when interest rates are already at zero, no!”

    Don when QE was first announced in Nov 2008, the 30yr was trading near 6 – 6.5% and the 10 yr was in the 4 – 4.5% range. As one would expect, when you tell the market you are going to buy half a trillion in paper starting next month, rates collapsed with the announcement.

  39. Gravatar of Postkey Postkey
    26. March 2016 at 09:15

    “Bob, I hope you know that I would turn down the job, regardless of who appointed me. I’m not even close to being qualified.”

    Do you need to be ‘qualified’?

    From the post you ‘recommended’?

    “A. It’s simple! You just declare an NGDP path target, set up a prediction market, tell an intern to do whatever the prediction market says, and then go on vacation for the rest of your life as a central bank!
    Q. This is madness!
    A. Madness? THIS… IS… MARKET MONETARISM!
    LikeShare”
    https://www.facebook.com/groups/674486385982694/permalink/896559330442064/#

  40. Gravatar of Major.Freedom Major.Freedom
    26. March 2016 at 09:47

    Sumner wrote:

    “Bob, I hope you know that I would turn down the job, regardless of who appointed me. I’m not even close to being qualified.”

    But you once said NGDPLT is so easy even a monkey could do it.

    Are you saying a monkey is more qualified? Or was that just false modesty (typical of socialists)?

  41. Gravatar of Don Geddis Don Geddis
    26. March 2016 at 18:42

    @Dan W.: “QE directly rewards those currently invested in stocks and bonds.

    No, it doesn’t. But I’ve already explained multiple times, and you choose to ignore that and continue to spout your false claims, so there’s no point in any further explanation.

    When the lower 80% see the upper 20% getting increasingly wealthy

    Ah. I see that you greatly prefer a depression, where everybody is poor. I prefer the “rising tide” economy that lifts all boats, but if you would rather send the tide out and ground all boats, I guess everyone makes their own choices.

    If central bank intervention is what is best

    “Intervention” is not a thing. There is only monetary policy. There is no such thing as a “non-intervening” central bank.

    stand tall and proud and defend it!

    I absolutely would, and do. No obfuscation or shame required.

    Don’t equivocate and pretend that it is something other than what it is!

    Agreed! Only, the claims you are making, are false. I prefer to only “proudly defend” the true claims.

  42. Gravatar of Don Geddis Don Geddis
    26. March 2016 at 18:44

    @Postkey, MF: The current government office of the Chair of the US Federal Reserve, is not a technocratic position of implementing NGDPLT. That indeed would be easy & trivial, and Sumner would be more than qualified to oversee such an implementation. But that isn’t what the central bank chair job is about.

  43. Gravatar of Dan W. Dan W.
    26. March 2016 at 19:40

    @Don,

    So you disagree with Sumner? For he has gone on the record that all one has to do is look at the stock market to see if the central bank has the right monetary policy. And I agree with Sumner. For the one thing the central bank CAN DO is manipulate the stock market. Greenspan did it. Bernanke did it. Yellen is doing it. I do not understand why you refuse to acknowledge the direct link between looser monetary policy and higher stock market prices. Are you embarrassed by it? What is your excuse?

    Sumner: The asset markets keep me from going insane
    https://www.themoneyillusion.com/?p=31565
    “But then I look at the asset markets, and am reassured. I’m not really losing my mind. Monetary stimulus is effective, and it’s needed in Japan and Europe, and was needed in 2007-08 in America. No matter how many times the press tells us that the markets hate negative IOR, each new IOR news shock confirms once again that the markets prefer even more negative IOR in Europe and Japan.”

  44. Gravatar of Don Geddis Don Geddis
    26. March 2016 at 21:38

    @Dan W.: “For the one thing the central bank CAN DO is manipulate the stock market.

    No, that’s completely false. The one thing the central bank can do is manipulate the money supply.

    I do not understand why you refuse to acknowledge the direct link between looser monetary policy and higher stock market prices.

    Because there is no direct link. There is only an indirect link. Looser monetary policy may improve the future economy, and if it does so, stock prices will almost certainly change to reflect the new expectations.

    Stock prices are just a sensor on the future economy. Monetary policy changes the future economy (with no direct effect on stock prices, except through the whole economy). It’s pretty simple.

    Are you embarrassed by it? What is your excuse?

    That I’m unwilling to profess your false claims.

  45. Gravatar of Dan W. Dan W.
    27. March 2016 at 06:48

    @Don

    The US stock market is within 5% of its all-time high and it is 30% higher than its 2007 peak. If the stock market was a “sensor” of the whole economy the economy should be booming! But apparently the economy is not booming because we have central bankers wringing their hands about poor economic growth.

    Stock market prices are loosely, if that at all, linked to real economic expectations. The stronger link is simply interest rates which drives the raw financial calculation of NPV and the financial engineering of stock buybacks

    Consider McDonalds. Its stock price is up 25% in the past 2 years. Yet since 2013 its sales have declined 10% and its earnings have declined 20%. So past economic growth does not explain the increase in the company’s stock price. What about the future? Estimates are for the company’s revenue to decline 5% this year and 5% more the next year!

    There is no economic growth in the business of McDonalds! Yet its stock price is up 25% with most of that increase in the past six months. What is driving the price of the stock of McDonalds is interest rates and the ability to finance borrowing to buyback stock and increase leverage of declining company profits – since 2013 McDonalds has increased it debt by $10 billion. And McDonalds is just one of many such examples of stock prices increasing in the face of declining business performance.

    Here is what The Economist writes about QE: “The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment.”
    http://www.economist.com/blogs/economist-explains/2015/03/economist-explains-5

    So when the central bankers inject a whole bunch of new money into the system the bulk of it goes into stocks and bonds. Current holders of such assets receive the first and greatest benefit. Any flow to the real economy is indirect. That is the real world and if theory does not match then it is the theory that is wrong.

  46. Gravatar of ssumner ssumner
    27. March 2016 at 07:16

    myb6, I was talking about IOR

  47. Gravatar of Don Geddis Don Geddis
    27. March 2016 at 08:55

    @Dan W.: “McDonalds … stock price is up 25% in the past 2 years … buyback stock” You’re confusing stock prices, with market caps. When people say “stocks are up”, they mean that market capitalizations are up. The actual price of an individual stock (with splits, and buybacks) is essentially meaningless.

    Here is what The Economist writes about QE” The Economist is wrong about the primary monetary policy transmission mechanism. That whole article repeats the fiction that even in “ordinary times”, monetary policy is mainly about interest rates and bank lending. It isn’t. Their key sentence: “Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans.” They’re wrong about both ordinary policy, and also QE. Oh, here’s another: “Today, interest rates on everything from government bonds to mortgages to corporate debt are probably lower than they would have been without QE.” That is wrong too. Interest rates are very, very low, during economic depressions. Interest rates mostly reflect economic growth, not QE (which, over the long term, boosts growth, and thus raises rates, compared to the counterfactual).

    So when the central bankers inject a whole bunch of new money into the system the bulk of it goes into stocks and bonds.” No, it doesn’t. I know you believe this. But you’re wrong.

    Any flow to the real economy is indirect.” You’ve got causality backwards.

    But your biggest problem, is that you try to interpret monetary policy through bank lending, and Cantillon effects. Both are only minor aspects of monetary policy, and you completely miss the major effects (which are velocity changes caused by changed expectations and changes in the money supply) which absolutely dominate what happens to the economy.

  48. Gravatar of Dan W. Dan W.
    27. March 2016 at 17:44

    @Don

    You wrote “The actual price of an individual stock (with splits, and buybacks) is essentially meaningless.”

    It is not meaningless when one is discussing changes in net worth. The incentive for shareholders is to increase the price of shares held by shareholders. This is why companies buy back stock. The objective is not to maximize the company’s capitalization but to maximize the value of shares that are held.

    And this highlights the wonderland that is macro-econ. You are so focused on your abstract models that you fail to understand how financial decisions are actually made. Your macro view tells you that the price of company shares is meaningless and the aggregate company capitalization is meaningful. The reality is the exact opposite. The incentive to a shareholder is to make money and this is done by “buying low and selling high” where low and high are the price of shares held and not the total value of the company.

  49. Gravatar of Don Geddis Don Geddis
    27. March 2016 at 18:40

    @Dan W.: Please try to stay on topic. We were talking about monetary policy affecting the stock market. You said: “Sumner … has gone on the record that all one has to do is look at the stock market to see if the central bank has the right monetary policy.” That indicator is looking at stock market capitalizations, not at individual stock prices. Hence your comments about the price of McDonald’s stock were irrelevant to the conversation.

    As to net worth: an investor owns a share of the company. The company sells a product for more than it costs to make. The company earns a profit. It can: (1) store the profit in a bank account; (2) invest the profit to grow the business; (3) distribute the profit as shareholder dividends; or (4) use the profit to buy back stock. No matter which option it chooses, that profit is already owned by the shareholder. Having it realized in the form of stock buybacks is not any more significant than the shareholder realizing the same profit in any of the other forms.

    But none of this has anything to do with whether monetary policy works by raising stock prices, as you (falsely) claimed. Again, please try to stay on topic, and don’t get distracted by an irrelevant nearby topic, just because it may be less confusing to you. The streetlamp may be on over there, but you lost your keys over here.

  50. Gravatar of derivs derivs
    28. March 2016 at 02:13

    Don,
    Dan W maybe jumping around a little too much for his own good (Individual issues, and I never did understand first to get access to new money thing) but his basic premise is correct.

    The act of buying paper or announcing intent to make major purchases (MBS, Treasuries,etc) causes rates to drop. If I lift the offer in bonds, even with a 1 lot, make a new high print, that print results in a lower quoted interest rate. This is a simple fact.
    Lower interest rates, all other things being equal, result in higher NPV (higher asset prices) No opinion here either, this is also simply a fact.

    So therefore QE intent was, in part, to goose up asset prices. This particularly makes sense when you look at the MBS paper the gov’t took from banks, the embedded short put that all mortgages contain, and how important it was for asset prices to go up or have this paper explode.

  51. Gravatar of jonathan jonathan
    28. March 2016 at 16:37

    “The Fed obviously ignored that advice in 2008, and they are ignoring it today. The question is why?”

    This is indeed the central mystery. It is a smaller mystery than when Bernanke was chairman, because we *knew* that he knew better. Now we can only guess that Yellen and company probably know better.

    My best guess is that there is a subset of people at the Fed who don’t know better, and are strong enough hawks that their views tilt policy significantly.

    My second best guess is that the Fed is afraid to act too aggressively because they are fearful of losing their independence or other consequences of that sort.

    That said, it is less clear that policy is too tight today than at any point since 2008.

  52. Gravatar of ssumner ssumner
    29. March 2016 at 07:34

    Jonathan, Ironically, they are most likely to lose their independence if they act timidly, not aggressively.

  53. Gravatar of Dan W. Dan W.
    29. March 2016 at 13:07

    CBS Marketwatch Headline: “Stocks close at 2016 highs as Yellen strikes cautious tone”

    No complaint from me, my gains matched the S&P. Although I did not do as well as Facebook’s Zuckerberg. Apparently his net worth increased a billion dollars today. One billion dollars and why? We don’t really know do we. But it might possibly have something to do with Ms. Yellen’s cautious tone concerning interest rate hikes. Maybe. But who really knows.

  54. Gravatar of Eliezer Yudkowsky Eliezer Yudkowsky
    29. March 2016 at 17:26

    A question that, I’d hope, might deserve a post in its own right:

    Should market monetarists be pushing heavily to have the Fed be buying higher-priced bonds, foreign assets, or non-volatile shortable equities, instead of US Treasuries?

    It seems to me intuitively that buying Treasuries with money might itself be a wobbly steering wheel, because as the Treasuries have lower yields and especially as you foolishly start to pay interest on reserves, you’re substituting two very similar assets. As the two assets get *very* similar you might be approaching a division-by-zero scenario where it takes unreasonably large amounts of money creation to change anything. And yes, there’s still an amount of money that’s enough. But maybe you would literally have to run out of short-term Treasuries to buy. Maybe you’d need to print far less money if you were buying a basket of low-volatility stocks or something. So maybe this is one of the things that market monetarists should push for, for the same reason we push for not using interest rate targeting because the meaning of the asset keeps changing? Like, if we try to create money and exchange it for Treasuries, does the meaning of that act change and diminish even as the Treasury yields get closer to zero.

    If printing more of the unit of account or unit of exchange is supposed to have a mode of action that doesn’t interact with the similarity of that currency to the Treasuries that it’s replacing, then I confess that this is something I still don’t understand myself and definitely couldn’t explain to anyone else. It might need to be explained to me with some kind of concrete metaphor involving apples being traded for oranges in a village that prices everything by apples, or something. Right now, the only part I understand is the notion that people have a price/demand function for things-like-currency, which implies that if a Treasury has become a thing-like-currency, creating currency and removing Treasuries will be a wash in terms of the demand function.

  55. Gravatar of ssumner ssumner
    29. March 2016 at 19:11

    Let me think about that and do a post tomorrow

  56. Gravatar of Derivs Derivs
    30. March 2016 at 01:10

    “Should market monetarists be pushing heavily to have the Fed be buying …or non-volatile shortable equities, instead of US Treasuries?”

    Not sure what qualifies as a “non-volatile shortable equity”, and I love all buyers of equities as I always seem to be long them, but sounds a bit like gov’t taking ownership of private means of production – pinko commie stuff”.

  57. Gravatar of Derivs Derivs
    30. March 2016 at 01:34

    Eliezer,
    One more thing. Treasuries are already considered cash equivalents. FASB says so.

  58. Gravatar of myb6 myb6
    30. March 2016 at 07:36

    Scott, OK thanks for explaining. But we could easily NOT pay IOR. So my apologies for being annoying, just trying to understand, but I still see “debts” as liability for the money, but then 100% coverage is huge overkill.

    https://research.stlouisfed.org/fred2/graph/?g=3ZMK

    I understand the desire for our institutions to invest rather than consume- can you come up with such a policy that’s neutral on distribution?

    Eliezer, I’m coming at this from a very similar angle, +1.

    The foreign assets mention triggered a thought: USD held by other states might need special treatment regarding coverage.

  59. Gravatar of ssumner ssumner
    30. March 2016 at 08:47

    myb6, I don’t understand what you are asking. I have no idea what phrases like “Debts as liability for the money” even mean. Please be much more specific.

    As far as not doing IOR, you can’t just not do IOR and leave everything else the same, or the price level gets very unstable.

  60. Gravatar of myb6 myb6
    30. March 2016 at 10:28

    Sure, I’ll give it another try, thanks for your patience.

    Eliminating IOR will result in money flowing back into the economy, so whatever monetary mechanism the Fed is using will need to adjust to keep NGDP expectations on track, right? But that seems unrelated to the mechanism question, helicopter-money vs asset-purchase, no?

    So I’m not yet understanding what precisely you meant by a helicopter-money mechanism increasing the national debt. I’m asking if the underlying issue is really that the monetary base is a Fed liability. Helicopter-money gives away such Fed liabilities for nothing, but the Fed will need marketable assets in case NGDPLT requires removal of such liabilities from the economy. However, if that is indeed the underlying issue, I don’t understand why the Fed needs enough assets to cover 100% of those liabilities.

  61. Gravatar of ssumner ssumner
    30. March 2016 at 18:02

    myb6. Let’s bring it to a personal level. You are Bill Gates. You have a billion dollars. Is you net worth going to be any different if:

    A. You dump the money out of a helicopter.

    B. You use the billion dollars to buy back your debt.

  62. Gravatar of myb6 myb6
    30. March 2016 at 19:28

    Right Scott, thanks, we’re on the same page, as I wrote: “I understand the desire for our institutions to invest rather than consume- can you come up with such a policy that’s neutral on distribution?”

    Or if you want to be more classical liberal about it, a policy that’s more neutral on the size of government? What if Bill Gates buys back a billion of his debt, and Melinda just issues another billion in response?

  63. Gravatar of myb6 myb6
    30. March 2016 at 19:40

    PS Thanks for engaging so much on this topic. I also really like your new post in response to Eliezer and am digesting.

  64. Gravatar of Lewis Lewis
    31. March 2016 at 09:19

    Hey I thought the readers here might be interested in this game I threw together. Kind of like Flappy Bird for fed policy.

    http://lewis500.github.io/macro/

    I might build it out into a full explanation when I get the time. It is a continuous time model with adaptive expectations and an expectations-augmented phillips curve.

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