The Fed has adopted a policy stance expected to produce about 4.5% annual NGDP growth.  The policy might fail.  It might fail by generating 4.0% NGDP growth, or it might fail by generating 5.0% NGDP growth.  I claim that Bernanke would be very disappointed by 4.0% NGDP growth, and pleasantly surprised by 5.0% NGDP growth.  Indeed I think if God came down from heaven and told Bernanke he could have any NGDP growth rate he wanted over the next two years, he’d pick something closer to 6%, well above what the Fed expects.  At least that’s my hunch.

Have you ever requested something of someone, because you felt you had to, secretly hoping they’d say “no?”  Is that where Bernanke is?  Does he feel he must end QE2, but secretly hopes for the NGDP growth path that would result from one more dose of QE?

In the previous post I criticized this FT piece by Joseph Stiglitz.  But I left out his most intriguing comment:

In certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy – more predictable, faster, without the adverse long-term consequences brought on by greater indebtedness. Indeed, some advocates wax so enthusiastic that they support recent drives for austerity in many European countries, arguing that if there are untoward effects they can be undone by monetary policy.

I don’t recall these ideas as being particularly fashionable in early 2009, when I argued that both sides of the fiscal stimulus debate were missing the point.  I’m glad to see they have become so fashionable that the British government is now cutting spending and relying on easier money to offset the negative effects.

I thought it might be interesting to create a list of newly fashionable ideas:

1.  Using monetary stimulus instead of fiscal stimulus (recently adopted in Great Britain)

2.  Cutting the IOR as an expansionary policy tool (an option discussed recently by Bernanke.)

3.  Negative IOR (recently advocated by Alan Blinder and adopted by the Swedish Riksbank.)

4.  QE (likely to be adopted by the Fed.)

5.  Level targeting (being widely discussed at the Fed.)

6.  NGDP level targeting (recently mentioned as an option in the minutes of a Fed meeting.)

7.  Monetary policy might currently be restrictive despite low rates and a large monetary base (recently suggested by Chicago Fed President Charles Evans.)

Of course some of these ideas (such as QE) are hardly novel.  And others (such as level targeting) are well known in academia.  But I think it’s fair to say that we quasi-monetarists were ahead of the curve in most of these areas.

In a complex field like economics all arguments are tentative—subject to further revision.  Objective proofs are almost impossible.  What matters is whether an economist is able to change the conversation, to shift the perspective of others.  I think we quasi-monetarists (including both bloggers and commenters) have had real success in that regard.  We shouldn’t be discouraged by Stiglitz’s criticism; it shows how far we’ve come.

In an earlier post I argued that Fed policy almost always reflects the consensus views of economists, and therefore that most economists fail to perceive major monetary policy failures at the time and place they occur.  I applied that conjecture to episodes of inflation and deflation.   Let’s see if we can take that conjecture even further today.

I’d like to argue that almost every American recession shares two characteristics:

1.  Recessions are caused by a slowdown in NGDP growth, which is triggered by tight money.

2.  During every recession most economists fervently deny point 1 applies to the current problem.

That’s a pretty bold claim, but what else would you expect from a blog entitled “The Money Illusion?”

Den ganzen Beitrag lesen…

Suppose you have a crystal ball, and are given one peak at the future, say May 2011.  But you are only allowed to look at one variable—and it’s not the Dow, it’s the fed funds rate.  Now suppose I tell you the following, it will be one of these two numbers:

a.  0.25%

b.  3.75%

Den ganzen Beitrag lesen…

Even people who are sympathetic to my policy views often have trouble swallowing my thesis that the Fed caused the crash of 2008.  In my previous post (which you should read first) I argued that people make unjustified distinctions between “active” and “passive” monetary policy stances.  The argument is often that the Fed did not “do anything” that might have caused the crash of 2008.  Here I will reprise and extend an argument I used in response to Josh over in Nick’s blog.

Den ganzen Beitrag lesen…