From the WSJ:

Mr. Bullard noted that in 2009 the Fed may have kept monetary policy too tight, but that was before the Fed embraced bond buying as a tool of policy stimulus.

Pay no attention to the “may.”  Officials don’t acknowledge that the institution they are responsible for may have screwed up, unless they actually think it screwed up.

HT:  Steve

Off topic.  A commenter named “Cornflour” produced what I thought was the most persuasive explanation of the “Driftless Area Mystery.”

I don’t have the numbers at hand, but I’m an ex-geologist who grew up in Iowa, so I have some observations that aren’t entirely imaginary.

It’s already been noted that Rochester and the Quad Cities are on the edges of the driftless area, and have their own stories. For the rural part, this is a gentrification story.

The driftless area is very pretty country, and by Midwestern standards, the climate isn’t too bad. It was always poor land for farming, and earlier generations ran small hog and dairy farms. These were never very competitive, and don’t survive in large numbers. Starting in the 1960″²s, back-to-the-land people started buying land and lived (some still living) a vaguely hippie lifestyle. Later migrants were more middle class, or even wealthy. They started B&B’s, organic dairy farms, organic apple orchards, goat farms, restaurants, etc. A few are artists and craftsmen. There are quite a few hobby farms. Most of these people have come from the Chicago area and are very liberal. A very small number of them are conservatives of the “crunchy con” sort.

Not all of the local people have left, but they are now called “the locals.” It’s the newcomers who swing votes to Democrats like Obama, but not necessarily to more old-fashioned local Democrats. For those with Midwestern myopia, think of New York and Vermont a generation earlier.

So it’s sort of the upper New England of the Midwest.  I guess one can live in a state without really understanding it.  BTW, do you recall the famous Maine catalog company “L.L. Bean.”  Guess where “Land’s End” is located.  That’s right, the Driftless Area–Dodgeville, Wisconsin.

I have to disagree with him on one point, however.  There is no such thing as a Midwestern climate that “isn’t too bad.”

PS.  I mentioned the 1966 film “Blow Up” in the Driftless Area post.  I just saw the film last night at Harvard (a perfect print, BTW) for the first time in 40 years.  Blow-Up obviously influenced the directors of The Conversation, Blow Out, A Clockwork Orange, and many of the films made in Asia over the past 25 years.  After the film I thought about all of the great films made between 1958-75; Blow-Up, The Passenger, Vertigo, Psycho, The Godfather I and II, Laurence of Arabia, Dr. Strangelove, 2001, Touch of Evil, Chinatown, etc.  And that’s just a partial list of the classic English language films.  We haven’t even gotten into all the Italian/French/Japanese classics.  Or the films of Tarkovsky, Bergman, Ray, etc.  And yet today far more aspiring directors have access to “film schools,” or to cheap digital cameras where they can show their chops.

Why don’t they make “great” films like “Blow-up” anymore?  Is it because they’ve already been made? Or because we can’t recognize them? Because we just aren’t seeing what future generations will see. Or to put it another way, does this comment by Susan Sontag also apply to film?

IS LITERARY GREATNESS still possible? Given the implacable devolution of literary ambition, and the concurrent ascendancy of the tepid, the glib, and the senselessly cruel as normative fictional subjects, what would a noble literary enterprise look like now?

Answers can be provided in the comment section.

Here’s a Warstler post sent to me by Josiah:

Early after Obama won in 2008, John Papola asked me what I thought about Scott Sumner’s Money Illusion.  I headed over and got into it.

It has been an ugly 3 years.  But last night I lost a big bet, so….

For the next month or so, I’m going to layout how I let go of my driving political philosophy since the mid-1980’s and adopted Sumner’s.

.   .   .

What is needed as a strategy is a single conservative policy embedded directly into the fabric of our economy, that assures, “growth.”

This can be accomplished through monetary policy, specifically through a new approach by the Federal Reserve.

The Fed is on the verge of throwing out their dual mandate, and instead using only one: Nominal Gross Domestic Product on a Level Target (NGDPLT).

Conservatives must rally their political strength to this idea.

.   .   .

We can Go Gulch, but there’s a smarter trickier way to do it.  If Ayn Rand had been around today, she’d come to understand there is another way.

The answer is NGDPLT.

Saturos sent me the following:

STOCKHOLM, Nov 5 (Reuters) – A majority of Swedish rate-setters now firmly believe that high household debt levels must be considered when setting policy, a central bank source said, a shift that could cap rate cuts if debt starts growing.

Sweden’s economy is slowing as the turmoil in the neighbouring euro zone hits the exports of its leading firms, prompting markets to bet that the Riksbank will soon loosen monetary policy to underpin growth.

However, Swedes have among the highest borrowing levels in Europe and though worries of a housing bubble have subsided and borrowing growth rates have fallen, credit expansion is still strong. This seems to have put some policymakers off cutting rates.

The four most hawkish members of the six member executive board now think it is time to remove doubts that high levels of consumer debt and debt sustainability are factors in setting interest rates.

“It is only now that the majority (of the board) is clear that it puts an explicit emphasis on indebtedness and that it affects the assessment of the balance of inflation and resource utilization,” the source told Reuters.

The move, which has been brewing for some time, comes after criticism of board members for being unclear about whether they have other targets than the official one of an inflation goal of 2 percent over a 2-year horizon.

The source noted a hardening in the stance on household debt had been seen in late October in Central Bank Governor Stefan Ingves’ newspaper opinion piece, which surprised markets as it came just a week before a rate-setting meeting that had been seen as being in the balance.

The source also mentioned a speech by Deputy Governor Per Jansson, where he said household debt had to be taken into account, even if it was difficult exactly to quantify the impact of monetary policy measures on such borrowings.

. . .

In the last few years, the question about whether household lending should be taken into account when setting rates has been hotly debated within the board.

The more hawkish majority – currently Ingves, Jansson as well as Barbro Wickman-Parak and Kerstin af Jochnick – has referred to household debt occasionally as a reason to keep rates higher.

The most dovish member of the board, Deputy Governor Lars Svensson, has argued the repo rate is the wrong tool if debt is to be kept down.

So I get it.  Only wimps favor straying from a rigid inflation target to save jobs.  But the central bank has a duty of overrule the regulatory policies toward debt formation of popularly elected center-right governments, when they don’t happen to like them.  Even when it means ignoring their inflation target.  Why am I not surprised?

PS.   I will attempt to be first to call the election tonight.  I’ll probably fail, but if I can find a network with a non-idiot like Stu Rothenberg, I’ll let you know as soon as the numbers make it clear who will win.  Of course by then Intrade will likely know–but it can be hard to access on election night.

Here’s Stephen Williamson:

That seems to be what Kocherlakota is attempting here, and he goes even further than you might expect. His conclusion is:

“…monetary policy is, if anything, too tight, not too easy.”If you have not fainted and fallen on the floor, take a couple of deep breaths, and we’ll figure out what Narayana has on his mind.

If you did faint and fall on the floor, you are probably someone who thinks money was “easy” in 1932, when the base was soaring under an aggressive QE program, and rates were near zero.  Or perhaps you are a follower of Joan Robinson, who thought easy money couldn’t have caused the German hyperinflation, because interest rates were not low.  So I hope all my readers are still conscious.

Monetary policy should respond to forecast inflation, not actual inflation. You would think Kocheralakota would know better. Does a forecast give us any more information than what is in the currently available data? Of course not.

This one had me scratching my head.  When it was announced that the Bank of England would become independent the TIPS spreads in the UK fell on the news.  What sort of “currently available data” was that in response to?  You target the ratex forecast, not some sort of crude adaptive expectation equation using past inflation.

So let’s do a test. When the Fed met on September 16, 2008, the trailing 12 month inflation data was quite high, in contrast the TIPS spreads were showing only 1.23% annual inflation over the next 5 years, well below the Fed’s target. One can’t imagine a better test of market monetarism against new monetarism. Should we have a forward-looking monetary policy and target the forecast (preferably the level of NGDP, BTW, not inflation), or a backward-looking monetary policy as Stephen Williamson seems to favor.  Should we drive the car while looking down the road, or in the rear view mirror?

The Fed opted for new monetarism. Citing an equal risk of recession and HIGH inflation (yes, you read that right, high inflation), they refrained from easing two days after Lehman failed, keeping the fed funds target at 2%. In mid-2009 NGDP fell 9% below trend. And that’s why we are in a little depression. Bad demand-side policies lead to bad supply-side policies (just as in the 1930s), making the contraction longer than necessary.

I can’t imagine someone advocating a policy that doesn’t target the forecast.  Why adopt a policy stance that is expected to fail?  Right now, Fed policy is set at a position that will likely deliver less NGDP growth than would be optimal, given the Fed’s dual mandate.  Money is tight in the only sense of the term ‘tight’ that is meaningful, relative to what’s necessary in order that policy be expected to hit the policy goal.

I remember in late 2008 all sorts of conservatives mocking the fear of deflation, mocking the claim that we needed demand stimulus.  Then we got deflation in 2009, and the biggest fall in NGDP since 1938.  They were wrong in late 2008, 2009, 2010, 2011, and they are still wrong.  High inflation is not just around the corner. Just as the doves were wrong in 1965, 1966, 1967, 1968, 1969, 1970, 1971, 1972, 1973, 1974, 1975, 1976, 1977, 1978, 1978, 1979, 1980, and 1981.  Both hawks and doves were about right between 1985 and 2007.

HT:  Lars Christensen

PS.  Commenter Declan sent me an interview of Warwick McKibbin, who is a former central banker in Australia.  I haven’t had time to hear the entire interview, but in the 37:00 minute to 40:00 minute area he confirms that Bernanke abandoned the advice he gave the Japanese and speculates that there were political constraints involved.  A bit after the 40:00 minute mark he endorsed NGDP targeting.

Johnleemk and Nic Johnson sent me this great quotation from Minneapolis Fed president Narayana Kocherlakota.

[The Fed] has also been targeting a fed funds rate of under a quarter percent for nearly four years””and anticipates continuing to do so through mid-2015. In the language of central banking, the Fed’s policy stance is considerably more accommodative than it was five years ago. . . .

Some observers argue that the Fed has done too much, has been too accommodative. I strongly disagree. … In light of the unusually large macroeconomic shock, I believe that it is misleading to assess the FOMC’s actions by comparing its current choices to policy steps taken over the past 30 years. Instead, we have to assess monetary policy by comparing the economy’s performance relative to the FOMC’s goals of price stability and maximum employment. In particular, if the FOMC’s policy is too accommodative, that should manifest itself in inflation above the Fed’s target of 2 percent. This has not been true over the past year: Personal consumption expenditure inflation””including food and energy””is running closer to 1.5 percent than the Fed’s target of 2 percent.

But this comparison using inflation over the past year is at best incomplete. Current monetary policy is typically thought to affect inflation with a one- to two-year lag. This means that we should always judge the appropriateness of current monetary policy using our best possible forecast of inflation, not current inflation. Along those lines, most FOMC participants expect that inflation will remain at or below 2 percent over the next one to two years. Given how high unemployment is expected to remain over the next few years, these inflation forecasts suggest that monetary policy is, if anything, too tight, not too easy.  (Bold print added by Johnleemk.)

It’s really gratifying to see Fed people like Dudley and Kocherlakota getting closer and closer to the truth, that Fed policy has been ultra-tight since mid-2008, just as Fed policy in the 1930s was ultra-tight, despite near-zero interest rates.  Over time, people will stop talking about policy as being “too tight” and just start calling it “tight,” as Friedman did in 1997 when Japanese policy was too tight to hit their inflation target, and interest rates were near-zero.  After all, you rarely see people say; “Those 1000% interest rates show that monetary policy was tight during the German hyperinflation, albeit too expansionary relative to the needs of the economy.”  They simply cut to the chase. Policy was too easy!

When I started out in late 2008 and early 2009 my claims that tight money was the problem were met with incredulous stares.  Now we’ll see who gets the last laugh.  Indeed (here’s a teaser) we may find that a month from now I’ll be able to get the last laugh on some of my early critics.  I have a long memory.

I’ll get back to the MOE/MOA debate tonight.

PS.  Do you see a bit of sarcasm when an academic says “in the language of central banking.”