David Beckworth on EconTalk

David Beckworth was interviewed by Russ Roberts this morning in a special video version of EconTalk, which was held at the Cato Institute and hosted by George Selgin. Unfortunately I am not able to find a link for the talk, but I’ll put one up if someone else can direct me to it.

Update:  Here’s the link:


Update#2:  I’m told the link no longer works, but a new link should be up in about 10 days.

There was some discussion of whether the market monetarist critique of Fed policy in 2008 is just Monday morning quarterbacking.  David seemed to concede that this complaint had some merit, and perhaps to some extent it does.  But I also think David is being too modest.  Here’s David criticizing interest on reserves, way back in October 2008, right after it was first adopted:

Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled as seen in the figure below.

.  .  .

Now in 2008 the Fed did not suddenly increased reserve requirements, but it did just start paying interest on excess reserves. The Fed, then, just as it did in 1936-1937 has increased the incentive for banks to hold more excess reserves. As a result, there has been a similar decline in the money multiplier and the broader money supply (as measured by MZM) which I documented yesterday. If the Fed’s goal is to stabilize the economy, then this policy move appears as counterproductive as was the reserve requirement increase in 1936-1937.

David says that in retrospect he thinks that Fed policy went off course even earlier, in the middle of 2008. Speaking for myself, I didn’t really become aware of the problems with monetary policy until September 2008, after the Fed refused to cut rates despite plunging TIPS spreads.  In retrospect, money became much too tight a couple of months earlier.

Because of data lags, it’s not always possible to predict a recession until the recession is already well underway.  During the past three recessions, a consensus of economists didn’t predict a recession until about 6 months in.  That’s right, not only are macroeconomists unable to forecast, we are also unable to nowcast.

This is why NGDPLT is so important. Under a level targeting regime, the market tends to prevent sharp drops in NGDP from occurring in the first place.  Under NGDPLT, the economy would not have fallen as sharply in late 2008, partly because level targeting would have prevented a steep plunge in asset prices, and partly because current AD is heavily dependent on future expected AD.  If you keep future expected AD rising along a 5% growth path, current AD will not fall very far during a banking crisis.

There was also some discussion of the shortage of safe assets.  Two questions came to mind:

1.  Does this theory imply that risk spreads should have widened in recent years, as the demand for T-bonds has increased faster than the demand for riskier bonds?

2.  Has this in fact occurred, and if so to what extent?




16 Responses to “David Beckworth on EconTalk”

  1. Gravatar of E. Harding E. Harding
    19. May 2016 at 12:04

    Well, Scott, it looks like the Cultural Revolution ain’t dead:


  2. Gravatar of E. Harding E. Harding
    19. May 2016 at 12:07

    “That’s right, not only are macroeconomists unable to forecast, we are also unable to nowcast.”

    -This is clearly an indicative of a systemic bias in the economics profession. My guess is that this is because all too many economists like promoting the status quo. At least Dean Baker, who was never a friend of the status quo, was able to nowcast.

  3. Gravatar of Gary Anderson Gary Anderson
    19. May 2016 at 12:10

    He hit it. My claim has been for a long time that bankers never forget. They liquidated the economy in the early 30’s and slowed it in 1937. They do the same things over and over. They have a plan, and it appears it favors the insiders and not main street. Will Rogers used to say that the banks wanted to restore confidence. Well, CNBC used the very same terms in 2008. CNBC is the media link to the Fed.

    Nothing changes. They behave the same way in crises of credit, and you can expect them to take out who they want with low blows, like Mark to market and by not buying commercial paper in 2007-2008.

  4. Gravatar of E. Harding E. Harding
    19. May 2016 at 12:15

    Also, risk spreads have apparently significantly widened since the 1950s and 1960s:


  5. Gravatar of E. Harding E. Harding
    19. May 2016 at 12:19

    Also see


  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. May 2016 at 14:00

    Off topic, but stubborn is, as stubborn does;


    A Wall Street Journal examination of pay in 446 major occupations found that women in many elite jobs earn well below men, with professions such as doctors, compensation managers and personal financial advisers among those showing the widest earnings gaps.

    The biggest gaps in many white-collar professions don’t easily lend themselves to legislative remedies. In fact, the Journal’s findings belie policy makers’ hope that the most-educated women would lead the way in shrinking the gap. Currently, more women than men graduate from college.

    Why? you ask;

    Wage transparency—requiring employers to report salary data—is “just not going to move the needle much,” says Claudia Goldin, a Harvard University economics professor and one of the country’s foremost scholars on gender and pay. Prof. Goldin found in a 2010 paper that men and women earned almost the same salaries right after receiving University of Chicago M.B.A.s. At least a decade after graduating, the women earned 57% of their male classmates.

    The main factor, she and her co-authors concluded: Women became mothers, interrupted their careers and eschewed lengthy hours that generated higher paychecks. “These particular occupations,” Prof. Goldin says, “are not very forgiving of taking time off and having kids.”

    The Journal’s analysis of Census Bureau data for the five years through 2014 found male doctors working full time earned about $210,000 annually on average. Female physicians made 64% of that, about $135,000 a year. Among personal financial advisers, men took in about $100,000 while women made about $62,000.

    Many white-collar jobs give substantially larger financial rewards to those logging the longest hours and who job-hop often, phenomena that limit white-collar women who pull back for child-rearing. Researchers on the topic say ingrained workplace cultures also impede women’s earnings.

    Oh, the pity of it! People who work fewer hours and produce less output for their fellow woman to enjoy earn lower pay.

    There oughta be a law.

  7. Gravatar of Benjamin Cole Benjamin Cole
    19. May 2016 at 15:48

    Market Monetarists have been the best macroeconomists since at least 2008. Now, if MM’ers will just embrace money-financed fiscal programs (MFFP)….

    We can do away with this Rube Goldberg arrangement of a central bank buying or selling bonds through 22 primary dealers, with the hopes that will either constrain or boost commercial bank lending. Add on the intrigues of interest on excess reserves, or the mysterious reverse repurchase agreements and closed-door FOMC meetings.

    Is there not a virtue, on both democratic and administrative levels, of a simple plan like money financed fiscal programs?

    Implement a Taylor rule or Sumner futures market in connection with MFFP.

  8. Gravatar of Benjamin Cole Benjamin Cole
    19. May 2016 at 16:10

    Add on: I hope Scott Sumner or some other smartie explains what was the Fed’s “Primary Dealer’s Credit Facility.”

  9. Gravatar of Matthew Waters Matthew Waters
    19. May 2016 at 19:23

    The “safe asset shortage” or “reach for yield” arguments always struck me as hollow. From a purely libertarian perspective, people have themselves to blame if they didn’t give enough discount to a Baa bond. If finance people say they need higher interest rates to save them from themselves, that’s not very high praise of the finance sector or what they do for clients.

    The “safe asset shortage” is related to the practicality of NGDPLT. Expectations and the market’s response at the ZLB is a very sensitive, chaotic Game Theory problem. The most extreme MM assumption is all actors in this Game Theory problem have multiple equilibria of AD. All actors are perfectly rational and agree on which level of AD to choose. The Central Bank is the external actor which just has to speak the right level of AD and the actors follow. Expectations do the work without needing much in the way of “non-orthodox” policy (QE or negative rates).

    The real world is less clear. I’m not nearly as sanguine on the rationality of markets, especially within shorter time frames. If you have bank runs and no bailouts, I think the Fed would have had to have done some VERY heavy lifting on its own.

    An NGDP market where the Fed directly buys and sells futures may have done that heavy lifting. But it’s easier for me to understand significant negative rates, with some way of penalizing holding cash. The Fed can merely print $95 of cash for $100 in reserves. It’s really not that difficult logistically.

    Extending the Fed Funds policy below zero has all of the same issues as traditional policy: the Fed has been wrong, misses forecasts, has some leads and lags. But I think it depends less on the EMH than the NGDP market over relatively short time-frames (<1 year).

  10. Gravatar of Matthew Waters Matthew Waters
    19. May 2016 at 19:55

    “Add on: I hope Scott Sumner or some other smartie explains what was the Fed’s “Primary Dealer’s Credit Facility.””

    Guess I’ll call myself a smartie.

    A primary dealer is the broker for the trading desk at the New York Fed branch. Buying a billion dollars of Treasuries in QE means they have to actually be bought on the market, like any other buyer. The Fed uses several brokers it deems credit-worthy enough to clear extremely large open-market purchases. QE only prints money because the Fed increases the deposit balance of the primary dealer out of thin air, rather than transferring from another account. Otherwise, the transaction looks exactly the same to the primary dealer, to the seller’s broker and ultimately to the seller.

    The Primary Dealer’s Credit Facility was similar to the Discount Window which has always been available to member banks. The Fed Funds market is overnight, non-collateralized lending market between banks. The assumption is some banks will happen to have more demands for withdrawals due to daily variability. Withdrawals put a bank below reserve requirements (well, in normal times they do), and so the bank can borrow from other banks if other banks trust this bank. The discount window has a bit higher rate than the Fed Funds rate, where the Fed actually lends to the bank. A discount window loan is *collateralized*, unlike Fed Funds lending. The higher rate punishes a bank for using the discount window instead of other banks.

    The PDCF was similar, but for primary dealers. At the time of the Bear Stearns bailout, most of the broker-dealers were not member banks. The primary dealers then had a ready source of liquidity, as long as they had assets which the Fed accepted as collateral. The intention was the same as the discount window for member banks: lender of last resort. Lender of last resort theoretically allowed banks to withstand bank runs if the banks were honestly solvent. A private source of funds for the collateral may not be readily available with the same speed as the central bank.

    In general, facilities such as FDIC, discount window and PDCF may have economic justification if they alleviate some market failures compared to purely private banking. There may be far more market frictions and costs to cobble together buyers for collateral compared to a discount window, where the central bank can immediately print unlimited money. On the other hand, effective NGDPLT may address some of the root causes of liquidity demands and bank runs.

  11. Gravatar of ssumner ssumner
    20. May 2016 at 06:32

    Harding, Thanks for that graph.

  12. Gravatar of George Selgin George Selgin
    20. May 2016 at 12:30

    Scott, the interview video was put up by mistake, so the link no longer functions. Lest Paul Krugman or some other fool should claim this as evidence of Cato “suppressing” something, we weren’t supposed to air it until Russ posts the audio version on his own EconTalk site! That should happen in about 10 days, when everyone will be able to either see or see and hear hear David on either our or Russ’s site.

    My apologies to everyone for the mistake and any subsequent disappointment it may have caused.

  13. Gravatar of JonathanH JonathanH
    20. May 2016 at 22:01

    I had a direct link up to the mp3 in my browser for a few days that still works.


  14. Gravatar of ssumner ssumner
    21. May 2016 at 05:16

    Thanks George, I added an update.

    Jonathan, That seems to be just audio. The original was also video.

  15. Gravatar of flow5 flow5
    24. May 2016 at 07:47

    You missed Greenspan’s greatest Fed error in history:

    24 FFR policy reductions from 6/5/1989 until 9/4/1992 to “prime-the-pump” (via the Fed’s interest rate transmission mechanism) – only 8 during the recession.

    All this to counter the S&L crisis predicted in June 1980. And no increases until 2/4/1994 (prima facie evidence that money was “tight” as indicated by the unemployment reaching almost 8% as late as June 1992. (along with negligible net free or net borrowed reserve positions). I.e., the Fed’s monetary transmission mechanism is non sequitur.

    Senator Nancy Landon Kassebaum; responding to my letter in 11/4/81: “Today, less than two years since the DIDMCA was established, most of the liabilities have been deregulated with no change in the asset structure that would enable payment of higher rates to depositors”. The S&L crisis of the late 80’s and early 90’s was no happenstance.

  16. Gravatar of flow5 flow5
    26. May 2016 at 13:13

    I.e., a $13b drop in required reserves translated into only 1 billion dollars in excess reserves. I.e., Greenspan’s tightened monetary policy when the economy was in a recession (shades of Bankrupt U Bernanke).

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