Does the left actually support monetary stimulus?

Lots of commenters tell me that the left is better than the right on monetary policy. Yes, they doubt the effectiveness of monetary stimulus at the zero bound (so the argument goes) but a least they favor monetary stimulus.

But do they? What makes anyone think that Fed policy over the past four and a half years is different from the policy Obama favored? Six of the seven board members are Obama appointees, and the last Bush appointee leaves next month. It’s Obama’s board, and he never showed the slightest interest in money policy, even when the GOP had no ability to block his picks. Why shouldn’t we blame Obama for current Fed policy? And let’s not forget that Larry Summers was Obama’s chief economic advisor.

The only people who ever dissent in favor of a less contractionary policy are regional Fed presidents like Bullard and Evans. The Obama appointees NEVER dissent.

And now we have Massachusetts Senator Elizabeth Warren endorsing Paul Volcker for Fed Chairman. Seriously.

Yes, Paul Krugman favors additional monetary stimulus. But does the left agree with him? I’d like to see the evidence.

BTW, over the past five years the market monetarists have been the strongest supporters of monetary stimulus; no other group even comes close.

PS. Evan Soltas also did a post on John Williams’ recent article. I like Evan’s take better than my own.

HT: Yichuan Wang, TravisV


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50 Responses to “Does the left actually support monetary stimulus?”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    13. July 2013 at 05:40

    Volcker was born in 1927, making him 86 years old. More likely to die than survive a term as Fed Chair, I’d think.

    Elizabeth Warren; genius.

  2. Gravatar of Morgan Warstler Morgan Warstler
    13. July 2013 at 05:50

    PK isn’t really ALL IN.

    He says “Sure maybe it can help, can’t hurt.”

    BUT, if PK saw MP work. And saw it mean we could cut govt. aggressively and never experience suffer the economy slowing down….

    PK would be rabid against neutering the jobs growth argument of Fiscal.

    There’s an exact moment when we have only one lever, NGDPLT, that the left will wake up and realize that:

    Shutting down the post office = cheaper interest rates for the haves.

    We don’t think that mechanistically NOW, bc we have more than one pressure gauge, the choice isn’t visible, it doesn’t feel binary.

    But when we are running at a smooth 4.5% NGDPLT, it will be a KNOWN KNOWN that increases in govt. spending = higher private sector rates, decreases in fiscal = lower private sector rates.

    The debates between economists of left and right are obscured by: Fiscal vs. Monetary solely bc the public has opinions on both jobs and inflation.

    When those gauges no longer exist for the Fed to stare at:

    1. Unemployment only exists by bad govt. policy. Basically, GI CYB solves.

    2. Inflation ceases to exist, bc RGDP growth is ALWAYS GOOD.

    3. So if we’re at 4.5% NGDPLT, a proposal to close USPS means the voters can be GUARANTEED cheaper home and car loans for giving up .50 cent birthday cards to grandma.

  3. Gravatar of TGGP TGGP
    13. July 2013 at 06:43

    Obama probably doesn’t think much about monetary policy. Which might be blamed on “pop Keynesianism”. As much as I don’t care for the left, I think this post is rather pointless picking of a fight. Like Obama, most people don’t give much serious thought to monetary policy. The market monetarists, as impressive as their rise in the blogosphere has been, are a very small number of people.

  4. Gravatar of Saturos Saturos
    13. July 2013 at 07:10

    This should be of interest (HT Greg Mankiw): http://users.nber.org/~confer/2013/SI2013/FED/FEDprg.html

  5. Gravatar of Benjamin Cole Benjamin Cole
    13. July 2013 at 07:20

    Excellent post.

    Obama deserved to lose in 2012; only by running a guy with Cayman Islands bank accounts did the GOP lose.

    In a way, I understand Obama. He is not an economist, and everyone he knows is a Krugmanite. And Obama has a lot on his plate, from gutting in and out of wars to environmental policies etc.

    The big problem is that the Fed is considered to be independent. So the press gives the President a pass. The Fed is never held accountable by voters.

    Supposedly the voters would be irresponsible if they exercised their democratic rights in relation to the Fed, or leaders would cave in and ease the money supply before elections. You know, voters want prosperity, even at the expense of some inflation.

    Can that be any worse than an independent public agency closely allied to banks? That is a recipe for ossification, insularity and industry capture.

    We see the havoc the ECB is wreaking in Europe, the ruin the BoJ has brought to Japan, the and damage the Fed has done to the USA.

    The independent central bank model…not sure that premise flies anymore

  6. Gravatar of Ciceron Ciceron
    13. July 2013 at 07:46

    A nice feature of NGDPLT is that the government can plan with much ease. If the administration puts in place a tax system that collects a constant proportion of NGDP, it knows exactly how much it will collect in all future years. Except for future interest payments on short-term debt, it can plan almost perfectly.

    Then it can focus on real issues, such as the percentage of GDP to be spent on this or that program and the percentage of GDP to be collect with such and such method. No more crazy arguments about “temporary” fiscal policies to solve demand-side problems. It would be a much better world, in my mind.

    I think the left has taken a huge hit in 2009-2010 because the massive fiscal policies they put forward did not prevent the crisis (of course they claim it would have been worst if they had done less, but to me, that’s a rather specious argument).

    But at least, not many people on the left think the masses should suffer so to pay for past sins and profligacy. This seems to be a recurring theme in some conservative circles. And NGDPLT certainly is not built to cause mass unemployment and suffering.

    That being said, if NGDPLT is adopted, the left will have to reinvent itself. This might explain why they are timid when it comes to monetary easing.

  7. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    13. July 2013 at 08:03

    The problem is that monetary stimulus (and market monetarism in particular), basically takes away from the left one of its strongest argument for growing government (it’s a crisis, we need demand). So while they could be sympathetic to it as it is basically Keynesianism in a world of fiat money, they also know that in the end, it kills one of their better arguments for growing government.

    On the other hand, many on the right define themselves more by a deep fear of inflation rather than being for free-market principles. If given a choice, they’ll throw the free market under the bus and go for a gold standard and government stimulus.

  8. Gravatar of ChargerCarl ChargerCarl
    13. July 2013 at 08:26

    The left has greater trust in public institutions and just assumes the Federal Reserve is doing the best it possibly can.

    just my 2 cents

  9. Gravatar of Jason Jason
    13. July 2013 at 08:28

    The bloggy left supports monetary stimulus. However it does seem ironic for someone to say the left is a stronger advocate of monetary stimulus while simultaneously claiming it might be ineffective.

    @Luis, the argument for increasing provision of government services is almost orthogonal to the argument for demand management. The Keynesian argument calls for cutting deficit spending during normal economic growth. The left thinks the government should provide e.g. health care regardless of the state of the economy. Think of it as the first harmonic (+ in recession, – in normal times) and zero mode (+ all the time) in an oscillating system, respectively.

  10. Gravatar of Saturos Saturos
    13. July 2013 at 09:28

    That was a beautiful post by Evan, he could be a great economist.

  11. Gravatar of Saturos Saturos
    13. July 2013 at 09:32

    In case you didn’t get to it from the earlier link, here is the Bernanke speech: http://www.federalreserve.gov/newsevents/speech/bernanke20130710a.htm

    And here is the key quote: https://twitter.com/esoltas/status/355059722400964609

  12. Gravatar of J J
    13. July 2013 at 10:00

    Professor Sumner,

    The Elizabeth Warren comment isn’t quite relevant. She clearly likes Volker because she cares about financial regulation and thinks he is tough on banks.

    That aside, I agree that Obama is to blame for current monetary policy. There is no evidence that he wanted to appoint more dovish economists but was restricted by republicans. Nonetheless, who would the republicans have chosen? If Romney were president, would we be waiting for the announcement of John Taylor as the next Fed chairman? Monetary policy could be A LOT worse. People on the left are skeptical of monetary policy, but most of the economists/politicians/pundits arguing that we need to tighten NOW are right-wing.

  13. Gravatar of J J
    13. July 2013 at 10:02

    Professor Sumner,

    Perhaps the Elizabeth Warren comment is truly revealing. She doesn’t realize the importance of monetary policy (as opposed to regulation policy). That is bad, but better than demanding tighter money.

  14. Gravatar of Doug M Doug M
    13. July 2013 at 10:24

    The “hard left” doesn’t like monetary stimulus. They are as dubious of the Fed as the conspiratory theorists on the right.

    When the Fed eases they give money to bankers and drive up the prices of financial assets. It is “trickle down” economics. And and the same time, it drives up “the cost of living” and drives down the real wage.

    They would much rather see Keynesian stimulus and are likely to say that income inequality drives recessions.

  15. Gravatar of jknarr jknarr
    13. July 2013 at 10:57

    Exactly. I’d suggest that this means that the left-right analytical framework is useless. Useless frameworks need to be jettisoned.

    Both parties agree on tight money. Tight money centralizes and boosts the relative power of large balance sheet entities – the Fed, Treasury, large corporates.

    I’ll point out that the same thing is happening in Europe. Political centralization via tight money austerity.

    I maintain that PK is de facto hard money.

    The war has always been between hard-and soft- money: bankers versus farmers, capital versus labor, lenders versus borrowers.

    Left-right is a broken model, if it ever worked at all. Left-right squabbles are pure red herrings at worst, and internecine at best.

    Oligarchs agree on the big stuff: tight money.

  16. Gravatar of Steve Steve
    13. July 2013 at 11:13

    Elizabeth Warren has consistently played the populist card. Banks are evil, Wall St. is evil, they must be reigned in. As “J” said, she clearly doesn’t understand the importance of monetary policy. I’m not sure to what extent she’s populist because the voters in MA lap that up, and to what extent she simply doesn’t understand economics. To steal from Paul Krugman, it’s the “Fool or Fraud” theory…

  17. Gravatar of Steve Steve
    13. July 2013 at 11:27

    I have a comment that is partly in response to the previous post, but relevant to this one as well.

    Scott pointed out that the stock market is hitting highs despite higher interest rates, presumably due to higher growth expectations.

    But underneath the surface, there are some interesting shifts. Sectors sensitive to long term interest rates like housing and utilities have declined markedly since May 22. Weaker growth is expected in these areas. But autos, which are financed short term, have continued to do well.

    What’s most interesting, though, is that the big winner has been the financial sector. There’s a presumption that higher rates will increase profit share of national income that goes into the financial sector. This is because less bond buying by the Fed means that interest income, instead of being remitted to the treasury, will be remitted in financial stock holders.

    So it isn’t necessarily higher growth expectations. It might be that financial stability concerns of Stein, Warren, and others simply freeze low net worth people out of home ownership, because these people are the true source of financial stability risk in an unstable NGDP world. So the banks are now allowed to charge higher, more risk appropriate interest rates, in order to guard against financial stability risks.

  18. Gravatar of ssumner ssumner
    13. July 2013 at 11:33

    Morgan, Yes, it will improve micro policies.

    TGGP, The Dems used to be obsessed with monetary policy, what happened?

    I don’t see why you are saying I’m picking a fit. If you are right that they don’t care about monetary policy, they certainly won’t care about this post. But if it wakes them up, won’t that be a good thing.

    Fed officials claimed a few years back that one reason they weren’t doing more monetary stimulus was because they were getting almost zero pressure to do more, and lots of pressure to do less.

    Ciceron, Good points.

    Luis, How does that explain why Warren likes Volcker and Krugman doesn’t?

    Saturos,, Yes, the sky’s the limit for Evan.

    J, Interesting question. Which is worse, ignorance or bad judgment?

    Jknarr, I don’t agree about Krugman.

  19. Gravatar of ssumner ssumner
    13. July 2013 at 11:36

    Steve, When rates are ultra low people insist it’s a Fed plot to help the banks. When they rise people insist it helps the banks. I don’t know what to think.

    BTW, falling stock prices for utilities does not mean lower profit forecasts, it means a higher discount factor.

  20. Gravatar of Steve Steve
    13. July 2013 at 11:54

    “When rates are ultra low people insist it’s a Fed plot to help the banks. When they rise people insist it helps the banks.”

    That’s because it’s populist to blame banks. If the policy is going to hurt *me*, the best political strategy is to claim it helps the banks.

    Banks are helped by a steep yield curve. Borrow short, lend long, and all that. So it depends on which rate.

    I’m just pointing out the only reason the stock market is still at May 22 levels is because the banks stocks have gained. The housing industry certainly has not.

  21. Gravatar of Steve Steve
    13. July 2013 at 12:01

    BTW, I wasn’t claiming conspiracy, only unintended consequence.

    Of course one could argue that the phrase “unintended consequence” is a redundancy when Washington is involved.

  22. Gravatar of jknarr jknarr
    13. July 2013 at 12:38

    PK denies that “responsible” countries can use monetary policy effectively, and so cuts it mostly out of the picture. This pure bonehead tautology. We argue that monetary policy is choice and a variable, not a fixed constant cultural characteristic.

    http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/

    I believe that PK has the huge NYT bullhorn partially because he steers clear of how-to-enact-effective-monetary-policy issues, and so convinces the smart-stupid set that fiscal policy is the only way to go, and thus helps maintains the tight money status quo. (Expansive federal social spending also just happens to fit his conscience as a liberal.)

    PK shows a lot of bad faith analysis when dealing with his ideological opponents. Why on earth should we assume any good faith in other matters, especially monetary policy? He is de facto – meaning for all intents and purposes – status quo tight money.

  23. Gravatar of ssumner ssumner
    13. July 2013 at 12:56

    Steve, I realize you weren’t claiming conspiracy, I should not have left that implication.

    I find it hard to understand how banks are helped by a steep yield curve, it’s a fairly competitive industry, isn’t it?

    Jknarr, Then why does he repeatedly complain that money is too tight?

    Saturos, Thanks for the Bernanke speech. Notice that there is no soul searching about the tight money policy of 2008, which pushed NGDP down at the sharpest rate since 1938. I’d expect him to hav some new ideas as to how to prevent that. Maybe that’s where the Svensson reference comes in.

  24. Gravatar of Steve Steve
    13. July 2013 at 13:18

    Wouldn’t the argument be that the Fed is crowding out the banks by buying up so many MBS at lower rates than what the private sector is willing to lend at?

    The steep yield curve helps because of the mismatched duration of assets and liabilities. I presume you are right in the long-run, i.e., new competition erodes the returns from a steep yield curve. So nothing really “helps” in the long-run, other the doing a better job than the competition. But it seems like it helps in the short-run unless I’m missing something.

  25. Gravatar of jknarr jknarr
    13. July 2013 at 14:22

    I read it as lip service – giving approval or support insincerely – if it were a sincere complaint, he might try to take the MM approach seriously. Instead, he treats most of these matters with his relentlessly tedious personal blend of bad faith analysis and ad hominem attacks.

    These guys are motivated by power. They want to further a social utopia with big government, but mainly to be in charge. This is the root of their focus on fiscal policy, and all else follows.

    If monetary policy were applied effectively, the lumpencitizen might have- and spend- money according to their own individual preferences! (gasp) With no political strings attached! (horrors). Can’t further collectivism (with us in charge) that way.

    Where’s the fun, profit, and power for DC, WS, or yes, the NYT, in just handing money out to citizens?!

    Much better to have tight money, beggars to the banks, states giving up power to Federal strings-attached funds, and a small group of people in charge to do the horizontal tango with big newspapers.

  26. Gravatar of Greg Hill Greg Hill
    13. July 2013 at 15:28

    Scott,

    “I find it hard to understand how banks are helped by a steep yield curve, it’s a fairly competitive industry, isn’t it?”

    Why not look at the data, e.g., the relationship, if any, between bank profits and the steepness of the yield curve?

    p.s. It is interesting that even the left economists who blog, e.g., PK and BD, draw on the General Theory’s modest case for fiscal policy, while ignoring the GT’s more assertive case for “the socialization of investment” and for a banking policy aimed at maintaining low interest rates over “the long run” (only at the very end of which, after the apocalypse, “we’re all dead”).

    p.p.s. Didn’t Obama recommend Peter Diamond for the Fed, which should remind us of the Republican “policy” of obstruction. I realize Diamond is not a member of the MM club.

  27. Gravatar of Geoff Geoff
    13. July 2013 at 15:55

    “BTW, over the past five years the market monetarists have been the strongest supporters of monetary stimulus; no other group even comes close.”

    And hence let the record of history show that the strategist group masquerading as economists who are most intellectually and politically responsible for the damage inflation has, is, and will wrought on innocent people’s lives, are the market monetarists.

  28. Gravatar of TravisV TravisV
    13. July 2013 at 15:57

    Morgan,

    Awesome comment! Everyone should read it! Here it is:

    https://www.themoneyillusion.com/?p=22242#comment-260936

  29. Gravatar of TravisV TravisV
    13. July 2013 at 16:11

    By the way, Prof. Sumner has made me an optimist about the future. Eventually, I think the Fed will adopt NGDPLT.

    I also think that over time, our policies in other major areas of the economy will become market-friendly. We’ll have market-friendly policies + redistribution like Denmark and Sweden.

    Prof. Sumner and Yglesias have both written excellent stuff on this subject:

    http://thinkprogress.org/yglesias/2010/09/28/198656/the-progressive-liberal-synthesis

    Prof. Sumner:

    http://www.econlib.org/library/Columns/y2010/Sumnerneoliberalism.html

    “The neoliberal revolution combines the free markets of classical liberalism with the income transfers of modern liberalism. Although this somewhat oversimplifies a complex reality, it broadly describes the policy changes that have transformed the world economy since 1975.”

  30. Gravatar of TravisV TravisV
    13. July 2013 at 16:23

    By the way, check out this 1.5-hour video of Prof. Sumner from March 2012. Awesome stuff!

    http://vimeo.com/38915078

    Watching it, I am so impressed with how quick and agile Prof. Sumner’s mind is. He has a great ability to instantly simplify wonky questions that seem almost impossible for most people to understand.

    Also check out Prof. Sumner’s enlightening explanation for how the Great Depression happened and why it lasted for so long:

    http://vimeo.com/11700175

    http://www.aeaweb.org/aea/2012conference/program/retrieve.php?pdfid=491

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. July 2013 at 16:27

    Greg Hill,
    You wrote:
    “Why not look at the data, e.g., the relationship, if any, between bank profits and the steepness of the yield curve?”

    This is a very popular meme among monetary policyphobes, especially MMTers, since many of them seriously believe that it is possible to set all interest rates to zero in perpetuity and there would be no negative consequences (which is part of their larger plan of simply making the financial sector illegal). And given monetary policyphobes are also by and large innumerates they never bother to check to see if this claim makes any sense empirically.

    The original source for the claim that there is a relationship between the yield curve and the financial sector proportion of domestic industry profits is probably James A. Bianco. Mr. Bianco has been President of Bianco Research, L.L.C. since November 1990, and makes his living by producing fixed income propaganda, er, commentaries. Needless to say he is not a big fan of low nominal interest rates. Here’s a sample of his handywork:

    http://www.ritholtz.com/blog/2011/03/financial-profits/

    The data in that graph comes from BEA Table 6.16. Simply divide line 10 by line 9 and you’ll get the financial proportion of domestic industry profits.

    Now, is there a correlation between the yield curve and the financial sector proportion of domestic industries profits?

    I’ve only looked at 2001Q1-2012Q4, but when I regress the financial sector profit proportion on the yield spread (the difference between the 3-month T-bill yield and the 10-year T-Note yield) what I find is a coefficient of determination (the R squared) of 0.003, meaning only 0.3% of the variation in the financial sector proportion of domestic industry profit can be explained by the steepness of the yield curve.

    Now, stop and think about why this makes a lot of sense. Until 1990 the financial sector proportion of domestic industry profits was almost never more than 20%, and it has been much higher ever since. But the yield curve shows no discernable trend before or since and, more importantly, why should it?

    So file this under really stupid claim about monetary policy #337.

  32. Gravatar of wufwugy wufwugy
    13. July 2013 at 17:08

    What I’ve learned from discussing monetary policy with my fellow liberals is that they’re not the biggest fans of monetary stimulus because they don’t trust the banks, and by extension the Fed. If the idea that Yglesias makes from time to time, that the Fed should write checks to people directly, were legal and utilized, I think the barrier that keeps liberals from pushing for monetary stimulus would be eliminated.

    While the left doesn’t necessarily support monetary policy to its fullest extent, they still support it more than the right, which adores the hard money ideas that reemerged with Ron Paul, as well as many policy makers still seem to have “over”-learned the lessons of stagflation.

    In defense of the left on monetary stimulus, Krugman may not give it a bunch of lip service, but I remember him calling for high inflation targets several times. It appears that the focus on fiscal stimulus keeps monetary stimulus ideas from being developed. However, one of the main problems with the Obama Fed isn’t that they haven’t attempted a ton of monetary stimulus, but that they don’t realize that due to environmental factors, their absolute levels of stimulus, which are much higher than normal, are still marginal relatively. With this in mind, it could be claimed that the Obama Fed and the left-wing is pro-monetary stimulus, they just don’t fully understand how to effectively achieve it

  33. Gravatar of ssumner ssumner
    13. July 2013 at 17:39

    Steve, I suppose that’s possible, but my hunch is that it isn’t a big factor in profits.

    Greg, Yes, the GOP has been obstructionist, bit it in no way exonerates Obama.

    Thanks Travis.

    Mark, Thanks for another excellent comment.

    Wufwugy, One problem on the left is that they think policy has been expansionary, hence they have not opposed Fed policy, which has actually been contractionary.

  34. Gravatar of rbl rbl
    13. July 2013 at 17:41

    Prof. Sumner,
    granting that the Fed’s policy trajectory is roughly what Obama wants, that still makes the most influential Democrat far ahead of the GOP on monetary policy. I know there is no neutral baseline to compare from, but even with the inappropriate tightening the Fed has done at times it still had a far looser monetary policy than most conservatives want (under Democratic presidents, at least). I may be biased, but it seems obvious to me that the GOP would have preferred tighter policy than what Obama’s Fed delivered. I also can’t think of anyone on the right, excluding MMs, that has been as pro monetary stimulus as PK or Brad DeLong.
    TL;DR with respect to monetary policy, Obama’s Fed is better than the GOP establishment, and left intellectuals are better than right intellectuals.

  35. Gravatar of Michael Michael
    13. July 2013 at 17:53

    I think it would be more fair to say that we are getting the monetary policy that *Obama* wants than to say that we are getting the monetary policy “the left” wants.

    We certainly are not getting the monetary policy that conservatives like Paul Ryan and Rick Perry want, but that is a good thing.

    Personally, I’d like to see Obama nominate Christina Romer as Bernanke’s replacement, as she (unlike anyone else who has been suggested as a possible candidate) has come out in favor of NGDP targeting. But I think the chances of this are almost zero: there is little evidence to suggest that Obama wants more monetary easing, and lots of evidence that the GOP Senate would never allow a conformation vote on Romer. So I hope for Yellen, who would probably at least continue what Bernanke has done, and fear someone like Stein who wants to pop bubbles.

  36. Gravatar of Steve Steve
    13. July 2013 at 19:22

    Mark,

    There are a ton of things wrong with your regression.

    1 The assertion is that bank profits benefit from a steep yield curve, not necessarily the entire financial sector. The long term increase in financial sector profits as a share of the economy is driven in large part by a move from cash to debit/credit, and increase in asset management, and insurance/bank demutualizations. We want to look at banks only.

    2. The data is garbaged up by huge accounting driven swings. I’m guessing the regression coefficients are almost entirely a function of one extreme outlier in Q1 2009. Market to market losses and piggy bank loss reserve builds drive much of the short term volatility in reported profits.

    3. Lots of financial analysts seem to think that a steep yield curve is predictive of future net interest margin at banks, and therefore of future profitability. It doesn’t change the profitability of the existing book, but it drives the future. A regression of coincident profitability doesn’t test this.

    So maybe there’s still a fallacy in there. I’d like to hear it, because it would mean the analysts are wrong. And you could make money betting against the market.

    Looking forward to my smackdown 🙂

  37. Gravatar of Greg Hill Greg Hill
    13. July 2013 at 19:33

    Mark,

    You write, “So file this under really stupid claim about monetary policy #337.”

    The trouble is, I made no claim whatsoever regarding the relationship between the yield curve and bank profits. I simply suggested that it would be useful to look at the data. Perhaps English isn’t your native language. Otherwise, there’s no excuse.

  38. Gravatar of ssumner ssumner
    14. July 2013 at 03:52

    Rbi, In 2009 Brad Delong published an article claiming that Fed stimulus was ineffective due to the zero bound. I wrote an article criticizing his view, and later he became more supportive of monetary stimulus.

    The fact is that both the left and the right have contributed to this policy debacle. But the left is currently in power, so naturally the focus is on their actions. I’d add that the Dems are traditionally the more dovish party (Bryan, FDR, etc), which makes their current views even more peculiar.

    Michael, I agree.

    Greg, I doubt Mark’s comment was aimed at you.

  39. Gravatar of Morgan Warstler Morgan Warstler
    14. July 2013 at 05:37

    Scott, if you’d explain those micro policy improvements in a post, I predict it would be a highly read, blogged, and commented post.

  40. Gravatar of joe joe
    14. July 2013 at 07:54

    You’re first mistake is assuming Obama is a “leftist”.

    Leftists and progressives would disgree and say he is heavily moderate. But we all see what we want to see.

  41. Gravatar of J J
    14. July 2013 at 10:19

    Professor Sumner,

    You said: “The fact is that both the left and the right have contributed to this policy debacle. But the left is currently in power, so naturally the focus is on their actions.”

    Moreover, the party in power’s actions reveal true desires. The Obama administration and the democrats must not agree with your position on monetary policy. Otherwise, they would at least occasionally advocate for more aggressive central bankers.

    On the other hand, it’s hard to say what republicans would do if they were in power. In a world of self-interested political parties, the party not in power should favor suboptimal monetary policy. I dislike the republicans for their obstructionism (in many areas), but it’s hard to criticize them (or applaud them) too much for policy ideas that won’t pass until they have more control.

  42. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. July 2013 at 11:09

    @Steve,
    “The assertion is that bank profits benefit from a steep yield curve, not necessarily the entire financial sector.”

    Your original claim at “13. July 2013 at 11:27” concerned the *financial sector*. Moreover that’s the form the meme almost always takes and that is also Bianco’s specific claim.

    “The long term increase in financial sector profits as a share of the economy is driven in large part by a move from cash to debit/credit, and increase in asset management, and insurance/bank demutualizations. We want to look at banks only.”

    We could test the hypothesis out for the banking subsector provided I can find the data. I’ll see what I can do.

    But my intuition is that if it is not true for the financial sector as a whole, why should it be true for some subset of the financial sector, unless the other parts of the sector are offsetting banks? That is to say, the implication would be that the profit shares of mutual funds, insurance companies and pension funds are inversely correlated with the yield curve which is equally, if not more, unbelievable.

    2″. The data is garbaged up by huge accounting driven swings. I’m guessing the regression coefficients are almost entirely a function of one extreme outlier in Q1 2009. Market to market losses and piggy bank loss reserve builds drive much of the short term volatility in reported profits.”

    Bianco makes a similar claim about timing of losses, accounting, etc. but provides abolutely no evidence. So essentially it boils down to saying the claim is true but there’s no way of verifying it because the data is all screwed up. My reaction then is don’t make such a claim in the first place.

    And the big outlier is 2008Q4, and removing it only raises the R-squared to 0.0383, so it makes virtually no difference.

    “3. Lots of financial analysts seem to think that a steep yield curve is predictive of future net interest margin at banks, and therefore of future profitability. It doesn’t change the profitability of the existing book, but it drives the future. A regression of coincident profitability doesn’t test this.”

    This can be verified by testing for Granger Causality. In order to do this I would need more data. The quarterly dataset goes back to 1985, so I shall take a look.

    However, keep in mind financial analysts make a lots of claims that turn out to be false under closer scrutiny. Much of what they say is gut intuition and not based on doing any actual number crunching.

    @Greg Hill,
    That last comment wasn’t directed at you, or Steve for that matter. It’s the claim that’s stupid and unfortunately it’s very common.

  43. Gravatar of Steve Steve
    14. July 2013 at 12:07

    Mark,

    Thanks for the thoughtful reply.

    My failure to distinguish financial sector from banking was laziness, but as you pointed out there would probably still be a (weaker) correlation were it true.

    I originally raised this point because I observed bank stocks performing strongly in reaction to the taper, while housing performed badly. That raises the possibility that the market is wrong (but OMG EMH!) or that there is a relationship.

    No need to dig up data sets unless you are interested.

    My suspicion is that there isn’t a coincident correlation (it takes time to reprice assets and liabilities). Nor is there a very long term correlation (competition erodes the advantage). But there probably is a small intermediate term benefit. And maybe the stock market overreacts to that.

    I’m just trying to puzzle out what the market is doing. And difficult to prove assertions go with the territory.

  44. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. July 2013 at 14:48

    Steve,
    I have some results and they’re somewhat inconclusive but they’re still not very supportive of the yield curve causes financial/banking profit share meme.

    There is before tax profit data on banking from 1929 through 1987. It is only available at an annual frequency. BEA changes its classifications in 1988 and again in 1998 so the data is discontinuous after that. In any case what I found was that a simple ordinary least squares (OLS) regression of before tax banking profit share on the yield curve reveals no significant correlation (R-squared values almost equal to zero). Moreover the coefficient is negative. This was true with or without the two significant outliers in 1932 and 1933.

    When I checked for Granger causality on the other hand, I found that that the yield curve Granger causes banking profit share at the 10% significance level. However the nature of the causality is not what is claimed. That is, the first lag of the yield curve is *negatively* correlated with banking profit share at the 1% significance level and the second lag is positively correlated with banking profit share at the 10% level.

    I also found the quarterly data for financial sector going back to 1948. Simple OLS does show a positive correlation that is significant at the 1% level. But the R-squared value is only 0.0416 so it doesn’t explain very much of the variation in financial sector profits share. And when I checked for Granger causality the results failed to reject noncausality by a very large margin (the Chi-squared probability was equal to 97.2%).

    So in short the results weakly support the idea that the yield curve causes banking profit share but that the relationship is complicated and not at all a simple positive correlation story. (Actually it’s more like a complicated negative correlation story.) And using a larger amount of data for the financial sector profit share I manage to find a positive and significant correlation but one that still doesn’t have very much explanatory power and one for which the profit share being caused by yield curve is not supported.

  45. Gravatar of Scott Freeland Scott Freeland
    14. July 2013 at 18:30

    Scott,

    Warren is very ignorant about economics, which is why I’m glad she wasn’t the first financial consumer protection czar, but her heart’s in the right place. She strikes me as no more or less ignorant on economics than other politicians, but do you doubt her ultimate motives?

    She just needs an education from a more enlightened liberal, such as yourself.

  46. Gravatar of ssumner ssumner
    15. July 2013 at 04:08

    Morgan, I have done so.

    Joe, How do you think conservatives view Bush, McCain, Romney, etc. It’s all relative.

    J, Given that both parties appointed Volcker, Greenspan and Bernanke, I think we can assume that the views of each party on monetary policy are essentially identical.

    Scott. I have no way of judging whether politicians have their heart in the right place. They all talk like they do. I can only judge them on their actions.

  47. Gravatar of mpowell mpowell
    16. July 2013 at 08:36

    I think you could make a strong argument that tradional conservatives like the Bush’s and their team are better advocates of monetary policy than the left with the highly critical caveat – as long as a Republican is in the WH. So, thanks, but no thanks. And I think it would be crazy to want to turn major aspects of national government policy over to the national Republican party at this stage. They are the ones trying to convince the WH they’re willing to use a debt default to get their way on policy. And also the party of Rick Perry, who threatened to shoot the fed chairmen if he relaxed monetary policy in the run-up to the 2012 election (if he visited Texas).

    If the democratic party was left to govern without pressure from the right, I imagine they would choose fiscal policy over monetary policy. But I still think they would govern small c conservative. There just isn’t a ‘side’ these days that gives you any assurance of pursuing aggressive monetary policy. I’m not sure how useful that debate is.

  48. Gravatar of Bill Ellis Bill Ellis
    16. July 2013 at 11:10

    Scott, In part, It depends on how you define left and right.

    Obama = left is fair enough, but it ignores a more important distinction… Establishment vs elite outsider. ( If you are fan of Orwell’s 1984 think Inner-party vs outer-party )

    The establishment has its own left/right axis that is far narrower and to the right than the Outsider’s. Almost no one in the establishment, left or right, is for adequate monetary stimulus. But even within the establishment there is far less opposition to it on the left than there is on the right.

    As for the Outsiders, almost all the “informed” folks on the right (M&M”s excluded ) are vehemently against more monetary stimulus, while most of the academic left, (MMTers aside) are very favorable to the idea.

    So, given this… I would say… YES, absolutely, the “left” does actually support monetary stimulus…And just as importantly, the right actively opposes it.

  49. Gravatar of Bill Ellis Bill Ellis
    16. July 2013 at 11:17

    ???? “Given that both parties appointed Volcker, Greenspan and Bernanke, I think we can assume that the views of each party on monetary policy are essentially identical.”

    I don’t think so. If it were up to the repubs or the Dems alone, would they make identical choices ? I doubt it.

    I think we would see big differences.

  50. Gravatar of ssumner ssumner
    17. July 2013 at 12:40

    Mpowell, Don’t forget that George Bush chose fiscal stimulus over monetary stimulus.

    Bill, You said;

    “I think we would see big differences.”

    The two parties pick very different people for the Supreme Court. Why do they pick identical people for the Fed?

    As for “informed people,” there are Republicans at the Fed who favor monetary stimulus.

    I’ve seen no survey evidence of a big difference between liberal and conservative academics on monetary policy.

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