Don’t think we don’t see what’s going on here

The Fed is clearly ignoring its dual mandate.  After the last meeting they basically admitted as much:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

In a previous post, this is how I responded:

We expect to fail, but we’ll keep a close watch on things just to make sure.

Yet the inflation rate is close enough to their informal target that lots of average people are being fooled into thinking the Fed is “doing its job.”  But not the experts.  Here is James Hamilton’s reaction:

In almost identical language that it used November 2, the Fed is saying that it expects unemployment will remain higher than it wants, inflation will likely be lower than it wants, and that it has significant concerns about where events in Europe might lead. In normal times, that trio would surely signal that policy would become more expansionary.

But the Fed opted instead to keep things more or less on hold, again using almost identical language as in its previous statement:

I vaguely recall similar statements made at various times by progressives like Krugman, DeLong, Yglesias, etc.  It’s very clear what’s going on here.

Unfortunately there is a long delay in releasing the minutes from Fed meetings.  When the minutes for the November 1937 meeting were released, we learned that the Fed was almost criminally negligent.  They had doubled reserve requirements earlier in the year.  Now the economy was clearly sliding into a deep slump.  But they did not reverse course.  One governor indicated that if they cut reserve requirements the Fed would be embarrassed, as its previous decision would look incorrect–thus putting his “feelings” ahead of the welfare of millions of cold, hungry and unemployed men and women.

I expect similar revelations from the minutes of the past four years.  Just consider the slump in NGDP between June and December 2008.  There was the August meeting where Fisher voted for tighter money.  The meeting after Lehman failed in mid-September, where the Fed refused to cut rates out of fear of inflation, even as TIPS spreads (correctly) showed 1.23% inflation over the next five years.  The decision to raise the interest rate on reserves to roughly 1% in November 2008, in a successful attempt to keep excess reserves bottled up in the banking system.  All the various decisions not to use their ammunition, despite the obvious need for more demand.

Some will argue the Fed’s doing a good job; that it’s all about low inflation.  Unfortunately, the Fed itself does not agree.  Frequent commenter Benjamin Cole has an eloquent post over at Lars Christensen’s blog.  Here he points out that there’s never been anything magical about 2% inflation:

The United States economy flourished from 1982 to 2007″”industrial production, for example, doubled, while per capita rose by more than one-third””while inflation (as measured by the CPI) almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct.  It is irrefutably the historical record.  If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic?

The Fed has frequently eased monetary policy when inflation was well above 2%, most recently in late 2007 and early 2008.  You might argue that those easings were done in response to fear of a banking crisis.  That’s right, they’re willing to ease to help the banks, but not to help the unemployed.  BTW, employment is part of their dual mandate, banks aren’t.

You might wonder how I can be so sure that the Fed minutes will expose all sorts of embarrassing admissions.  It’s not hard at all, just look at what Fed officials are saying publiclyMarcus Nunes directs us to a recent speech by Richard Fisher.  Here’s a passage he didn’t quote:

My colleague Sarah Bloom Raskin””one of the newest Fed governors, and a woman possessed with a disarming ability to speak in non-quadratic-equation English””recently used the example of the common kitchen sink to illustrate a point. I am going to purloin her metaphor for my description of our present predicament. You give a dinner party. The guests leave and you are washing the dishes. When you are done, you notice the remnants of the party are clogging the sink: bits of food, coffee grinds, a hair or two and the like. You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess. You look over your shoulder to make sure your kids aren’t looking, and, voilà, you turn the faucet on full blast, washing your immediate troubles away.

From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow. It may provide immediate relief but risks destroying the plumbing of the entire house.

Fisher would have been quite at home on the Herbert Hoover Fed.

Fisher’s speech produces two reactions.  First, how could he be so clueless about monetary policy.  But when you stand back and start to think about what it all means, a second question begins to emerge.  Why are such fools allowed on the FOMC?  How is it that the world’s greatest economic policy institution, the central bank that tends to set the tune for world aggregate demand, is managed by people who are so obviously incompetent?  Let’s see where we can connect the dots:

1.  Stiglitz develops a theory that unemployment is caused by rapid technological change, which makes workers redundant.  This in some mysterious way reduces aggregate demand.

2.  Stiglitz meets with Obama, to offer a Nobel Prize winner’s expert advice on our predicament.

3.  Christy Romer and Larry Summers are horrified to find Obama spouting theories that the unemployment problem isn’t lack of demand, rather it’s ATM machines stealing  jobs.  Christy Romer can’t convince Obama that the Fed still has ammunition.

4.  Obama never pays any serious attention to the Fed.  When the Dems had a filibuster-proof majority in the Senate, he fails to even nominate people for several positions for a period of 18 months.  Even today he is ignoring the problem, several seats remain empty.

The following quotation is from Fisher, but it might just as well have been Stiglitz:

My reluctance to support greater monetary accommodation has been based on efficacy: With businesses’ cash flow””driven by record high profits and bonus depreciation””at an all-time high, both absolutely and as a percentage of GDP; with every survey, including those of small businesses, indicating that access to capital is widely available and attractively priced;[6] with balance sheets having been amply reconfigured; and with bankers and nondepository financial institutions sitting on copious amounts of excess liquidity, I have argued that further accommodation was unlikely to motivate the private sector to put people back to work. It might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet. This inevitably raises concerns we are creating distortions in the fixed income markets that inhibit proper market functioning, or concerns that””despite our protestations to the contrary””we are given to monetizing the government’s debt, an impulse that ultimately destroys a central bank’s credibility.

I have argued that other, nonmonetary factors are inhibiting the robust job creation we all seek.

Monetary policy is one of those areas where the fringe right and the fringe left meet and shake hands.  And right now they are influential enough to prevent the Fed from doing what it knows needs to be done.  Not powerful enough to prevent all action—the Fed will prevent deflation, I have no doubt about that.  But powerful enough to prevent the Fed from fulfilling their dual mandate.  History will see all this very clearly, and judge the Fed harshly.  How ironic after Bernanke promised Milton Friedman that the Fed would never repeat the errors of the Great Depression.  How ironic after Bernanke eloquently spoke out against the passivity of the Bank of Japan (an institution that also cut rates to zero and did massive QE.)

On a positive note, Fisher will be off the FOMC in January.

HT:  Morgan Warstler


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79 Responses to “Don’t think we don’t see what’s going on here”

  1. Gravatar of Becky Hargrove Becky Hargrove
    18. December 2011 at 08:38

    It was becoming more and more obvious that Stiglitz was giving the same message as Fisher: enough production already. However I would suggest that those who have joined hands are not the fringe of left and right, but the already powerful who want to see things basically remain the same. The moderate now becomes the fringe, who the powerful would just as soon avoid and ignore. And, as Marcus indicated, Fisher not only does not care what happens to his own country, he does not care what happens to the rest of the world when he basically says that its problems have nothing to do with us. This is the deal the powerful have made with our government – we will put up with your requirements, as long as you pull up the ladder, NOW.

  2. Gravatar of Richard A. Richard A.
    18. December 2011 at 10:06

    It’s not just Obama. I can not think of one office holder in D.C. who understands how the Fed tanked the US economy.

  3. Gravatar of dwb dwb
    18. December 2011 at 10:20

    i don’t think i could agree more. There is overall an appallingly insufficent degree of accountability on the FOMC.

    ugh, i read stiglitz and could not get past the first page without choking. too busy working on what-happens-if-the-fed-makes-a-massive-policy-error, but your previous post only nailed the tip of the iceberg. double ugh, why do we expect the press to write smarter things than nobel prize winners, exactly?

    One can only hope the FOMC wanted to wait until after the new year to announce “communication guidelines” so that the voting composition was less hawkish.

  4. Gravatar of Benjamin Cole Benjamin Cole
    18. December 2011 at 10:37

    Scott Sumner-

    Thanks for noticing my post.

    Richard Fisher? I am absolutely against censorship. But when I hear misogynistic rap music, or Richard Fisher speaking, elements of censorship have appeal.

    My fellow Market Monetarists; Keep blogging, write letters to the Fed, or other media outlets. I know it sounds corny, but it is what we can do.

  5. Gravatar of Nick Rowe Nick Rowe
    18. December 2011 at 10:55

    Depressing.

    It’s interesting that Brad DeLong basically agrees with you on that bit about the fringe right meeting the fringe left:

    “I would also notice that from one viewpoint Stiglitz has rocketed himself around the closed Friedmann universe and is now approaching Austrianism from the unexpected direction of the Galactic South: that the recalculation requirements of rapid structural change put the economy in a configuration in which it is more vulnerable than usual to monetary shocks, and in which monetary policy is less powerful than usual in repairing the damage.”

  6. Gravatar of Morgan Warstler Morgan Warstler
    18. December 2011 at 11:41

    Fisher delivers like Dominos…

    You are all dancing around the FACT that he and I and all our ilk are arguing that the Fed has a moral obligation to the private sector to force the politicians to act like conservatives whether they are or not, whether they want to or not.

    If you fight us, you prolong the pain of the unemployed, you don’t have a choice, ALWAYS REMEMBER if Obama has just done as instructed and made like Bill Clinton, the Fed would have delivered – Scott forces you to admit it.

    So ADMIT IT.

    AND IF Obama loses, Scott will be admitting that this policy is superior to his prescription.

  7. Gravatar of Steve Steve
    18. December 2011 at 12:38

    Scott, two points:

    First point, it’s striking that:
    1) Stiglitz opposes monetary stimulus as a dangerous distraction from the need for more government deficit spending
    2) McKinnon opposes monetary stimulus because it is *helpful* in financing government deficits

    Second item: I recently listened to an interview with a Wall St economist ranting that Friedman and Keynes were both wrong, Ricardo was right, etc. He was arguing we need fiscal austerity, monetary policy is ineffective, and we need to just accept deflation due to too much debt. He was smart enough to be dangerous: he was quoting papers from the BIS, Harvard, McKinsey, etc. I looked up his bio: “senior economist, Dallas Fed” prior to going Wall St!!!

    Quickly getting to my question, is there something structurally wrong with the regional Fed system, or culturally wrong with the Dallas Fed?

    P.S.
    Next year we get Jeffrey “Zero Marginal Product Workers” Lacker!

  8. Gravatar of Matt Waters Matt Waters
    18. December 2011 at 12:54

    Uh, so am I wrong to conclude that Fisher called the millions of unemployed “the flotsam and jetsam of a jolly, drunken fiscal and financial party?”

    I’m of course disgusted, but also quite dumbfounded. If the Lesser Depression was merely the wrath of markets on financial irresponsibility, then only a relatively small handful of bad actors would be suffering. That’s what happened in, say, the mid-80’s after the oil boom. The markets in Texas had a deep recession because of the overinvestment in oil companies, but the economy as a whole picked up the slack.

    But instead of only a few markets suffering, all markets suffered greatly at the same time. By Fisher’s logic, all markets were overinvested all at once. But from a Macro-101 PPR perspective, that doesn’t make any sense. An economy’s productive capacity is always finite and there’s no way ALL sectors can be overallocated at the same time.

    The only way Fisher’s argument makes sense is that somehow our economy real productive capacity fundamentally went down in 2008-09 and we just have to adjust to the “new normal” of lower RGDP. But there’s no huge supply-side shock to suggest our fundamental capacity should go down so much. There is no oil embargo or disastrous Hugo Chavez socialist policies or anything like that. There is just the unsettling fact that the millions of unemployed are caught up in a huge demand-side shock where suppliers and customers agree to drastically reduce AD for no real reason at all.

  9. Gravatar of Matt Waters Matt Waters
    18. December 2011 at 12:56

    Uh, so am I wrong to conclude that Fisher called the millions of unemployed “the flotsam and jetsam of a jolly, drunken fiscal and financial party?”

    I’m of course disgusted, but also quite dumbfounded. If the Lesser Depression was merely the wrath of markets on financial irresponsibility, then only a relatively small handful of bad actors would be suffering. That’s what happened in, say, the mid-80’s after the oil boom. The markets in Texas had a deep recession because of the overinvestment in oil companies, but the economy as a whole picked up the slack.

    But instead of only a few markets suffering, all markets suffered greatly at the same time. By Fisher’s logic, all markets were overinvested all at once. But from a Macro-101 PPF perspective, that doesn’t make any sense. An economy’s productive capacity is always finite and there’s no way ALL sectors can be overallocated at the same time.

    The only way Fisher’s argument makes sense is that somehow our economy real productive capacity fundamentally went down in 2008-09 and we just have to adjust to the “new normal” of lower RGDP. But there’s no huge supply-side shock to suggest our fundamental capacity should go down so much. There is no oil embargo or disastrous Hugo Chavez socialist policies or anything like that. There is just the unsettling fact that the millions of unemployed are caught up in a huge demand-side shock where suppliers and customers agree to drastically reduce AD for no real reason at all.

  10. Gravatar of Matt Waters Matt Waters
    18. December 2011 at 12:59

    Uh, sorry for the double post. I refreshed before hitting submit again and thought I was in the clear. Guess not.

  11. Gravatar of John Bennett John Bennett
    18. December 2011 at 13:31

    Halleluiah

    Someone is finally willing to go after the FED for violating the law–the dual mandate. But the violation has never been so egregious.

    Thank you Scott. This really does show the failings of the economic policy makers.

  12. Gravatar of Lorenzo from Oz Lorenzo from Oz
    18. December 2011 at 16:54

    I thought entitling my post of a little while ago On the Stupidity of (Some) Central Banks might have been a bit harsh. Clearly not.

  13. Gravatar of Bob Murphy Bob Murphy
    18. December 2011 at 18:05

    Scott wrote:

    Fisher’s speech produces two reactions. First, how could he be so clueless about monetary policy. But when you stand back and start to think about what it all means, a second question begins to emerge. Why are such fools allowed on the FOMC? How is it that the world’s greatest economic policy institution, the central bank that tends to set the tune for world aggregate demand, is managed by people who are so obviously incompetent?

    I realize it’s supposed to be obvious to most of your readers, but for what it’s worth, Scott, I liked that Fisher quote. I thought it was a good analogy. I’m willing to hear arguments to the contrary, but you didn’t offer any in this post.

    Believe it or not, there still remain some people–even with PhDs in economics–who think running a printing press doesn’t make society richer. It’s not like the Fed has been timid since late 2008, either.

  14. Gravatar of Neal Neal
    18. December 2011 at 18:24

    “Fisher would have been quite at home on the Herbert Hoover Fed.”

    Is there a more damning imprecation?

  15. Gravatar of Mike Sandifer Mike Sandifer
    18. December 2011 at 18:35

    Scott,

    I’m struck with the idea lately that people in the economics profession don’t know how to think. I exclude people like you, Romer, Beckworth, Woolsey, DeLong, etc., but seriously it seems that data analysis and the scientific method need greater focus in econ higher education.

    Perhaps there should be an entire required course on the scientific method with applications to economic theory and econometrics. Maybe there should be more than one.

    Also, people need to be taught how to understand formal modeling better, and how to use “valid” models in macroeconomics. At some point, courses in Austrian or real business cycle theory, for example, should not count toward college credit and perhaps there should be some kind of standardized exam one must take to earn econ degrees.

    I’m not saying there are many courses in Austrian or real business cycle theory, or many students taking those that exist, but I make the broader point that the macroecon community eventually has to decide that some theories currently don’t fit the data and move on.

    I’m reminded of the saying about brains falling out of minds that are too open.

  16. Gravatar of B B
    18. December 2011 at 22:10

    Bob Murphy wrote:
    “It’s not like the Fed has been timid since late 2008, either.”

    How do you define timid?

    “The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.”

    That sounds timid to me.

  17. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 04:36

    A thought –

    Not a small bit of the “real shocks” argument is driven by _volatility_ in the constitution of aggregate demand. By that I simply mean that the lack of a consistent monetary policy (which is also perceived as sustainable, unlike our own) makes the constitution of demand inconsistent. Here’s a simple example:

    Should we shift our technical labor force into export and service manufacturing (and away from services), since the dollar is historically weak? Or is the Fed going to continue to pursue a dollar strengthening policy, in which case labor should focus on domestic service-focused sectors? To get this decision right, you need to know where the dollar is going, and that means you need to know what the ECB and the Fed are going to do. So, might as well wait till November 2012, when we’ll get more Romn… I mean, clarity.

    Every major company out there is waiting till November 2012 except on critical initiatives, or initiatives with clear _cost-saving_ benefits (e.g. labor reducing). The net effect of this looks very much like a broad technological shift.

  18. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 04:42

    Morgan:

    “AND IF Obama loses, Scott will be admitting that this policy is superior to his prescription.”

    If your ilk (the Tea Party) gives Gingrich the nomination, there’s a very very good chance Obama will actually win in 2012.

  19. Gravatar of david david
    19. December 2011 at 05:19

    Scott, what’s your opinion on an independent monetary policy authority using its independence to force other government policies in some favored direction?

    Because, you know, Morgan Warstler.

  20. Gravatar of Claudia Sahm Claudia Sahm
    19. December 2011 at 05:53

    Scott, it will come as no surprise that I disagree with some of your analytical arguments…but my bigger complaint is your style of attack. In economics graduate school, I learned that as a researcher I need to carefully communicate and defend my ideas against the multitude of economists who are trained to tear them apart. Research is pretty much an individual pursuit…like hand-to-hand combat. Policy making is NOT. Since I began my job at the Board, I learned that I have to discuss my ideas with others in a civil way and work hard to build a consensus. Insulting people whose ideas differ from my own is a nonstarter, since we meet regularly and sometimes I need their help. I never have and probably never will attend an FOMC meeting, but I don’t think the transcripts will reveal anything “criminally negligent.” Building a consensus among smart, successful people who come from a range of academic, business, and regulatory backgrounds is NOT simple. You may adamantly disagree with what some of the FOMC members say, but I don’t understand why blogs and public discourse is full of so much disrespect and so many accusations. The stakes are high but that seems all the more reason to work together.

  21. Gravatar of flow5 flow5
    19. December 2011 at 06:13

    Contrary to Milton Friedman, the monetary base has never been a base for the expansion of new money & credit. The St. Louis adjusted total legal reserves figure became that base. With the advent of interest on reserves required reserves (per Dudley July 29 2009), are now that base. Recently Eurozone contagion, FDIC insurance, and an indifference on the part of depositors due to historically low yielding returns has created depositor shifts from savings/investment (interest-bearing) type accounts, to transactions based (non-interest-bearing) accounts. Consequently (contrary to Dudley’s speech), required reserves have risen without a corresponding increase in commercial bank credit. Is this another mistake by the FED’s technical staff or did a one time increase in the turnover of deposits (during account liquidation), partially offset this tightening?

  22. Gravatar of ssumner ssumner
    19. December 2011 at 06:18

    Becky and Richard, You are right, it’s more than the fringe.

    dwb, That’s what I hope too.

    Ben, That was an excellent post–well done.

    Nick, But DeLong is the much better writer.

    Morgan, Yep, I’m ignoring that possibility, because I don’t believe it.

    Steve, Very good points. I’m told the new group will be less hawkish, however.

    Matt, Very good points.

    Thanks John Bennett.

    Lorenzo, That’s right.

    Bob, I have 1000 posts explaining why–that’s pretty much all this blog does–explains why Fisher is wrong.

    The problem isn’t that the Fed has been “timid,” (although I suppose that’s true) the problem is that they’ve been CONTRACTIONARY since late 2008. Too little NGDP.

    Thanks Neal.

    Mike, I’m dubious of those sorts of solutions. We need to keep plugging away. This depression was far milder than the 1930s, and we need to make the next mistake smaller still.

    Statsguy, Yes, but real shocks don’t affect the unemployment rate. I’ll do a post on that soon.

    David, I strongly oppose that, and have said so in other posts.

  23. Gravatar of david david
    19. December 2011 at 06:22

    Oh thank god, finally. The last time someone prodded you in the comments, I recall your answer being oddly ambiguous. In any case Warstler does not seem to have noticed.

  24. Gravatar of Becky Hargrove Becky Hargrove
    19. December 2011 at 06:26

    Going forward, what about economics education that people need to understand this pressing issue? (re: Mike Sandifer). IMO this could be a rough juncture for forcing certain aspects of models especially as they collide in the political present. However, it is not as though what is at issue here is beyond comprehension by anyone, and many formats are available to get the most important elements across, depending on how one’s mind works. Some of us understand better in a historical / theoretical framework, which is not widely taught in a formal setting. There is a reason why a certain threshold of the public HAS to get this: People who elect to put the big squeeze on, know for the most part what they are actually doing. As long as global finance was going well, there was adequate money for the services government provides. But now, a quiet decision has been made to begin a long pull back on services.

    For me, the problem lies not in whether the service sector was too big for government to handle, but that no alternatives were ever seriously discussed in a truly democratic setting. No one ever asked, gee, maybe women don’t just necessarily want to have to stay home again and do all these things that government can’t do, and the private sector supposedly can’t do in an affordable fashion. As a result, some people think we are going to get to a better place by just destroying what everyone relies on now with no further adieu. That’s simply not true because too many assets and human capital could further deteriorate in the process.

  25. Gravatar of ssumner ssumner
    19. December 2011 at 06:35

    Claudia, Good points. Let’s see if we can meet halfway:

    1. I generally tend to respond in kind. Maybe that’s a bad habit, but when others use inflammatory language, I do so in reply.

    2. Fisher obviously used the same sort of over the top language as I did, in his accusations against Congress. So can I assume that your criticism applies equally to Richard Fisher?

    3. He’s in a high profile position of authority, I’m not.

    4. Would you agree that the sort of arguments made in the following transcript by a Fed official are “criminally negligent?” Not in a technical sense, but in the sense of how the term is used in everyday speech. An outrageous and completely immoral dereliction of duty?

    https://www.themoneyillusion.com/?p=6439

    If you agree on points 2 and 4, then I’m willing to retract the “criminally negligent” comment, as I do not believe that to be true in a technical sense. I doubt they are actually violating the dual mandate law in a clear cut enough fashion that they could be prosecuted.

  26. Gravatar of Morgan Warstler Morgan Warstler
    19. December 2011 at 06:57

    Whoa wait just a minute there professor!!

    We do have an agreement that if Obama loses you will BELIEVE IT, moreover if he loses you will accept that my policy prescription regarding your work is supreme monkey kung-fu.

  27. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 07:52

    @ssumner –

    A permanent increase in the volatility in the structure of aggregate demand would increase the long term trend rate of unemployment. It would _look_ like a skills mismatch.

    That said, we haven’t exactly seen a sustained increase in the number of job openings.

    http://www.data360.org/temp/dsg2251_500_350.jpg

    Let alone openings per employee. This suggests the technical mismatch issue (even in the context of AD volatility) is a secondary effect, if that.

  28. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 08:38

    @ Claudia Sahm

    “I don’t understand why blogs and public discourse is full of so much disrespect and so many accusations”

    In defense of Scott (and many other angry bloggers), it is easier to place a high value on civilized discourse when one is not among the 45.8 million americans on food stamps. The suffering out there is very real, even though it doesn’t seem as real in DC (the best performing housing market through the downturn).

    When you describe your views on “what works” in policy debate, you write:

    “Meaningful fraction of paid time for self-directed research.”

    “Well-known, transparent procedure for acquiring new research resources.
    Substantial funds to support research resources, including data, software, and
    hardware.”

    “Excellent research assistants.”

    …among a list of other items. Surely you will agree that Fed is quite well funded. Indeed, the personnel expenditures of the Fed have increased substantially year-on-year, right through the biggest economic downturn of the last 80 years. [See table 3 Expenses of the Federal Reserve System for 2011 annual budget report]

    Surely, as an economist, you will agree that taxpayers have a right to demand results from civil servants, and also that incentives matter. (I’m sure we can agree that the Fed is publicly funded, if not through overt taxes then through a legal monopoly). So let me ask you:

    1) Do you believe that the Fed is actively achieving its dual mandate to the best of its ability?

    2) How would you suggest altering the Fed’s incentive structure to better encourage it to do so?

    From our perspective, the Fed is clearly failing. I think the data certainly indicate the Fed is not failing due to lack of funding. So why is the Fed failing so badly?

    a) It’s failing by choice (perhaps for political objectives), which means that failure is illegal and quite possibly criminal.

    b) It’s failing because of innocent misunderstandings of monetarist economics or the inability to properly analyze the incoming data streams, which suggests a failure of analysis.

    c) It’s failing due to the ideological beliefs of members of the FRB, which may or may not be criminal.

    d) It’s failing because it does not want to be embarrassed, which would be placing the interest of the Fed (and its officers) above the interests of the country.

    So which is it? Do you think the Fed is failing, or not? If not, would you care to let us know why you think the Fed is not failing? And if you agree the Fed is failing, then why?

    Please feel free not to answer the questions above if you are concerned that doing so would jeopardize your position on the research staff at the Fed. But if you choose not to respond, please try to at least understand that the anger you see as counterproductive is caused directly from that real suffering that results from the Fed’s policy errors.

    Peace.

  29. Gravatar of Morgan Warstler Morgan Warstler
    19. December 2011 at 08:48

    Stats,

    People on food stamps is a reason to follow my plan to auction the unemployed.

    When everyone is WORKING everyday for a boss, and some kind of profit is derived from them, no matter how shitty a worker they are, then we will no longer call it or think about it as FOOD STAMPS… it will just be fact.

    You indignation is foul and unfocused, the FACT is that many people in the US are not skilled enough to cover their own nut in this country in the face of global competition.

    Level targeting of NGDP will NOT solve of that.

    Scott’s bit is just the small piece of the larger shift we need.

    The bigger piece is my Guaranteed Income plan.

  30. Gravatar of o. nate o. nate
    19. December 2011 at 08:52

    Scott- I was wondering if you noticed Bill Gross’s column today over on FT:

    “The ugly side of ultra-cheap money”
    http://www.ft.com/intl/cms/s/0/b5f3af76-2712-11e1-b9ec-00144feabdc0.html

    His thesis: “Ultra low, zero-bounded central bank policy rates might in fact de-lever instead of relever the financial system, creating contraction instead of expansion in the real economy.” He goes on to explain how this could happen. You might find it interesting.

  31. Gravatar of Why are such fools allowed on the FOMC? « Economics Info Why are such fools allowed on the FOMC? « Economics Info
    19. December 2011 at 09:00

    […] Source […]

  32. Gravatar of Mike Sandifer Mike Sandifer
    19. December 2011 at 09:24

    Scott,

    At the very least, it might be nice if the econ profession had a large, respected, private certification organization with guidelines on acceptable theory and practices. I’m not saying that certification should be required by law, but that it would be sought, because the organization is respected.

  33. Gravatar of Cthorm Cthorm
    19. December 2011 at 10:14

    @ nate

    I read BG’s article in FT. I thought it was a good condemnation of the folly and limits in targeting interest rates as a monetary policy lever. Fed models and real world observations point to the need to reflate/stimulate, but the lever they pull does worse than nothing, it is destroying the market altogether. I think the term “ultra cheap money” is too vague though and may suggest exactly what Fisher et al are advocating, when the proper course is to apply stimulus in a completely different way and allow market interest rates to correct. The best kind of stimulus: a permanent change in policy (reduce uncertainty) with automatic stabilizers in both good and bad times. Soft money when you need it, hard money when you don’t.

  34. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 10:47

    @nate

    In the FT article, BG confuses nominal and real. His conclusion seems to be that low nominal and high real interest rates will destabilize the financial sector and force deleveraging, and therefore Fed easing is bad. This, he argues, is a radical conclusion that is not captured in our economic models.

    Or is he just arguing that beyond the zero bound you can’t affect the real interest rate by targeting the nominal rate in the short to medium term (hello Captain Obvious)?

    Does he anywhere say that a commitment to aggressive monetary expansion cannot get push up the real rate at the lower bound?

    BG seems to argue whatever is on his book. Where are the “Ring of Fire” references from last year? (nice marketing ploy, that one)

  35. Gravatar of Bonnie Bonnie
    19. December 2011 at 11:09

    Scott:

    In your reply to Claudia, which I think is good, you left out an important piece – the human cost to being wrong. There are a couple of documentaries available on Netflix, “The Panic is On” and “Life in the 30’s” that chronicle life during the Great Depression. These are also available on amazon.com, and perhaps in some libraries if Netflix isn’t an option. Although many here probably have already seen them, they might be well worth review. For me they were astoundingly tear-jerking. I’m aware both represent extremes of what can happen with dysfunctional monetary policy, and we likely are not experiencing that level of depravity, yet. But that does not mean that it isn’t happening to far more people than Fisher’s, or others’ with the ability to change it, ivory tower allows them to see. Doing this bit of evil does not justify any other kind of evil they might be trying to prevent simply because it is not as extreme, and insisting upon it is, at least in my point of view, criminally negligent.

  36. Gravatar of Becky Hargrove Becky Hargrove
    19. December 2011 at 11:41

    Claudia,
    I have been among the first to get upset when the dialogue grew too harsh, and have complained any number of times to blog hosts when that happened. (even if I just accused the guys of ‘having too much pie’ as I did after Thanksgiving here) Perhaps it would help to explain what is different this time, at least for myself. This issue is not quite the same as getting upset with our friends over ideological points of view. It has to do more with the fears of losing a way of life, which I can understand are not easy for the Fed to consider, either. For some time I knew that many service jobs we take for granted, especially in the teaching and healing professions, would eventually slip away as it became more difficult for government to fund them. If everyone could accept that as the central issue, everyone could work on solutions and the responsibilities of the Fed would be far easier. But if no one begins on that larger reality we are all in danger. Plus, it is vitally important that women become monetarily literate, as their very freedom could in fact depend on doing so. Until women are monetarily literate and so understand what’s really at stake, they may not have the incentive to take part in solutions for the most important work of our lives: redefining our very culture as government loses the ability to fund the service industries of education and healthcare. We need to keep money stable until we are able to restabilize through the use of our own skills.

  37. Gravatar of o. nate o. nate
    19. December 2011 at 11:43

    Cthorm – I basically agree with your take. BG highlights the ineffectiveness of a zero-rate policy, and he implies that the answer might be to raise rates. However, he’s a bit muddled on how to get there. I thought Scott might find the argument interesting, since it sounds a bit like his adage that low rates means money has been tight, and that higher rates would counter-intuitively be an indication that the Fed is succeeding. However, that observation only makes sense within a framework of NGDP-targeting, which BG doesn’t mention.

    Stats- I’m not sure if BG has a coherent model either, or if he’s just talking his book, but I found the parallels to some of Scott’s previous statements suggestive.

  38. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. December 2011 at 12:20

    ‘In the FT article, BG confuses nominal and real.’

    It’s worse. He confuses money with credit. As we’ve discussed numerous times here on TMI, interest rates are not ‘the price of money’.

    Then, Steve Landsburg points to a Seattle economist who doesn’t understand what a public good is:

    http://www.thebigquestions.com/2011/12/19/alas-poor-yoram/

    Not a good day for scholarship.

  39. Gravatar of Benjamin Cole Benjamin Cole
    19. December 2011 at 12:29

    We may get rid of Fisher, but this guy (see below) is getting a voting seat. Who wants to open up a bar with me somewhere in the Pacific, that caters to Chinese tourists?

    “CHARLOTTE (Reuters) – The Federal Reserve is unlikely to need to ease monetary policy further given the country’s steady if moderate pace of economic growth, Richmond Fed President Jeffrey Lacker said on Monday.

    Lacker, an inflation hawk who will rotate into a voting seat on the policy-setting Federal Open Market Committee next year, said he expects the economy to expand between 2 percent and 2.5 percent next year.

    He said this forecast was predicated on an extension of payroll tax cuts, which have run into political opposition from Republicans in Congress, but also built in a significant slowdown in the euro zone.

    “I’m hard pressed to see the rationale for further monetary stimulus,” Lacker told reporters after a speech.”

    Yeah, he is hard-pressed. I am reminded of a guy in a Three Stooges clip who has his head “pressed” by a garment-pressing contraption. Lzcker is that guy.

  40. Gravatar of dwb dwb
    19. December 2011 at 12:47

    BG thinking these days is muddled. And, lets not forget he’s under performed this year because he bet wrongly on treasuries, shorting them. his argument is premised on central banks reaching the political limit of QE. Yes, we need to see rates going up – but because of expansionary monetary policy leading to higher inflation expecations, not because the Fed raises rates and interest on reserves (i.e. demand vs supply). The incentive for people to pull their deposits and not “store them under the mattress” but spend them is inflation. Thats where he goes wrong. Inflation is created by more QE, not less or contractionary policy. So, IMHO he’s half right, putting the finger on contractionary policy (due to “political” limits on QE). He’s also right that contractionary policy leads to higher fear of bank failure. But wrong about the medicine. His argument is a bit like saying: my car can’t turn right because my steering is broken, so lets turn left and hope we get there. its the same nonsense Kocherlakota espoused last year in a speech. And by the way you will rarely ever see a bond fund manager hoping for higher inflation, just not in their genetic code.

  41. Gravatar of Steve Steve
    19. December 2011 at 13:04

    Benjamin Cole wrote:
    “Who wants to open up a bar with me somewhere in the Pacific, that caters to Chinese tourists?”

    I do

  42. Gravatar of Claudia Sahm Claudia Sahm
    19. December 2011 at 13:09

    Scott, First, a quibble with your interpretation of the dual mandate. Here’s the summary from the Board’s website:

    “The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate. The dual mandate is the long-run goal for monetary policy, and the Congress also established the Federal Reserve as an independent agency to help ensure that this monetary policy goal can be achieved.”

    The Federal Reserve Act does not specify the exact weights to put on “maximum employment” versus “stable prices” and it is not clear what is the relevant time frame. The current system for better or worse involves a lot of discretion, but there is oversight too. Of course, you have every right to your opinion about whether the FOMC is falling short, but I don’t think it’s such an open and shut case.

    Now to your detailed response to me:

    Clearly, this is your blog and you can say whatever you like however you like to…I was just sharing my two cents (being pedantic is a bad habit of mine).

    In response to your response: When I present my ideas, I am always talking from a junior (low authority) position. I try hard to respond to a hostile critique with a calm argument, so my ideas don’t get discredited (because I am acting emotional/irrational). This works better for me than responding in kind…it only makes a bad situation, worse.

    There is no way I am going to write my views on current FOMC members (your points 2 and 4) here. (It doesn’t matter anyway.) But I take the time to read and comment here because I find the economics interesting and helpful. I can filter the words (even when they are quite strong).

  43. Gravatar of Claudia Sahm Claudia Sahm
    19. December 2011 at 13:23

    @Becky, I agree there is a difference between asking people to be civil in the blogs/other public discourse and calling out people/institutions who are not doing their job. I am not asking Scott to be less critical…I am just bothered by his throwing around inflammatory language. More generally, what irked me is the idea that an opinionated member on the FOMC is a problem. The Federal Reserve Act created a *committee* to make decisions about monetary policy. They did not deputize one person to call the shots. The committee is composed of a diverse group of individuals and it takes time/effort to build a consensus. Maybe it is taking too much time…I don’t know, but I have to believe that the transcripts will eventually show how much serious discussion is happening. Ex post, maybe it will look negligent to some, but hindsight is 50-50. All I was dreaming of was a civil discussion…I am not trying to dream the problems away. They are real.

  44. Gravatar of Claudia Sahm Claudia Sahm
    19. December 2011 at 13:38

    @StatsGuy, I am flattered that you read my write up on being an economist at the Board. Remember, it’s just one person’s views. I would argue that economic research at the Board is important. The research I have done with surveys put me in a great position to study data from households during this recession. For example, I am deeply concerned about how pessimistic households are about their income prospects and how that affecting consumer spending. You can read some of my new research on that topic on my personal website too. I have gotten funding from the Board to field and analyze survey questions on the impact of the 2008 tax rebates, the 2009-10 Making Work Pay tax cut and the 2011 payroll tax cut. Don’t you think it’s important for us to at least try to quantify the hundreds billions of dollars spent on fiscal stimulus on the economy? It’s true the Board supports a large staff, but it’s because the U.S. economy and its interactions with other economies are complicated. Monetary policy needs to be thoughtful and informed. I started at the Board in the summer of 2007 and my mood has tracked the economy (more than it should have). I do care about the unemployed and the food stamp recipients (as I know some well). I have been working hard to be a part of the solution…but hey, I am just an economist. Cheers.

  45. Gravatar of Bob Murphy Bob Murphy
    19. December 2011 at 13:52

    Mike Sandifer,

    Don’t you think it’s a big premature to be purging everybody, when Scott’s point here is that Nobel laureates and current members of the FOMC are unspeakably stupid? If you put your “economists’ certification” program into place anytime soon, they might shut up Sumner before Fisher. It’s probably safer for you guys to focus on arguments, not banning people who don’t think printing money is the path to prosperity.

  46. Gravatar of Steve Steve
    19. December 2011 at 13:54

    @Claudia Sahm

    I for one find it encouraging that an economist for the Board of Governors is reading this blog and the comments section. And I would hope that you aren’t the only one.

    Still, I would second StatsGuy’s remark and add that in addition to the millions on food stamps, there are millions competing for a shrinking pool of jobs in the private sector. These are people who can lose pay, or get fired outright, for making mistakes. When we look at the Fed, we wonder why there isn’t similar accountability there. Perhaps it would sharpen pencils and minds?

  47. Gravatar of Bob Murphy Bob Murphy
    19. December 2011 at 13:56

    Scott wrote:

    Bob, I have 1000 posts explaining why-that’s pretty much all this blog does-explains why Fisher is wrong.

    OK, so in your opinion, anyone who hasn’t been convinced by the arguments on your blog regarding the need for NGDP targeting is an incompetent, clueless fool? If I didn’t think you were crazy, I might take offense.

  48. Gravatar of dwb dwb
    19. December 2011 at 14:17

    OK, so in your opinion, anyone who hasn’t been convinced by the arguments on your blog regarding the need for NGDP targeting is an incompetent, clueless fool? If I didn’t think you were crazy, I might take offense.

    Bob, name 1 actual, tangible harm from “running the printing presses” given where the economy is right now. show me. convince me. Not abstract ideas. If you say inflation show me how the 90s were this horrific time period when GASP inflation was sometimes above 3%. really, wheres the beef?

  49. Gravatar of Cthorm Cthorm
    19. December 2011 at 14:21

    @nate
    I’m not sure what BG’s model is, but I can definitely say NGDP targeting is on his radar. He mentioned it on CNBC during the last FOMC meeting as a change that could be made down the road.

    @Stats
    I don’t see why you would expect anything but “talking his book” from an investment manager. That is par for the course. BG is a smart guy and a shrewd poker player, he isn’t just going to show you his cards. I wouldn’t look to him for policy recommendations, but exactly what you got: an opinion on the effectiveness of current policy.

    @dwb
    BG’s call earlier this year (which he has been dragged through the mud for constantly) was not a bet on the central bank ending QE, it was a bet on improvements in the real economy. Remember that the concrete indicators were solid until Q3, when the Eurozone crisis and the Debt Ceiling debacle brought existential risk back to life.

    I might have some bias though, I work at BG’s firm. Obviously these are just my opinions though.

  50. Gravatar of CA CA
    19. December 2011 at 14:24

    Please, dwb, don’t encourage the Austrians!

  51. Gravatar of 123 123
    19. December 2011 at 14:44

    A quick translation of Bill Gross:

    1. The Fed cuts the fed funds rate from 1% to 0%.
    2. This is a negative AS shock via reduced profitability of money market fund industry etc.
    3. Negative AS shock reduces the natural interest rate by 1.25% points, so AD is lower too.

    I’m not saying BG is right. All I’m saying is that he’s got a model.

  52. Gravatar of StatsGuy StatsGuy
    19. December 2011 at 18:02

    @Claudia Sahm

    The presupposition of your post (what makes the Board model work) presumes that it does in fact work. From the outside, it does not seem (to us) that way. Even very mild mannered people (James Hamilton) are utterly bewildered. Bernanke’s response was to declare the Fed had a “communication problem”. This is like calling a bank solvency crisis a liquidity crisis.

    In this context we must answer the question: “Don’t you think it’s important for us to at least try to quantify the hundreds billions of dollars spent on fiscal stimulus on the economy?”

    But my question isn’t whether it’s important – my question is always whether it’s more important than other uses of those funds? Would I rather have one more survey about how the Disinflation is affecting people’s views, or would I rather fund one more NIH cancer researcher investigating a new metabolic pathway? Tough call, Ripley.

    I suppose the answer depends on whether or not the Board’s research is helping the Fed make better decisions. Again, from the outside this does not appear to be the case. I don’t think there’s any amount of money that the Board could spend on better research that would change the minds of Herr Lacker or Monsieur Plosser. Back in the 1980s, the foreign policy literature conducted experiments that showed undergraduate students with a starting world view came to the same conclusions as distinguished tenured faculty, but the latter simply justified themselves better. I fear the same is true with the Fed.

    Also, I would note one inaccuracy in your reply to Scott – the Fed’s policymaking committee is _not_ charged with reaching consensus. It is a voting institution, and honestly I would be rather upset if any members of the Fed were placing their personal comfort and desire for collegial meetings above the interest of 300 million Americans who depend on them. That would be dereliction of duty. Certainly, various inflammatory speeches by folks like Plosser show no indication that the hawks care one whit about consensus, other than using it as a club to beat the doves.

    Here’s what I do think – I bet that if we made the salaries and retirement benefits of the Fed members (and all of its staff) contingent on how well it hits the targets that are mandated in law, we’d get better policy. Economists (especially the academic variety) have a funny way of believing in incentives unless those incentives are applied to their own job performance.

    [As an aside, your research topic is interesting. The risk tolerance signal extraction problem reminds me of various approaches to customer loyalty measurement using Bayesian MCMCs.]

  53. Gravatar of ssumner ssumner
    19. December 2011 at 18:11

    Morgan, No we don’t.

    Statsguy, I don’t think AD has “structure.” It’s an aggregate. Output has structure. Sectoral problems can increase frictional unemployment–I agree with that. But there’s no evidence that this is going on. There were huge structural changes in the late 1990s, as the unemployment rate plummeted.

    I agree about the job openings.

    o. nate, I’d tell him “never reason from a price change.” Ultra low interest rates aren’t a policy. Interest rates in general aren’t a policy, they are the effects of excessively contractionary policy. There are two ways to raise interest rates:

    1. Tight money.
    2. Faster expected NGDP growth.

    I think you know which one I favor.

    Mike, Who watches the watchman? Would they certify my zero fiscal multiplier? My argument that low rates signal tight money? I doubt it.

    Bonnie, Good point.

    Patrick, There’s a lot of that going around.

    Ben, Wow! He expects no recovery at all, just trend GDP growth. And he says that shows no stimulus is needed. What more can I say? If the economy has already recovered, why the h*** do we even need a payroll tax cut? What’s it supposed to do? Boost the recovery? But we’ve already recovered.

    Claudia, Well I certainly didn’t expect you to take a shot at Fisher, but given the tone of his remarks, and your (perhaps justified) criticism of me, you can’t blame me for asking. Consider it a rhetorical question.

    I agree that reasoned arguments are more effective, and I generally try to avoid ad hominem attacks. Obviously I occasionally get so upset that I use excessive language. I hope that doesn’t happen very often.

    I would add that things always look different from within an organization. For instance, I mentioned Fisher’s attack on Congress. I’ll wager that if I had attacked Congress with the same ferocity as I attacked the Fed it would have seemed less objectionable to you, as Congress bashing goes back to at least Mark Twain.

    Regarding the dual mandate, I read the Fed as conceding they’ll fall short on both fronts. That’s a policy failure under any non-negative weights. (A negative weight means they enjoy seeing people lose jobs–and I wouldn’t even accuse Fisher of that.) But I also think one needs to use some common sense here. Regarding AD, or NGDP growth, there should be no such things as “good news” which differs from the forecast. But does anyone seriously doubt the Fed would prefer NGDP in 2012 and 2013 to come in above forecast, as compared to below forecast?

    I do regret that my attack on the Fed seemed to attack the entire institution, whereas my frustration is directed against a few individuals.

    Bob Murphy, I agree! “First they came for Murphy, then they came for Sumner, then they came for Krugman . . . ”

    You said;

    “OK, so in your opinion, anyone who hasn’t been convinced by the arguments on your blog regarding the need for NGDP targeting is an incompetent, clueless fool? If I didn’t think you were crazy, I might take offense.”

    Thanks for not taking offense, I think . . .

    Seriously, my point was in response to your complaint that I never said what was wrong with Stiglitz. I pointed out that I’ve said it 1000 times. I would not argue that everyone who disagrees with me is an incompetent, clueless fool.

    123, A path of the fed funds rate is not a model, unless conditional on macro aggregates like NGDP or inflation. Otherwise it’s reasoning from a price change. See my reply to o. nate.

  54. Gravatar of Bob Murphy Bob Murphy
    19. December 2011 at 18:32

    Scott Sumner wrote:

    Seriously, my point was in response to your complaint that I never said what was wrong with Stiglitz. I pointed out that I’ve said it 1000 times. I would not argue that everyone who disagrees with me is an incompetent, clueless fool.

    Just to clarify, I was referring to Fisher, not Stiglitz. You quoted Fisher in this post who made an analogy trying to show that looser monetary policy right now might lead to an apparent short-term improvement in the economy, but it would actually be irresponsible because it would just hide the “real” problems.

    This of course is exactly what the Austrians think. We think there is a complex capital structure in the economy, and that relative prices are very important for getting these relationships right. The economy in the real world is a lot more complicated than the intersection of an AD and AS curve.

    So I was waiting to see what your response to Fisher would be. (You also had another quote from him showing that firms aren’t suffering from a lack of liquidity.) And your argument was, “Hey everybody, look at this idiot! Can you get a load of this guy? He actually thinks printing money would provide a short-term illusion of help but in the long run would make things worse.”

    I’m making the modest point that Fisher’s view doesn’t strike me as so self-evidently absurd as it does to you and your regular readers.

  55. Gravatar of Brito Brito
    19. December 2011 at 19:01

    @Bob Murphy, Austrians like to make some gesture (without really convincingly following it up on my opinion) regarding how the economy is an enormously complex life form that cannot be reduced to a few mechanical relationships – but then with stunning hypocrisy blame the entire global financial and economic crisis on something as tediously simplistic as low interest rates. You can forgive me for finding it a bit grating when an Austrian might have the audacity to argue that suggesting tight money is holding back the recovery is too simplistic.

  56. Gravatar of Mike Sandifer Mike Sandifer
    19. December 2011 at 20:43

    Bob and Scott,

    A non-partisan certification organization that is run by market monetarists and those who agree that something like NGDP targeting is a good idea, for example, might do the trick. Let’s say they limit their scope to monetary policy to begin with, so that some Keynesians such as Romer or Mankiw might also become certified members of the organization. Then, perhaps a consensus on broader sound theory and prescriptive policy can be built from there.

    So, hypothetically, one could have people like Sumner, Rowe, Beckworth, Woolsey, DeLong, Romer, Mankiw, Krugman, Hatzius, Krugman(trade can be addressed later), etc. with consensus, evidence-based positions, perhaps reviewed and updated every x number of years. Consensus could be via some formula for prevailing majority opinion, or weaker, full-consensus positions.

    Krugman’s ideas on Chinese trade would presumably be rejected, as well as these arguments for Keynesian policy effectiveness based on fallacy of composition arguments, to list two examples. Then, when he speaks in favor of such ideas anyway, people can understand he’s speaking against the consensus of what is hopefully the most prestigious, non-partison organization of its kind.

    A key could be a good balance between opposing sides on issues upon which they disagree, so that at least policy positions end up hopefully being based on evidence upon which most or all agree is solid and relevant.

    Yes, I know this may be a really dumb pie-in-the-ksy idea, but it might be nice to think about.

  57. Gravatar of Mike Sandifer Mike Sandifer
    19. December 2011 at 20:55

    Bob,

    No offense, but how can Austrian economics be anything more than religion or philosophy when it rejects science? How can you expect any reasonable person to even want to listen to you?

    And please, don’t explain anything to me about the people in the movement, because I don’t care. The predictions I’ve heard based this perspective have always been wrong.

    Krugman hit that Peter Schiff guy the other day for being wrong about hyperinflation predictions for years, for example. He also sometimes hits you guys for being dead wrong about the US government financing our debt.

    Why do you guys think you can sell serious people on these ideas, and why are you acting outraged that someone like Scott, who’s been right for years, actually says so occasionally and is rightly critical of ideas that have been flat wrong, based on all evidence, for as long as those arguments have been made?

    We can probably agree that Krugman has embarrassingly kooky and fallacious ideas at times, but who are you to point them out? I think you need to focus on the problems with your own worldview.

  58. Gravatar of Mike Sandifer Mike Sandifer
    19. December 2011 at 21:03

    Bob,

    I should add that Austrians can always try to develop such an organization as I mention above. Surely nothing prevents it. My unprofessional guess is though that it wouldn’t carry much weight in many quarters, although the gold bugs might love you.

  59. Gravatar of Claudia Sahm Claudia Sahm
    20. December 2011 at 06:17

    Some day I will learn to just read blogs and keep my opinions to myself…but I feel compelled to “finish” what I started.

    Scott, if you had bashed Congress I would have felt similarly annoyed but I probably would not have commented. I was “taught” by some early mentors to be respectful of public servants (especially the ones you disagree with). I struggle with using the proper words to express my views, so original comment to you is pretty ironic.

    StatsGuy, Steve and others, I comment here because I care. These are my own views…just like all the other commenters. BTW I have a lot less job security than Scott Sumner…or any other tenured academic…and I understand incentives. I do take the critique of the FOMC and the Reserve System staff personally…I know a lot of smart economists (and non-economists) at the Board who have invested a lot of time and energy into finding a solution to our economy’s troubles. Good thing we’re not incentivized by encouraging words on the blogs. Myself, I have a thick skin now (being a young, female macroeconomist will do that to you). I just think personal attacks are a waste of time. I don’t really care who “messed up” the economy…it’s surely complicated and there’s plenty of blame to go around. I just want to know what to do about it. Complicated problems do not have simple solutions IMHO. Back to reading.

  60. Gravatar of 123 123
    20. December 2011 at 09:02

    Scott,

    In my reading, Bill Gross does not make a mistake of reasoning from a price change. Bill Woolsey says negative rates are a bad idea unless cash convertibility is suspended – is he making a mistake of reasoning from a price change too, as negative rates is not a policy?

    Bill Gross is saying that AS curve shifts in a bad direction if rates are ultra-low for a long period of time. You may agree or disagree, but he has got a consistent model. His writing style is very unclear, but there were enough hints to get his idea. Krugman has blogged about Gross, and it is clear Krugman did not understand what Gross wanted to say.

  61. Gravatar of Bob Murphy Bob Murphy
    20. December 2011 at 09:30

    Mike Sandifer wrote:

    No offense, but how can Austrian economics be anything more than religion or philosophy when it rejects science?

    Oh, glad we could clear this up. No Austrian economist rejects science. Whoever told you that was wrong.

  62. Gravatar of ssumner ssumner
    20. December 2011 at 09:55

    Bob, OK, let me put it a different way. The Herbert Hoover Fed often made similar arguments. Ron Paul often makes similar arguments. This arguments may be valid, but . . .

    1. I think the arguments are nuts.
    2. The mainstream of American macro from Paul Samuelson to Milton Friedman thinks they are nuts.
    3. These guys are put in charge at the Fed, and Obama doesn’t even have a clue as to what’s going on.

    I’ll do the technical analysis in other posts, here I’m showing he’s way out of the mainstream, and I think his ideas are nuts.

    Is being way out of the mainstream evidence, ipso facto, that one is nuts? I hope not, because I claim inflation, interest rates and income should not be the focus of macro–which would make me a nut. Come to think of it . . .

    Mike, Well if I can be in charge then I’m all for it! Seriously, I’m not so sure Krugman’s view on China might not win out. In addition, it would be really hard to develop such a committee. Krugman wouldn’t want market monetarists on the list, he’d want new Keynesians, and he could rightly claim they are the mainstream right now.

    Claudia, Perhaps the biggest problem at the Fed isn’t policy, it’s intolerance of dissent. I know people at the Fed will claim they welcome diverse opinions, but the Chinese newspapers also have lots of criticism of the government. However just as there are certain lines one cannot cross in China (the three Ts), I know for a fact that there are certain positions a Fed researcher cannot take without risking their career. And that’s a huge flaw in the Fed. They should be making job offers to people like me, Steve Waldman, Tim Duy, David Beckworth, etc, etc. They should being trying to maximize criticism, maximize dissent.

    123, If Krugman didn’t understand Gross then maybe the problem is that Gross didn’t express himself well. I don’t know enough to comment. If Gross says “Low interest rates are really bad for the economy, and hence the Fed needs to have a much more expansionary monetary policy” then I withdraw my criticism. If not, then I don’t.

    It sounds to me like he has a partial model, an observation that low nominal rates might make the financial system less effective. That’s fine. But that’s not a model, as it doesn’t even tell us whether we need easier or tighter money.

  63. Gravatar of Cthorm Cthorm
    20. December 2011 at 11:17

    Scott,

    It sounds like you’re reading Gross like you’d read Krugman or some academic. He is a portfolio manager, not an academic; he is not trying to illustrate why X policy is needed, he is trying to maximize returns on a risk-adjusted basis. Keep in mind that his article points out that near-zero interest rates force bank-like entities to delever (which is bad for the economy), but Pimco is not a bank-like entity, it’s a huge investment manager. The delevering of those banks is a tremendous buying opportunity for such investors, so long as it does not collapse the overall financial system. He is never very specific about policy proposals, unlike his Co-CIO El-Erian (a former IMF official), who has op-eds out all the time.

  64. Gravatar of 123 123
    20. December 2011 at 11:22

    Yes, Gross didn’t express himself well. Of course, his FT piece covered only a tiny part of his views. Here is a market monetarist tweet Gross tweeted on Nov 2:
    “Gross: Nothin new in stmt but look for Fed to do the talking & private sector to do the walking. Nominal GDP targeting ahed. Curve steepner” (i.e. long bond yields will rise when the NGDP targeting will start)

  65. Gravatar of 123 123
    20. December 2011 at 11:51

    Scott, have you seen this:
    http://www.frbsf.org/publications/economics/papers/2011/wp11-30bk.pdf ?
    On page 28 there is an interesting list of monetary surprises (2008-2010). Strangely, 2010 Jackson hole speech is considered contractionary there.

  66. Gravatar of Mike Sandifer Mike Sandifer
    20. December 2011 at 12:03

    Scott,

    In regard to the consensus committee, I bet you guys could all agree that we primarily have a demand problem right now. That alone would be huge.

    Besides, is there really much daylight between market monetarists and new Keynesians on monetary policy right now? I thought Woodford was down with it all.

    Further, I see much more agreement than disagreement in the public statements you and Krugman make. I think you nerds sometimes blow your differences out of proportion. Well actually, it’s mainly Krugman who does that.

  67. Gravatar of Mike Sandifer Mike Sandifer
    20. December 2011 at 12:12

    Bob,

    I haven’t read much Austrianism, but I was under the impression that it rejects science in favor of “praxeology”. Also, when I thumbed through a couple of Austrian journals a couple of years ago, all I saw was political philosophy.

  68. Gravatar of Mike Sandifer Mike Sandifer
    20. December 2011 at 13:00

    Claudia,

    There’s a reason Friedman wanted a computer running monetary policy. The Fed almost always falls short in some respect, and I don’t see any excuse for it.

    I think Scott’s made a convincing argument, based on Bernanke’s own words, that the Fed’s not doing everything it can right now, according to Bernanke himself. This is presumably due to inflation fears, which seem totally unfounded given theory and evidence, and perhaps some political pressure.

    In any case, unfortunately the present FOMC does not have enough people who have the intellectual rigor and intestinal fortitude to do the right thing. Evans is an exception. If he were determining monetary policy alone, we might have a robust recovery.

  69. Gravatar of Becky Hargrove Becky Hargrove
    20. December 2011 at 13:22

    Claudia,
    I just wanted you to know that I really appreciated your response. At this point I can only say that I am a concerned citizen, who is also an advocate for those who are inadvertantly finding themselves effectively outside the working system. In the present I increasingly question the efficacy of presenting my opinion online, especially in that a fair number of the macro and monetary blogs I visit were hit by viruses today. It does not matter if I tell others that I am concerned by what happens to all of us, if their response is to try and shut down the communication device that I visit. So the best thing for me to do is to continue my own work offline, and hope that the angrier elements might focus their attention in more productive ways, as well.

  70. Gravatar of StatsGuy StatsGuy
    20. December 2011 at 13:38

    @Claudia

    “Myself, I have a thick skin now (being a young, female macroeconomist will do that to you). I just think personal attacks are a waste of time.”

    Actually, this crowd was trying to be relatively polite. 🙂

    The anger is less at the Fed staff – we don’t expect them to speak their minds most of the time because they can’t; they’d be fired. We also don’t expect a real diversity of opinions on the Fed (although we seem to be open to including fringe elements on the right, like Plosser, but can you imagine Krugman on the Fed?).

    However, we have every right to be angry at Plosser – the damage he’s caused is incredible. Nor has he ever reserved harsh words in public for the institution he’s supposed to serve. I don’t doubt much of the staff’s work _could_ be valuable, but not in Plosser’s hands. The asymmetry is glaring.

    Consensus is a failing strategy in the presence of idealogues. I am not going to not ask for your agreement, because I suspect your words are limited by the Fed’s public relations protocols (either formally or informally). I don’t think anyone who posted her harbors any antipathy toward the staff.

  71. Gravatar of ssumner ssumner
    21. December 2011 at 07:36

    Cthorm, No, I’m not doing what you say. I have no trouble with him saying low rates are bad for the economy, I’ve been saying that for 3 years. I’m just trying to find out if he ALSO believes we need tighter money.

    123, He predicts it, but does he favor it?

    That study looks questionable to me, I doubt that rumors of QE2 lowered commodity prices–that’s not what I recall.

    Mike, John Taylor would not agree, and he’d have to be on any such committee. The Taylor rule is the dominant central bank policy paradigm.

  72. Gravatar of Cthorm Cthorm
    21. December 2011 at 09:01

    Thanks for the reply Scott. I think he recognizes that we need the effects of NGDP targeting. In traditional terms: looser money now, tighter money later (really more about gov’t spending).

    BG has been tarred-and-feathered for his bet against treasuries early in the year, because he thought the economy was improving and yields would rise, especially on long dated debt. He has made a big stink about “financial repression” and how it doesn’t make sense to own 30yr debt at nominal yields of less than 4%. So if you’re in his shoes, and you’ve been arguing consistently that the yield curve needs to get steeper, don’t you think saying a policy that steepens the yield curve implies you favor it? Now maybe I’m looking too far into it by putting words in his mouth, but it doesn’t seem like the dots are too far to connect to me.

    How is grading those papers going? Got time for a visit to Newport Beach? Maybe a private seminar is what it would take to connect those dots.

  73. Gravatar of 123 123
    21. December 2011 at 09:44

    Scott,

    Yes, Bill Gross supports 5-6% NGDP growth, even if it means 3% inflation:
    http://www.aspenbusinessjournal.com/ybarticle/id/30182/sid/11
    June 22, 2011
    “KEENE: Bill, we’ve seen so many op-eds in the last number of days on stimulating job growth. James Shugg, who will be on Surveillance Midday today, literally talks about a QE III being not a done deal, but will be something we will see. How do we spur nominal GDP if we are at a very sluggish four percent level?

    GROSS: Well, you reflate it. I’ve spoken to – and Mohamed has spoken to a new normal in terms of two percent real growth for the developed world. And if we need to spur five to six percent nominal GDP, which we think we do and have for the past few years (although we have come up short), basically that means the balance has to be taken up in terms of inflation. I think we have been there for the past 12 months at 3.5 percent. So the feds of the world, the central banks of the world will dismiss inflationary intentions. The Bank of England, for instance, will continue write letters ad infinitum for the next several years, as will the fed in terms of denying the relationship from headline to core. But nonetheless, a five percent to six percent nominal GDP basically has to come from three percent inflation as opposed to three percent growth. “

  74. Gravatar of 123 123
    21. December 2011 at 09:50

    So I think FT piece Gross wrote should be interpreted as an argument that 3-year ZIRP commitment is a wrong way to ease monetary policy as there are better alternatives available (QE, NGPD targeting – I don’t know his exact optimal choice), and 3-year ZIRP has negative consequences for AS.

  75. Gravatar of Mike Sandifer Mike Sandifer
    21. December 2011 at 10:27

    Scott,

    Okay, well it might not be unanimous, but Taylor could be out-voted. Of course, the committee could also just choose not to let him join the committee at all, since he’s off the reservation, like Stiglitz.

  76. Gravatar of TheMoneyIllusion » We all know how it developed. TheMoneyIllusion » We all know how it developed.
    21. December 2011 at 17:54

    […] a recent comment section a Fed employee named Claudia Sahm took me to task for some intemperate remarks I made about the Fed.  I think her criticism […]

  77. Gravatar of ssumner ssumner
    22. December 2011 at 07:34

    Cthorm, You said;

    “How is grading those papers going? Got time for a visit to Newport Beach? Maybe a private seminar is what it would take to connect those dots.”

    If you guys plan to offer me a job I might pay a visit! (I’d love to live in Newport Beach, if I could afford it.) 🙂

    Based on your comment, and 123’s, I think I misjudged him. I’ll try to keep an open mind. I also expected stronger growth in early 2011, so I’m not going to get on his case for that prediction. I still think the jobs numbers suggest GDP growth was underestimated in Q1, but we’ll have to wait several years for the final revision.

    I’m done grading papers, but will only get as close as Tucson next week.

    123, Then I stand corrected. Good for him.

    Mike, You see it as a binary either or; view it instead as a series of overlapping circles. Economists view their close neighbors as OK, but the further away you get the larger the differences, and the more you’d say they “aren’t serious.”

  78. Gravatar of 123 123
    22. December 2011 at 11:11

    @Cthorm

    are you from PIMCO?

  79. Gravatar of Cthorm Cthorm
    22. December 2011 at 11:45

    @123

    Yeah, I’m a Business/Compliance Analyst at PIMCO. Unfortunately not in any position of influence, but I’m young and I’ve only worked here since July.

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