Ezra Klein’s stimulus proposal

Tim Duy sent me an interesting proposal by Ezra Klein:

I am convinced that there is something more the Fed can do, and that now is the right time for them to do it. I call it Uncle Ben’s Crazy Housing Sale.

Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only.

The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.

This is a particularly good time for Uncle Ben to launch his sale, because the housing market appears to be turning: More houses are being built, the price of existing homes is beginning to rise, and inventory levels are falling. A recent Wall Street Journal poll of economic forecasters found that 44 percent thought housing had bottomed out, while only 3 percent thought the housing market had further to fall.

This isn’t going to happen for a variety of reasons.  But even though it’s neither my first nor second choice, it’s an interesting proposal and might be re-shaped into something that’s “worth a shot.”  So here’s my attempt:

1.  No discussion of “crazy” and no discussion of housing (I presume he was kidding about crazy’.)  Let news people tell the public what it implies about when to buy housing.  Just say you are trying to reduce rates to spur aggregate demand.

2.  Target the 10 year bond, not the 30 year bond, and target a lower rate, not the current rate.  Thus set a 1.25% peg for the 10 year.  I like Klein’s 1 year window, I think that’s about right.

3.  Announce that the policy will terminate if it seems to be working, and will continue beyond one year if not.  This is why I propose 1.25%, not the current 1.5%.  The idea is not to have tight money after one year, but just return to the current policy (status quo ante for you ancient Romans) if the plan worked.  It’s like a sales tax holiday that gets everyone out shopping on a given weekend.

4.  Is it possible to (routinely) replace the fed funds rate with the 10 year T-bond yield as a policy target once rates hit zero?  I’ve never given this much thought, but then I’m no Keynesian.  I’m kind of surprised this hasn’t received more discussion.  I think Nick Rowe is right that the Fed’s lack of ability to communicate effectively once rates hit zero was a big problem.  So why not keep communicating using longer term bonds? I suppose the recent promise to keep short rates low for a specified period tries to do the same thing. But that ties the Fed’s hands for much longer.  I’m just thinking out loud here, but it seems like the one year promise on a long rate provides less risk of allowing inflation to become unanchored (a risk I think is pretty low right now, but can always pop up when targeting nominal rates) as compared to promising to keep short rates low until 2015 or whenever. Is there a model that supports this intuition?

In June I did a post with my second choice (NGDPLT is number one) which was to have the Fed promise open-ended QE continually until certain macro objectives were achieved.  A few days ago I did a post pointing out that the Fed is now considering a similar idea.  Tim Duy sent me a link to a Jon Hilsenrath WSJ piece that confirms this idea is under consideration, and also that lower IOR is being considered.  That brings me a certain satisfaction as my very first blog post (after the welcome post) was on the topic of IOR, pointing out that it was contractionary.  I think I was a bit ahead of the curve on that issue (along with David Beckworth and a few others.)  In any case Hilsenrath said negative IOR is unlikely, and even I would agree there are probably better ways to do stimulus, as it might screw up the money market industry.  But even a lower rate would be a modest step in the right direction.

Hilsenrath suggests the Fed’s mood is definitely one of increased frustration—with most officials viewing the economy’s recent trajectory as unacceptable.  I think it’s easiest to think of that in terms of NGDP.  He mentions the disappointing 2% RGDP growth rate, but if the deflator was going up at 4% it would be much harder to make a case for stimulus.  If Q2 NGDP growth is around 3%, look for much more pressure for stimulus.

PS.  If you are wondering how my first post began, it was with a quotation:

“If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume “” Of Money

What better way to distinguish market monetarism from old-style monetarism—V matters too!

Off topic:  I get lots of span comments that you guys never see—they get deleted.  Other bloggers will know what I mean, as they almost all sound roughly the same (Hi, I love your writing style, where can I learn more about your blog?”) with commercial addresses attached for dog grooming or whatever.  A few are so bizarre they are amusing.  Here’s a recent one from “Afghanistan Directors:”

I’m comfort acquisition from you, but I’m trying to achieve my goals. I utterly copulate reading all that is posted on your site. Save the tips future. I enjoyed it!

All I can say is I also utterly “love” reading comments like yours.  And BTW, you might consider getting a new thesaurus.


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92 Responses to “Ezra Klein’s stimulus proposal”

  1. Gravatar of dwb dwb
    25. July 2012 at 05:26

    Hilsenrath suggests the Fed’s mood is definitely one of increased frustration””with most officials viewing the economy’s recent trajectory as unacceptable.

    well, gee, they are targeting an inflation measure heavily influenced by import/oil prices which is a defacto gold standard: When world demand rises the fed induces unemployment, regardless of how appropriate it is for the US. A guy named Bernanke wrote about this phenomenon several times. They only have themselves to blame for their own self-induced paralysis. Not surprisingly, what needs to happen is that the FOMC stop defending the credibility of the standard and just chuck it.

    Erza Klien’s proposal is very similar to one Bernanke suggested in his deflation-combatting toolkit. If they dont like costs of buying Treasuries (due to market distortions) they will like this even less. But i am in favor of anything thats gets us closer to the day that the Fed finally admits its policy failure.

  2. Gravatar of Bonnie Bonnie
    25. July 2012 at 05:28

    We all get into trouble when government focuses on stimulating a particular sector of the economy. It’s funny how some people never learn that lesson and are anxious to jump right back into the problems from the past.

    I am glad to hear that the level of frustration is finally rising up to the Fed. I am not holding my breath, but perhaps they might just take at least one step in the right direction for once. The one issue I see a real problem with is that they already announced a firm 2% inflation target and I’m not sure how they can get around it, given that they’ve already sent Chuck Norris out in the wrong direction.

  3. Gravatar of Nick Nick
    25. July 2012 at 06:10

    Count me as sympathetic to the desire for more inflation, but I’m not sure how either Klein’s proposal (to target mortgage rates) or yours (10 year Treasury) can do that right now.

    The problem with mortgages is that you are not going to get new entrants into the housing market no matter what the interest rate. A low mortgage rate can’t qualify someone who is unemployed, or has a 500 FICO because they were foreclosed on, nor incent somebody who is nervous about their job or thinking that they might have to move soon, nor reduce fixed costs like property taxes and maintenance. Pretty much everybody who can get a mortgage right now is getting one, and an even lower rate than 3.75% doesn’t seem to have any marginal benefit.

    The problem with focusing on the 10-year Treasury is that the Fed would have to buy so much it would affect the day-to-day machinery of the financial world. Treasuries are used for a million things besides just wealth storage, such as for hedging or as collateral. Impacting the supply by that much will begin to make the second-order disruptive effects very significant.

    Maybe they should just invest in rotorcraft 😀

  4. Gravatar of Y.Alekseyev Y.Alekseyev
    25. July 2012 at 06:14

    Where is the ambition in a program that seeks to bring down the interest rate on a 10yr bond by 25bps? Why, I would say that a thing like that might just happen all on its own, with no help from the Fed whatsoever.

    And what do we think the effect of this decrease in a 10yr rate would be? Since no change of the inflation target (or a shift to NGDP target) is to accompany this suggested new policy, I would say an outline of some “concrete steppes” of a transmission mechanism is wanted.

  5. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 06:23

    Zuckerberg just locked in 1%

    The only thing interesting in Ezra’s bit is his attempt at a populist personal benefit, rather than a boring announcement.

    Which brings us back to my NGDP Futures proposal.

    Yesterday’s objectors have been silenced if not converted.

    Scott, why don’t you give me a real logical answer?

  6. Gravatar of Negation of Ideology Negation of Ideology
    25. July 2012 at 06:36

    Rather than trying to get new people to buy homes, we need to figure out a way for people who are underwater but want to stay in their homes to refinance at current rates. It adds no risk to a mortgage holder to cut someone’s rate from 7% to 4%, in fact, it reduces risk.

    Why Paulson didn’t make that a condition of the bailout is a mystery to me.

  7. Gravatar of Lyman Lyman
    25. July 2012 at 06:39

    I’d be interested to hear your response to this blogger, who argues against monetary easing on interesting (somewhat distributionally based or normative) grounds:
    http://www.macroresilience.com/2012/06/04/the-case-against-monetary-stimulus-via-asset-purchases/

    Also, I’m interested in your thoughts on his “individual helicopter drops.” Would we be better off just multiplying everyone’s checking accounts by 1.01 or 1.02 than using some other target?

  8. Gravatar of Saturos Saturos
    25. July 2012 at 06:45

    Scott, I utterly copulate reading you too.

  9. Gravatar of Bill Ellis Bill Ellis
    25. July 2012 at 07:25

    Negation of Ideology,

    That we have not helped the people who are underwater is frustrating to many.
    The reasons for not helping, (besides the moral objections) are not clear to me.

    But although I agree that making existing loans easier and more desirable to maintain by lowering the rates would reduce risk for the banks, it would at the same time make their balance sheets look worse.
    (Of course counting loans on the books that will end up in default is just an illusionary way to make the balance sheets look good. )

    I wonder If the banks portfolios of home loans were restructured, would they still be solvent ? (I have never seen this penciled out have you ? ) It may be that to bail out the homeowners we would have to bail out the banks again too ?

  10. Gravatar of ssumner ssumner
    25. July 2012 at 07:30

    dwb, Bonnie, and Nick, I agree.

    Alekseyev, You said:

    “Where is the ambition in a program that seeks to bring down the interest rate on a 10yr bond by 25bps? Why, I would say that a thing like that might just happen all on its own, with no help from the Fed whatsoever.”

    Yes, but wouldn’t you rather have it fall via easy money than tight money?

    Morgan, I’m not sure I understand your proposal.

    Negation, I’d focus on monetary stimulus, and treat the dysfunctional housing market with regulatory reforms.

    Lyman, I’ve responded to Ashwin many times–that’s just more liquidity trap nonsense. If the Fed tries monetary stimulus and it fails, then we can start looking for other options. But until they do NGDPLT, plus strongly negative IOR, plus buy up all the national debt, I won’t be willing to concede that they’ve made a good faith effort. They need to keep doing more and more. And when they are done doing more and more, they need to do even more and even more. And then more . . . That’s my response to Ashwin.

    The distributional stuff is all wrong, monetary policy has no significant long run distributional effects.

    Saturos, Thanks, I guess . . .

  11. Gravatar of mbk mbk
    25. July 2012 at 07:31

    Scott, I will not buy this record; it is scratched.
    cf http://en.wikipedia.org/wiki/Dirty_Hungarian_Phrasebook

  12. Gravatar of Doug M Doug M
    25. July 2012 at 07:37

    A few reasons why this idea is stupid.
    “2. Target the 10 year bond, not the 30 year bond, and target a lower rate, not the current rate. Thus set a 1.25% peg for the 10 year. I like Klein’s 1 year window, I think that’s about right.”
    Is this any different from “operation twist” currently underway? But more to the point, if the Fed wants to target a mortgage rate they should buy mortgages. They have bought MBS before. The could buy 100% of Fannie Mae’s new supply until the 30 year mortgage rate was on target.
    “3. Announce that the policy will terminate if it seems to be working, and will continue beyond one year if not.”
    Again, is this any different from QE, QEII and operation twist, etc. Furthermore, the how does the Fed exit? They will be committing to put all of these assets on their balance sheet. How will they intend to remove them.
    A steep yield curve is simulative, as it give banks incentive to borrow short and invest long. Attempting to drive down long term rates, pushes down the compensation for taking on risk. As proposed, this action will drive the private sector away from risk taking at put risk taking on the public sector.
    Does it matter if the mortgage rate is low, if you don’t have confidence that the house will hold its value? Buyers are still shell shocked, and many do not see houses as the same savings vehicle they saw in 2005.

    Mortgage underwriting standards are much tighter than they were in 2007. The same borrowers no longer qualify for the loans that they used to.

    If the house you are looking to buy is owned by an underwater seller, it is difficult to close the transaction. The bank that holds the mortgage must approve all of the terms of the deal before it can proceed. There are similar problems for houses that are in foreclosure.

    If your house is underwater, you can’t sell it to trade-up into a larger house.

    Lower rates will do more for current mortgagors, who will refinance at these new low rates that it will for new buyers.

    The mortgage rates are currently at an all-time low and that is not triggering a flood in demand for new mortgages.

    My mortgage rate is already 1.875%.

    Existing home sales have a relatively small economic impact compared to new home sales. Purchase of an existing house triggers a few thousand dollars of economic activity. Purchase of a new house triggers hundreds of thousands of dollars of activity.

    Housing and construction hold a fraction of the economic importance as it did a few years ago. Many of the people formerly employed in the construction trades have exited the field. While it seemed to make sense to create some sort of relief when there were so many unemployed construction types, it makes less sense now.

  13. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 07:44

    The more I read TheMoneyIllusion blog posts, the more I am convinced I am reading a political strategist whose hobby is translating the ravings of mad scientists, who have no clue how the market works, into politically palatable techno-babble so as to not rouse the rabble into justifiably calling it crazy, while at the same time proposing his own mad scientist proposals as part of his day job.

    ——————-

    1. No discussion of “crazy” and no discussion of housing (I presume he was kidding about crazy’.) Let news people tell the public what it implies about when to buy housing. Just say you are trying to reduce rates to spur aggregate demand.

    Another housing bubble. This time a manageable bubble. This sounds like Krugman in 2002.

    I notice that crazy central planning schemes always conveniently ignore the fact that humans are not lab rats, and can learn of the scheme that politicos are enacting, thus nullifying the fallacious assumption behind the scheme: that knowledge is constant and does not absorb the scheme itself.

    It’s why every inflation scheme heretofore has not worked in the long run.

    Please leave the “crazy” in. It’s more apt.

    2. Target the 10 year bond, not the 30 year bond, and target a lower rate, not the current rate. Thus set a 1.25% peg for the 10 year. I like Klein’s 1 year window, I think that’s about right.

    The fundamental flaw of the notion that the Fed buying treasury debt can spur investment and spendingin one chart.

    The flaw is that investors will just front run the Fed and go on a bond buying frenzy. Why invest in housing when you can make essentially risk free profit front running the Fed in the treasury market?

    And “that’s about right” according to what standard? Spiritual revelation, throwing darts at a dartboard, gut feeling? Is this economic science or is this a Ouija session?

    Serious question: Why is it that rigorous economic thinking is not appropriate when the magic word “recession” is used? It’s like hypnosis. Say the magic word “war”, and murdering children becomes something different than without the magic word. Say “recessionary war”, and watch out for the violent stampede of ignorance.

    3. Announce that the policy will terminate if it seems to be working, and will continue beyond one year if not.

    So announce that if the central planners feel good after one year, then it will stop, but if they don’t feel good, then it will continue. Yes, this is something investors can efficiently plan around. Or by “seems to be working” you meant if NGDP rises according to your arbitrary unscientific goal? You mean the statistic that the Fed is not officially targeting, and which no investor cares for to even start a futures market? People seem to care more about making a market for how much the next Twilight movie will gross than they do about future NGDP.

    That amuses me to no end. People would rather bet on Twilight than NGDP. I don’t know about you guys, but to me it’s almost poetic.

    This is why I propose 1.25%, not the current 1.5%.

    I propose 1.225%, not 1.25%. Don’t pay any attention to other arbitrary assertions. Mine is better. Don’t ask me why. I just “get” the economy and you all believe me, because you “get” what I am doing, and I “get” what you are doing, so we can all pretend to “get” why 1.225 and not 1.25% will work. It’s all about Rortyian rhetorical persuasion anyway. There is no such thing as knowable truth….except that persuasion is the correct method, and except that we can know for sure when persuasion has indeed taken place. Then truth can be known. Yes, this is a rank self-contradiction, but we’re not supposed to rock the boat with truth. We’re supposed to pretend that central planning works. Then, when errors are made, it’s not because central planning doesn’t work, but rather it’s because the wrong people were in charge.

    The idea is not to have tight money after one year, but just return to the current policy (status quo ante for you ancient Romans) if the plan worked. It’s like a sales tax holiday that gets everyone out shopping on a given weekend.

    Yes, that’s what the US economy needs. More inflation financed consumption and less real saving. There is no such thing as inflation financed overconsumption leading to economic dislocations and reduced standard of living in the long run. Getting everyone to buy the consumable output of malinvestment through inflation is definitely how to correct the malinvestment so that accelerating inflation is needed to sustain the malinvestments.

    How can any serious thinker believe this tripe? When are individual consumers going to dictate investment of who goes bankrupt and who does not? Or are we all supposed to be chattle under the Fed’s preferred clients forever, where if we want to bankrupt the primary dealers, the Fed will reverse those decisions because what’s good for Goldman is good for everyone?

    4. Is it possible to (routinely) replace the fed funds rate with the 10 year T-bond yield as a policy target once rates hit zero? I’ve never given this much thought, but then I’m no Keynesian. I’m kind of surprised this hasn’t received more discussion. I think Nick Rowe is right that the Fed’s lack of ability to communicate effectively once rates hit zero was a big problem. So why not keep communicating using longer term bonds?

    When MMs say never reason from interest rates for the stance of monetary policy, what they really mean is reason from interest rates only when MMs have control of them. When MMs say that lower 10 year and 30 year rates means lower inflation expectations, what they really mean is infer lower inflation expectations only when MMs are not in control of the printing press, because they need the low yields to serve as justification for more money printing, but when MMs are in control, then lower interest rates is supposed to mean inflation of the money supply is taking place.

    Isn’t it amazing? We hear time and time again that low interest rates means monetary policy has been tight. We hear time and time again that the recent very low yield auctions of 10 year and 30 year bonds means investors expect low inflation for 10 and 30 years out. But here is Sumner promising that inflation of the money supply to buy 10 and 30 year bonds will lower 10 year and 30 year interest rates, as if that is not already happening, as if the Fed isn’t already buying 10 and 30 year bonds, as if they are not already lowering these yields via inflation.

    Contradiction maker extraordinaire. There should be T-shirts with this stuff. Incredible.

    I suppose the recent promise to keep short rates low for a specified period tries to do the same thing. But that ties the Fed’s hands for much longer. I’m just thinking out loud here, but it seems like the one year promise on a long rate provides less risk of allowing inflation to become unanchored (a risk I think is pretty low right now, but can always pop up when targeting nominal rates) as compared to promising to keep short rates low until 2015 or whenever. Is there a model that supports this intuition?

    Yes. The model is called arbitrariness devoid of sound economic logic.

    In June I did a post with my second choice (NGDPLT is number one) which was to have the Fed promise open-ended QE continually until certain macro objectives were achieved.

    The only “macro objective” in MM world is NGDP. There are no “macro objectives” with an “s”, as if we’re supposed to infer that maybe MM is also theory of targeting higher employment, or output, or standard of living. It’s “macro objective” without an “s”. It’s nothing but aggregate spending. Every other issue is the responsibility of non-MMs.

    Leave QE open until NGDPLT is reached, no matter if the entire QE goes to consumption and lower standards of living, no matter if the entire QE goes to building more drones and ends up killing families who are stupid enough to live over oil and refuse to move. Even if everyone took their entire incomes and consumed with it, collapsing employment and capital investment, leading to millions if not billions of deaths, then MMs say their program was a success, because they succeeded in getting the economy to avoid a “nominal shock recession” as NGDP did not fall.

    It’s all about total spending. There is only one “certain macro objective”, no matter what destruction resides within a given NGDP.

    If the choice is between the government printing and spending $1 trillion on drones and SWAT teams and 5% NGDP growth, or printing and spending $0 which will lead to 2% NGDP growth, then we’re supposed to choose the drones and SWAT teams.

    A few days ago I did a post pointing out that the Fed is now considering a similar idea. Tim Duy sent me a link to a Jon Hilsenrath WSJ piece that confirms this idea is under consideration, and also that lower IOR is being considered. That brings me a certain satisfaction as my very first blog post (after the welcome post) was on the topic of IOR, pointing out that it was contractionary. I think I was a bit ahead of the curve on that issue (along with David Beckworth and a few others.)

    Yes, just like politically jockeying one’s way to first in line to the wizard’s office. Pick me. Pick me. Then, when it is overheard that maybe the wizard mentioned something one of the rabble said a while ago, then the rabble’s eyes light up, their heart skips a beat, because they’re one step closer to being the wizard’s apprentice.

    ——————-

    If you are wondering how my first post began, it was with a quotation:

    “If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume “” Of Money

    Hume was wrong about this (and about his belief that there is no connection between is and ought, but that’s a different topic).

    If everyone had lots of money locked up in chests, and they were owners of them, then they would provide a particular utility that would not otherwise exist. People value money not only for its at the moment purchasing power in spending service. People also value money for its storing of purchasing power over time service. What almost every Keynesian and Monetarist economist has no clue about. What is attacked ruthlessly in rages of jealousy and resentment, as if money is a “public” good that doesn’t belong to individuals, but to “society”, where individuals have to “do their part” to “society” and “spend it on others”…all the time, or at least fast enough to satisfy the arbitrary dictates of wannabe central planners.

    Back to Hume’s error. If everyone had lots of money locked away in chests, then they would have a greater incentive to take what they do spend, and devote more of it to investment. This is because the risk of loss to one’s assets is lower than it otherwise would be. For example, if I had $100k to spend, then I would almost certainly invest more of it if I owned $1 billion locked away in a chest, than if I didn’t have $1 billion locked away in a chest. For if I lose the $100k, then I still have $1 billion. If I didn’t have the $1 billion, then I would almost certainly consume more out of the $100k.

    There is another argument for why higher cash balances will stimulate more investment, and this has to do with what will occur to the rates of profit prevailing throughout the economy. If businesses hold more cash, and they invest less, then this will increase rates of profit in the long run, because dividends, interest payments, draw payments from sole proprietors, all the sources of consumption spending for business owners, comes out of cash balances. This spending adds to economic revenues without a corresponding addition to costs. That increases profits. This is unlike investment spending, which adds to business revenues but also increases business costs (with a time lag, so it can increase profits in the short run, but in the absence of inflation, profits from such net investment eventually come to an end, and profits from consumption of capitalists will be the only determinant of profit left).

    So with higher profits, the incentive to invest becomes all the more strengthened. The more that cash is “hoarded”, the higher profits will be in the long run, and the higher the incentive to invest will be.

    The kicker: An economy with more investment spending relative to consumption spending will result in a more productive economy, which will lead to LOWER prices, not unchanged prices.

    If the money locked in chests was destroyed, then the incentive to invest more would disappear. Consumption would then be higher relative to investment, and that will lead to higher prices.

    So money locked away in chests does NOT have the same effect on prices as does annihilating the money. Hume did not take the subjective value framework into consideration, which is not so difficult to understand, since the subjectivist revolution in economics didn’t occur until 100 years after his death. But nobody in 2012 has any excuse for making the same error.

    What better way to distinguish market monetarism from old-style monetarism””V matters too!

    An even better way to distinguish them is that MM wants more inflation than old-style monetarists at times when inflation is most damaging to recovery. MM is an acceleration in inflation futility.

  14. Gravatar of Steve Steve
    25. July 2012 at 08:06

    Grrr, I don’t like this idea. It has intellectual roots in the hawk argument that the low interest rate pledge is harmful, because it takes away the urgency to buy now. These same people then argue that stimulus programs like first-time home buyer credits or cash for clunkers simply pull demand forward, rather than creating real demand. They expect us to miss the logical contradictions of putting forward those two arguments.

    I’m not sure why the house purchases under this program wouldn’t be temporary, too. What about the currently unemployed person today, who can’t afford to buy next year when (if?) he gets a job?

    I stick to the two best stimuli, NGDPLT, and open ended QE.

    If you want to stimulate housing, how about telling Fannie and Freddie to stop doing mortgage putbacks in cases of job losses. Stick to ferreting out actual fraud.

  15. Gravatar of Cthorm Cthorm
    25. July 2012 at 08:08

    Morgan – I’ll give you an answer. The Fed is a “conservative institution” in the sense that it is very intent on keeping it’s appearance as buttoned-up Very Serious People. Just like Auction the Unemployed, it’s effective and simultaneously entertaining. But the Fed doesn’t like out-of-the-box ideas very much. They’re much more likely to accept Scott’s proposal, and even more likely to accept his 2nd choice proposal.

  16. Gravatar of Floccina Floccina
    25. July 2012 at 08:18

    Wouldn’t the mortgage industry sell the crappiest of crap to fed if they did this?

  17. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 08:35

    Cthorn,

    Scott’s plan doesn’t work.

    The real stopper is once the Fed sets up to actually run a NGDP market, where people can bet on both sides…

    The major market players can manipulate NGDP, so you already have to create a bunch of caveats.

    INSTEAD, sell it to the A Power. They can make ANYTHING seem acceptable.

    Effective policy making is hard, which is why most laws fail int heir intent, you’ve got to actually game shit out and figure out what actually occurs in the real world during game play.

    Scott, it is in the last thread, but frankly after years of talking about it, you should know what I’ve been saying BEFORE you just make shit up.

    Just remember Cochrane’s real advantage on the Futures market – it was all about actually using it as a transmission mechanism, that’s the SEXY PART.

    It wins the Ron Paul crowd because they know that Goldman is no longer getting first dollars in.

    But the real advantage is the SMB owners can self insure against downturns.

    You’d see billions floating month to month, and whenever the Fed wanted to move the needle up or down…

    They be making the SMB owners feel richer or poorer.

  18. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 08:40

    Properly done, it could do for Main Street SMB’s what Chicago Commodities futures did for farmers.

    Right when the economy heads south, no worries Dry Cleaner owner, the new printed money is being handed to you.

    And when it is zooming along, you are seeing a little bit of you deposit get eaten up, which slows down your growth expectations.

  19. Gravatar of Y.Alekseyev Y.Alekseyev
    25. July 2012 at 08:49

    @SSumner: “Yes, but wouldn’t you rather have it fall via easy money than tight money?”

    Since we can’t reason from the interest rate, how would we KNOW whether the money has, in fact, been easy or tight once the 1.25% rate is upon us? Or is signaling/expectation setting by the fed BY ITSELF going to increase the amount of base money in circulation? It’s getting really confusing…

    One other quibble: isn’t it an odd theory that leads you to a conclusion where BOTH easy and tight monetary regimes – two obviously and diametrically opposing courses of action by the only actor that matters – can lead to exactly the same outcome as far interest rates go?

  20. Gravatar of Becky Hargrove Becky Hargrove
    25. July 2012 at 08:54

    I’m still waiting for the howler op-ed or cartoon that talks (or better, illustrates) all the supply side solutions the Fed could do to stimulate the economy: in fact I’ve been waiting for weeks. Where was it the other day someone talked about the Fed supporting preschoolers over K through 12?

  21. Gravatar of johnleemk johnleemk
    25. July 2012 at 09:05

    Matt O’Brien hits the nail on the head again at The Atlantic: http://www.theatlantic.com/business/archive/2012/07/the-12-words-standing-between-us-and-a-recovery/260278/

    Determined to keep trying to get the economy going without causing inflation … the Fed says it wants to jumpstart the economy — but not if that means jumpstarting the economy.

    Say that everything about the economy was the same but interest rates were at 5 percent instead of zero. The Fed would almost certainly be cutting rates today. That’s what the Fed does when unemployment is above target and inflation is below target. (And markets expect inflation to stay under 2 percent for the next five years). But the Fed insists on backing itself into a corner — no inflation! — when it comes to using its unconventional toolkit.

    Self-induced paralysis is a lot of work with no pay off.

  22. Gravatar of Greg Ransom Greg Ransom
    25. July 2012 at 09:32

    Scott, why don’t you take on David Stockman instead of trying so hard to suck up to these lefty bloggers working on the intellectual level of mid-level, 2nd string op-ed page pundits.

    Of course, the Fed has already bought or backed massive numbers of mortgage backed securities.

    So the idea is to double down. And then triple down. Then, what, quadruple down?

    Turtles all the way to sovereign default & hyperinflation, I suppose.

    BTW the comment you “love” is computer generated to get around spam filters.

    It isn’t human.

  23. Gravatar of Saturos Saturos
    25. July 2012 at 09:33

    “Scott, I utterly copulate reading you too.”
    Okay, I see how that sounded weird…

    Arnold Kling has some new skepticism:
    http://econlog.econlib.org/archives/2012/07/the_magic_solut.html

    In fact maybe I should get Lars do to a reply (goto guy for forex transmission mechanism).

  24. Gravatar of bmcburney bmcburney
    25. July 2012 at 09:58

    I haven’t checked bet Klein loved “cash for clunkers” too.

    Ok, so we pull housing demand forward for one year (and/or delay demand until the program starts) but one year is not going to be enough time in most jurisdictions to actually build new housing so the increased demand will have to be satisfied by existing housing which will create a mini-bubble for as long as the program lasts and a mini bust afterwards. Since home builder will not generally be able to participate in the bubble portion of the program, the smart ones will reduce current employment to avoid the bust which will inevitably follow. So, essentially, the economy as a whole suffers so that big banks can reduce their REO inventory.

    Yup, sounds like an Ezra Klein idea alright.

  25. Gravatar of Bill Ellis Bill Ellis
    25. July 2012 at 10:15

    Negation of Ideology,

    Did you see this ?

    From Yglesias today…

    Senator Jeff Merkley of Oregon is out today with an ambitious plan to try to stimulate the economy by facilitating large-scale refinancing of so-called underwater mortgages. This is important because one way that low interest rates can help in a weak economy is that people with mortgages on their homes take advantage of the opportunity to refinance and boost their disposable income.(…)
    ….Merkeley’s proposal is to set up an entity””comparable to the HOLC of the New Deal””whose purpose is to borrow a gigantic sum of money from financial markets at today’s ultra-cheap US government cost of funds, and then buy up all the outstanding underwater mortgages that are out there. Then the new entity will offer each underwater homeowner one of three refinancing options:

    “” A plan that keeps your monthly payments roughly constant but shortens the life of the mortgage.
    “” A plan that cuts your monthly payment by just extending a new full-length loan at a lower interest rate.
    “” A plan that cuts your monthly payment a lot by in effect extending the life of your loan.(…)
    …How to pay for this? Well if you read the plan you can see the detailed explanation, but the main component is simply that we’ll be exploiting the gap between the federal government’s extremely low cost of funds and the very high rates that a lot of underwater homeowners are currently stuck with.

    There is a link to the actual plan in the post. (PDF)

    This sounds promising. I hope Obama gets behind this now. It would be nice if he could claim a mandate for doing it.

    http://www.slate.com/blogs/moneybox/2012/07/25/jeff_merkley_s_plan_for_underwater_homeowners.html

  26. Gravatar of Tommy Dorsett Tommy Dorsett
    25. July 2012 at 10:40

    I’m with Steve – Klein’s proposal is simply shifting the deck chairs on the Titanic. And targeting the 10 year also gives the false impression that low rates are synonymous with easy money. Let’s not perpetuate that myth. Assuming the Fed wont go full monti for a ngdplt, they could eliminate ior and commit to open ended purchases until five- year tips spreads hit 300 bps and reverse if they rise above 400 bps.

  27. Gravatar of Cthorm Cthorm
    25. July 2012 at 10:42

    Scott – Have you seen this article (Money, Where’s the Money?) by Steve Hanke of John Hopkins/CATO?

    I’ve never heard of this idea of governments directly buying their own debt and canceling it, which is supposedly substantively different from a central bank doing the purchasing. It’s kind of a funny idea, but I suppose a government saying “take your 200 bps premia and shove it” by issuing 5yr bonds and buying-and-canceling its own 30yr bonds would be inflationary.

  28. Gravatar of Negation of Ideology Negation of Ideology
    25. July 2012 at 10:51

    Bill,

    Thanks for the link, it looks like a workable proposal. I’m a little bit concerned about the third option, extending the life of the loan, because people who are underwater should use some of the interest savings to pay down principal faster, but perhaps for some people it makes sense. If the government did this and then restored NGDP to pre-crisis trend then it would probably turn a large profit.

    Notice in the comments that most of the opposition to this is of the “just deserts” variety. Even if it makes a profit, and doesn’t hurt homeowners who can already refinance, some people are angry about helping those they view as “irresponsible”. Strange.

    By the way, didn’t John McCain propose this in one of the Presidential debates?

  29. Gravatar of o. nate o. nate
    25. July 2012 at 11:02

    Wouldn’t it make more sense for the Fed to target 10-year TIPS rates? Currently the 10-year TIPS is at a -0.64% yield, so for instance, the Fed could target -1%. Thus either higher inflation expectations or lower nominal rates would have the desired effect.

  30. Gravatar of Bill Ellis Bill Ellis
    25. July 2012 at 11:34

    Negation of Ideology,

    Notice in the comments that most of the opposition to this is of the “just deserts” variety.

    Yep, funny how those same folks tend rationalize letting the elite get off scott free. It is a double standard.

    Job creators “take risks”…if they don’t pan out they can bail. It is just business.

    The average guy “makes commitments”…if they don’t live up to them they need to be forced to… they need to be punished.

    By the way, didn’t John McCain propose this in one of the Presidential debates?

    I think he did. He will have to deny it now. lol

  31. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 12:18

    Bill Ellis:

    Yep, funny how those same folks tend rationalize letting the elite get off scott free. It is a double standard.

    So that’s why we should support more inflation then! Now it makes sense. We should support giving those same elite MORE free money (net cash flow above what they would have gotten without inflation from the Fed, had they sold their securities in the open market instead, is free money).

    That is definitely not a rationalization of letting the elite get off scott free. It is definitely not a double standard.

  32. Gravatar of Doug M Doug M
    25. July 2012 at 13:06

    “Job creators “take risks”…if they don’t pan out they can bail. It is just business.

    The average guy “makes commitments”…if they don’t live up to them they need to be forced to… they need to be punished.”

    Mortgagors can bail — put their house back to the bank. Many have done so.

    Furthermore, no one is anyone suggesting that those who choose to stay in their house with an underwater mortgage should be punished. They can continue to live in the house that they love if they make the same payments that they always have. That isn’t punishment. What they have lost is an ability to exercise options that less encumbered borrowers are able to exercise.

    Finally, with 125 LTV loans now available, someone who is up to 10% underwater can convert thier underwater mortgage to a 3.5% 1st and a 6% 2nd mortgage for an average funding cost of 4.25%. Is that so bad?

  33. Gravatar of Bill Ellis Bill Ellis
    25. July 2012 at 13:49

    Doug M,

    Yes regular folks can bail..I was pointing out a difference between when the elite and the common man are regarded when they do bail.
    Maybe we just don’t see eye to eye on that.

    10% Underwater ? Where I live our values dropped buy about 1/3 from the top…and we live in an area of San Diego that was not hit as hard as many other areas.

    Maybe the problem is the 10% requirement ?

    I know a lot of people with good credit and good incomes that are having trouble with getting their upside down loans done. We own our house outright so I have not looked at it in detail. But I do know that only a small % of upside down loans have been redone nationally…So what is the hold up ? Whatever we are doing it is not working.

  34. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 15:30

    For another MM-MMT tussle see Phillip Pikington latest piece on Market Monetarism. He doesn’t sound impressed:

    So, if the market monetarists had their way and provoked added inflation in the economy it is clear that this would not necessarily result in real wage growth to match said inflation. The labour market is extremely slack at the moment and, as Roberts has shown above, employers are using this opportunity to supress real wages below trend. If a burst of inflation shot through the system there seems no reason to assume that real wages could keep pace. Much more likely that they would fail to rise and living standards would fall. And as people needed to use more of their income to buy fewer, higher-priced goods and services this would also lead to lower economy-wide demand.

    Indeed, such a policy might, if pursued with gusto, lead to a stagflation scenario where workers suffered unemployment on the one hand and falling living standards on the other. What a mess that would be… and, it should be said for those New Keynesians who tie their flag to this mast (you know who you are), it would make it all the more difficult to clear this disaster up with fiscal stimulus and other sensible policy measures as this might feed into the artificially generated inflation.

    As we said though, it is unlikely that the market monetarists’ policies will be able to generate inflation even if they are implemented. The last time monetarist cranks got into power their policies were used to mask political aspirations that the general public would not have otherwise accepted. This time around, if the central bank chooses NGDP targeting as its new shaman’s stick – since the QE-wand has by now gone completely and comically floppy – they will likely just fall flat on their face. Where once monetarism was a grim mask worn by a disingenuous reaper intent on mass destruction, today it appears as nothing more than a cockscomb worn by an insecure fool trying desperately to convince the financial markets of his continuing relevance.

    Read more at http://www.nakedcapitalism.com/2012/07/philip-pilkington-market-monetarism-or-an-attempt-to-speed-up-the-decline-in-real-wages.html#2aXaAWmagA0tIUOe.99

  35. Gravatar of Matt Waters Matt Waters
    25. July 2012 at 15:41

    The latest from Casey Mulligan is bad. Really, really bad.

    http://economix.blogs.nytimes.com/2012/07/25/who-cares-about-fed-funds/?ref=business

    I guess the piece’s tone was set by the end of the second paragraph, which gets a basic tenet of monetary policy wrong. The Fed does NOT lend to banks at the Fed Funds rate. The Fed Funds rate is the rate banks lend to each other in the overnight market. Banks with collateral can borrow from the Fed at the higher discount window rate.

    Then there is a host of wrong arguments on monetary policy. He reasons from interest rate changes. He picks a paper that consumer spending is not related to short-term interest rate changes, which you would expect if consumer spending really changes based on NGDP expectations, not interest rates. He links to a Krugman blog post which does not say anything close to what the link says. Then he says long-term interest rates are “immune” to QE, again making exactly the wrong conclusion from interest rate changes.

    Make no mistake, this is a classic example of the Dark Age of Macroeconomics. Sorry to go Krugman on a Chicago professor, but why can any professor let his theory stand in the face of mountains of contradicting empirical evidence? As an engineer, I approached the question of “what causes unemployment?” with “alright, which theory actually works?”

    What actually works is using NGDP levels as THE factor with regard to cyclical unemployment. Not interest rates. Not consumer spending in isolation, but NGDP. Instead of the contortionary structural explanations of 8% unemployment, NGDP has a simple explanation: lower nominal revenues (i.e. NGDP) doesn’t mean lower-wages. It means less workers. And since NGDP = MV, the organization with total power over M should be able to move NGDP. Even if all additional M sits in vaults, the central bank has further power to increase V as much as necessary through negative IOR and limiting how much deposits at the Fed can be converted to cash. This is all simple and straightforward; so why do a vanishingly small number of economists believe this?

    Sorry for rehashing all the points made on this blog many times before, but somebody is wrong on the Internet. Very, very wrong.

  36. Gravatar of Rob Rob
    25. July 2012 at 15:43

    Re: Klein’s proposal, a time-specific policy targeted specifically at housing (or even just a time-specific policy) could destroy the market. If buyers and sellers are finding an equilibrium, why introduce time related uncertainty? Yes, the press may encourage people to go out and buy, but the realtors will encourage others to sell now too. If I’m a homeowner, I’ll figure out that programmatically low rates means I can jack up my asking price all by myself…..

  37. Gravatar of Benny Lava Benny Lava
    25. July 2012 at 15:52

    I am more optimistic about housing when I read that the FHA will start clearing huge chunks of housing out to investors. Because the housing stock that is currently dragging the economy is worthless.

    If this were a centralized country like China the government would evict everyone in these worthless homes and bulldoze them. Which isn’t a terrible idea but this is a decentralized country so we will auction these to investors who will evict everyone and bulldoze the worthless homes.

    As the folks at Modeled Behavior slowly figured out, the problem isn’t that we aren’t building enough SFR.

  38. Gravatar of Tommy Dorsett Tommy Dorsett
    25. July 2012 at 16:00

    Sax – The Pinkington piece is obviously riddled with errors. It’d be nice if the skeptics actually took the time to understand what MM is before offering an arrogant, ignorant rant against it.

  39. Gravatar of Matt Waters Matt Waters
    25. July 2012 at 16:01

    “So, if the market monetarists had their way and provoked added inflation in the economy it is clear that this would not necessarily result in real wage growth to match said inflation.”

    If there is high demand-side, cyclical unemployment, then that is a feature, not a bug. The best example of that is the comparison of Iceland vs. Ireland. As it is in the real world, both countries have not reduced their nominal wages at all. But since Iceland depreciated their currency enough to keep NGDP from falling through the floor, they have 6% unemployment while Ireland has 14.6% unemployment.

    Let me put it this way: would you be for a very high minimum wage even if it causes very high unemployment because those who still have jobs would see higher wages? That’s essentially the situation when there is a fall in NGDP and real wages unnaturally increase.

    “Indeed, such a policy might, if pursued with gusto, lead to a stagflation scenario where workers suffered unemployment on the one hand and falling living standards on the other.”

    No, absolutely not. NGDP targeting would have led to FAR tighter policy in the 70’s than we actually had. 5% NGDP growth takes care of most all cyclical unemployment and further NGDP growth (the late-70’s averaged well over 10%) leads through to only inflation. If real wages are at their equilibrium level, then more NGDP per worker means better bargaining positions for workers.

    But what if you have 5% growth in NGDP today? Some of that money would go through to commodities and that would be pure inflation since markets clear. But some would also go to sectors that have higher-than-equilibrium real wages.

    For example, I personally know of an architecture firm which laid off most of its employees and the workers who stayed worked 15 hours a week. As some of that NGDP growth is spent on architecture, the new spending would only be inflationary if the new money went to higher wages. Since architects don’t have the bargaining power, it would go through to higher volume (RGDP) instead.

    Or maybe you’re right and “if market monetarists had their way” then NGDP growth would mean pure inflation. Even in that scenario, you have 5% inflation with 5% NGDP growth. That’s it: Reagan-era inflation. Was inflation so bad in the 80’s that it is worth early-80’s level of unemployment?

  40. Gravatar of Matt Waters Matt Waters
    25. July 2012 at 16:07

    Benny Lava, the issue has mostly been physical new household formation not keeping up with population growth. In 2003-07, we built only a few million extra houses than we should have. If new households formed at the 1.5 million/year pace that was present from 1990-2007, then the inventory would have easily cleared in most areas and home building nationwide would have resumed at the 1.5 million/year pace. Bulldozing homes in the midst of population growth would be an utterly tragic waste of all the material and labor that went into building those homes.

  41. Gravatar of Benjamin Cole Benjamin Cole
    25. July 2012 at 16:09

    I don’t know why Erza K. would pick just MBS for purchase, and why we should stimulate housing vs. the general economy.

    I prefer the Fed buy only Treasuries, and let the market decide what to do with the money (spend it, invest it, or put it in the bank).

    BTW, maybe I missed it, but…and ugly question out there (not ugly to me, but to the economics profession): Suppose with global interest rates going to zero, a conventional central bank policy tool has been obliterated. You can’t lower rates anymore.

    Okay. Now what? QE obviously.

    And maybe QE becomes a conventional policy tool.

    Now, with the QE conventional policy tool the Fed accumulates hundreds of billions in securities. More every year. Yes, we are monetizing the debt, but, as in Japan, it does not lead to inflation. Or, if the Fed buys a variety of securers, it is building up a huge storehouse of assets owned by taxpayers, reaching into the trillions of dollars.

    Now what? Tax holidays (financed by transferring Fed assets to Treasury)? Lower tax rates? What is the answer to swelling central bank balance sheets?

    Great blogging btw, and I am not a robot ad machine copulating with you.

  42. Gravatar of Doug M Doug M
    25. July 2012 at 16:20

    Pikington is bang on, but is too much of a communist to get it.

    The point of MM is to drive down the real wage when the economy is weak. This allows the labor maket to clear. When the economy is stron, the MM drives down inflation allowing the real wage to increase.

  43. Gravatar of Bill Ellis Bill Ellis
    25. July 2012 at 16:22

    Mike Sax,

    Like the MMT dudes…I am skeptical of NGDP targeting’s effectiveness when the economy is stuck in a demand slump… especially when fiscal policies are decreasing demand. (austerity)
    It is kinda of a flip side of Sumner’s point that a stubbornly low inflation target will kill the effects of a fiscal stim.

    Still, I don’t think it can hurt. And I do believe too weak a monetary policy does make things worse even in the absence of any fiscal change…and that we are experiencing too weak a policy. But who am I ?

    I think the real value of some kind of level targeting will come during normal times. The anti cyclical nature strikes me as Keynesian in philosophy. It could really help flatten out the Biz cycle and moderate bubbles…

    I hope it does not get discredited if it is tried, and fails to get us out of our slump.

  44. Gravatar of Mike Sax Mike Sax
    25. July 2012 at 16:30

    “The point of MM is to drive down the real wage when the economy is weak. This allows the labor maket to clear. When the economy is stron, the MM drives down inflation allowing the real wage to increase”

    His basic argument, Doug, is this. He doesn’t think MM can create inflation. But if it can he thinks that it would actualy hurt the poor, unemployed etc. because the rise of wages would be much slower than other rising prices.

    The one benefit of inflation in theory would be to bring down what borrowers owe.

  45. Gravatar of Doug M Doug M
    25. July 2012 at 16:39

    Mike Sax,

    “His basic argument, Doug, is this. He doesn’t think MM can create inflation. But if it can he thinks that it would actualy hurt the poor, unemployed etc. because the rise of wages would be much slower than other rising prices.”

    Yes, I agree, he is correct.

    “The one benefit of inflation in theory would be to bring down what borrowers owe.”

    That is a pure transfer from saver to debtor. Depending on your political leanings that could be acceptable behavior, or it could be theft.

  46. Gravatar of ssumner ssumner
    25. July 2012 at 17:06

    mbk, I should have linked to that–I always forget that everything’s on the internet now.

    Doug, My goal would not be to help housing. And it is different from twist, which had no i-rate target.

    Floccina, I don’t want the Fed to buy anything from the mortgage industry.

    Alekseyev, In theory you are right. But all we’d need to do is look at who voted for and who voted against (on the FOMC) and that would tell us what sort of signal the Fed was sending.

    It is odd. Normally it’s less of a mystery, because the liquidity effect hits shorter term rates. But now that they are zero, I look at other asset markets like stocks for confirmation.

    Economists call this problem “indeterminacy.”

    Becky, Yes, depressions bring out silly ideas. (Maybe like this post!)

    Johnleemk. That’s a really good one.

    Greg, Is Stockman talking about monetary policy now?

    No wonder I loved that comment so much–I prefer robots to humans.

    Saturos, Not that there’s anything wrong . . .

    Tommy, The reason I switched to the 10 year was the hope that it would raise the 30 year bond yield. But I’m willing to concede it’s a long shot.

    Cthorm, I’m not a fan of those sorts of gimmicks.

    O. nate, Good point. The only drawback is that it’s a much thinner market.

    Mike Sax, MMTers? Say no more.

    Matt, Yes, that was truly awful, Milton Friedman is rolling over in his grave right now.

    I don’t even think he’s a monetary economist.

    Benny, The issue isn’t housing at all, it’s AGGREGATE demand.

    Matt, Good point about Iceland.

    Ben, That’s right.

  47. Gravatar of ssumner ssumner
    25. July 2012 at 17:08

    Doug, You responded:

    “His basic argument, Doug, is this. He doesn’t think MM can create inflation. But if it can he thinks that it would actualy hurt the poor, unemployed etc. because the rise of wages would be much slower than other rising prices.”

    Yes, I agree, he is correct.

    He’s confusing hourly real wages with annual real income. Monetary stimulus reduces hourly real wages and raises annual real incomes.

  48. Gravatar of Jim Glass Jim Glass
    25. July 2012 at 17:52

    The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.

    Terrible idea. This type of thing has a long record of shifting the *timing* of purchases while stimulating nothing. In every recession they temporarily increase depreciation and create temporary equipment-purchase tax credits with a result that is 10-1 shift-to-stimulus. The home purchase tax credit of a couple years back was a dramatic, awful example to avoid.

    I think we all know that temporary steps of any kind not tied to meeting any specific target, and which everyone knows will be withdrawn after a period of time, aren’t going to produce much good.

    I’d suggest Bernanke say something more like this:

    “We at the Fed have decided to finally heed our double mandate regarding price stability and employment. To be transparent to the markets (and politically accountable) while doing so, we of course must have specific mandate targets to meet and relate them to the public.

    “Thus, we are announcing a unemployment-level mandate target of (say) 6%, consistent with our estimate of NAIRU, and a price stability target of 2% CPI inflation expectations going forward, as measured by the five-year TIPS-Treasuries yield spread, currently 1.7%.

    “(We use this spread because market expectations are far more important for future economic activity than the lagged recent CPI from a couple months ago, and much less subject to distortion from short term supply/price shocks).

    “We currently are below target by both measures, but much more so by the unemployment measure, which means we are logically compelled to ‘give’ a little on the price stability target until the differences equalize.

    “Thus, from now forward the Fed will be buying (something, anything, everything) as needed until the five-year TIPS-Treasuries yield spread reaches 2.75%. That spread will be maintained permanently until unemployment falls below 7%, after which it will be gradually reduced to 2%.

    “As this 2.75% expectation of future CPI inflation is *less* than actual 25-year 1/1983-1/2008 average inflation rate of 3.2%, worries that this will cause inflation expectations to become ‘unmoored’ are implausible — in fact, it will reduce inflation expectations from the 25 years of the ‘great moderation’.

    “This policy is permanent. Future actions will be announced in accordance with how they may be needed to meet these mandated specific policy targets.”

  49. Gravatar of Matt Waters Matt Waters
    25. July 2012 at 18:06

    “That is a pure transfer from saver to debtor. Depending on your political leanings that could be acceptable behavior, or it could be theft.”

    This is true for the converse as well: deflation is a transfer from debtor to creditor.

    Actually it isn’t true that inflation or deflation is a transfer from debtor to creditor. Instead UNEXPECTED inflation or deflation becomes a transfer between the two parties.

    For example, if an investor put their money in a bond, it wasn’t news to them that there would be inflation in the future. Therefore, they expected money tomorrow that at least had the same real value as money today. Otherwise they would lose real wealth and they would have more real wealth from going ahead and spending it today. For various reasons, real rates can go negative, but in general interest rates follow future expected inflation.

    Therefore, inflation in and of itself is not an immoral transfer from creditors to debtors. Rather, a central bank shouldn’t play favorites. As long as it truly targets a certain inflation level increase, then neither creditors or debtors will receive more real value in interest payments than they expected.

    NGDP targeting, vs. price level targeting, would have some unexpected inflation and deflation, but in general they would be tamer than the large deflation experience 2008-2009. The inflation/deflation changes would be worth reducing unemployment due to a possible supply-side shock.

  50. Gravatar of Morgan Warstler Morgan Warstler
    25. July 2012 at 18:40

    Benny, BULLSHIT – you are a outright liar.

    the issue isn’t clearing the inventory – that system is in place, the issue is the optics.

    Guys on your team make it HARDER to just evict, sell, and rent (no bulldozing is needed you dumbass authoritarian) – even though the folks on your team being evicted do not lose anything (they have no equity), and the result is they pay less for the same house as a rental.

    If you REALLY wanted to see this happen, then 4 years ago, you would have been clanging the gong amongst liberals telling them to get the evictions OVER WITH.

    Heel dragger laments we aren’t China.

    Pure genius Benny. Pure Genius.

  51. Gravatar of ChargerCarl ChargerCarl
    25. July 2012 at 21:27

    So I saw a bunch of paul bots ecstatic over that “audit the fed” bill that passed the house. Anyone have any opinions on that? I’m not really sure what it is.

  52. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 22:01

    Now that we’ve run through some structural distributionary features of the US economy, back to the market monetarists. What does all this mean? Well, it seems that although fiscal deficits by the US government are indeed propping up the economy and ensuring that those that have jobs can continue to remain employed, they are also covering up growing macroeconomic structural imbalances. Because there are such wide deficits and because these support corporate profits, companies have been able to suppress real wage growth and this has not significantly affected demand for their goods and services. So, if the market monetarists had their way and provoked added inflation in the economy it is clear that this would not necessarily result in real wage growth to match said inflation. The labour market is extremely slack at the moment and, as Roberts has shown above, employers are using this opportunity to supress real wages below trend. If a burst of inflation shot through the system there seems no reason to assume that real wages could keep pace. Much more likely that they would fail to rise and living standards would fall. And as people needed to use more of their income to buy fewer, higher-priced goods and services this would also lead to lower economy-wide demand.

  53. Gravatar of Shane Shane
    25. July 2012 at 22:34

    Anyone catch this Krugman gem from his sticky wage post: “On the contrary, for the US (though not for countries like Spain), wage stickiness is if anything good for us right now, helping stave off destructive deflation.”

    So wage stickiness is good because it prevents deflation, which is bad because of wage stickiness. Argh! I’m as lefty as they come, but I can’t read Krugman half the time these days. That’s quite an accomplishment, ruining Krugman for a lefty! Congrats in order to Dr. Sumner. Now if the Fed will just commit to open ended QE.

  54. Gravatar of Saturos Saturos
    25. July 2012 at 22:35

    MF, how did you post that link?!

  55. Gravatar of Saturos Saturos
    25. July 2012 at 22:38

    Shane, Krugman is probably the most economically literate “lefty” in the world. (And less lefty for that – cold understanding of economics destroys a lot of the naked fear of capitalism.)

    Krugman has been saying things that he knows better than (on trade, for instance) for ages now. Perhaps pay some attention to his “righty” critics on occasion, if you ever feel like playing “spot the contradiction” (I think Boudreaux has the high score).

  56. Gravatar of Saturos Saturos
    25. July 2012 at 22:40

    Scott, no, that wasn’t a Frank Ocean moment from me (brilliant album, btw, even Tyler likes it).

  57. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 23:41

    Saturos:

    MF, how did you post that link?!

    Like this.

  58. Gravatar of Major_Freedom Major_Freedom
    25. July 2012 at 23:47

    Saturos:

    I usually don’t put in the

    target=”_blank”

    I usually put in the > symbol right after the w3schools.com” like this:

    w3schools.com”>

  59. Gravatar of Saturos Saturos
    26. July 2012 at 00:14

    Thanks MF.

    Tragic realization – Scott, the Wikipedia article on you does not mention level targeting. Not once. It goes on about NGDP and nominal income, all well and good (though I think the clearest concept is nominal spending) but no mention of level targeting. Now, my edits on Wikipedia always get reversed, so I think this just shows that you need to publish more posts and articles on level targeting as the most important desired change to the policy framework. I can understand why you didn’t earlier; level targeting was a relatively mainstream idea, NGDP is more exotic and has more brand value. But I’m not sure that many people understand that the main argument for NGDP targeting per se is purely political. From a technical perspective, as you know, level targeting is more important. But the public (those that have heard of you) still haven’t got the message. The test of whether it’s gotten through to your wider readership is that Wikipedia page, as far as I’m concerned.

    PS OK the market monetarism page talks about targeting the level of nominal income. But the blue highlight is on “nominal income”, I doubt any of the other readers of that page understand the importance of “level”.

    PPS OK your article does say level once, “Sumner advocates that central banks such as the Federal Reserve create a futures market for the level of nominal gross domestic product…”. But again there are so many other things in that sentence. It’s hard to infer from that alone that in fact the impact of explicitly targeting levels dwarfs the impact of all the other factors.

  60. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. July 2012 at 01:33

    “We at the Fed have decided to finally heed our double mandate regarding price stability and employment. To be transparent to the markets (and politically accountable) while doing so, we of course must have specific mandate targets to meet and relate them to the public.”

    Jim,

    I agree with your post; however, the use of the term “politically” in the above-quoted parenthetical was an unfortunate choice of words and, I think, inconsistent with the substance of your proposed policy statement. Although laws are the result of politics, they are not the same. You should replace “politically accountable” with “legally accountable”. This is also, to some extent, the distinction between a short-term and long-term policy focus.

    This is not merely a word quibble, it is an important point that touches on a few themes discussed in a few recent posts, so I’m going to digress a bit—maybe a lengthy bit. Scott says he’s a pragmatist, but to be a good pragmatist you’ve also got to be a realist. The reality is that there is an increasing trend to subject Fed policy to politics from the outside. Yet, the very existence of the Fed was to ensure this would not be so. FOMC members are going to have their political biases to be sure””they’re human; however, I think the biggest threat to Fed policy is the attempt to insert political pressure from the outside. Every time Bernanke goes to Congress, picks up the paper, listens to the news, or even reads the blogs, he’s subject to these external political pressures. Unfortunately, I see the same trend with respect to the Supreme Court, the very existence of which was predicated on its independence. I find these trends very disturbing, not only for those institutions, but also for the government as a whole. Here, the drive to make the Fed “accountable” coming largely from the right can often be translated to “accountable to (our) politics”.

    Having read this blog for some time, I’m convinced that Scott is not mainly motivated by politics, but by a desire to be seen as technically correct. But, when he has a technical debate with the likes of Paul Krugman, it is not a mutual technical debate about (non-normative) economics. Krugman will agree with Scott anytime doing so is consistent with his desire to have the Fed pursue a policy to maximize employment (or redistribute income, or both). Many on the right would agree only if it is consistent with the desire to stabilize prices and have a strong dollar. PK’s blog is not called “The Conscience of a Liberal” rather than the “The Reason of an Economist” by accident (of course, the left think they are more rational; but the right think the same of themselves. Here, though, the self-defined characteristic is a superior conscience). When policy is politically motivated, the natural bias is to the short-term. As a result, you get misguided proposals such as the one put forth by Ezra Klein.

    While this is a problem from both sides of the spectrum, I sense that Scott’s relatively a-political approach is much more consistent with someone like John Taylor. Taylor is, to be sure, a conservative and a partisan. However, Taylor advocates one thing above all that I view as consistent with reducing the effect of short-term politics on policy and also with NGDP targeting: he favors a rule-based monetary policy that is relatively free of discretion. I get the sense that while Taylor would like this to be his rule, it is more important to him that there be a rule, period. With a dual mandate, Fed policy is nothing more than a political football game with each side trying to advance its mandate further up opposite sides of the field. The point is not to score a goal, because goals can’t realistically be scored, but to advance the ball and perhaps get a first down. Thus, no one knows where the ball is going in the short run, much less the long run, and it is constantly changing direction. This is not what an economy needs.

    I’m still somewhat on the sideline as far as NGDP targeting is concerned; however, the point, to make myself perfectly clear, is that I believe one of selling points of NGDP targeting, which has not been given sufficient attention here, is that it could be such a rule that is not only consistent with the existing mandates, but that could then help remove short-term politics from the game. As a result it would focus us more on longer-term objectives, increase transparence and predictability, and thereby improve the overall functioning and performance of the economy—for the good of everyone. For me, at least, having a good rule rather than a perfect rule may be better than no rule at all.

  61. Gravatar of Michael Michael
    26. July 2012 at 02:36

    “That is a pure transfer from saver to debtor. Depending on your political leanings that could be acceptable behavior, or it could be theft.”

    The Fed created this crisis in large part by enabling massive redistribution of wealth FROM DEBTOR TO CREDITOR. See this explanation from Steve Waldman:

    http://www.interfluidity.com/v2/3359.html

    “It is fairly obvious, then, that restraining prices in the face of a supply shock effects a transfer from debtors, taxpayers, and marginal workers to creditors and secure workers. A policy of price restraint is a form of insurance for creditors and secure workers, who are absolved of the risk that the purchasing power of their nominal assets will suffer an unforeseen decay. It is financed with a guarantee written by debtors, taxpayers, and marginal workers, who are put at risk by the policy.”

    In 2008, the Fed chose not to offset the contraction driven by rising oil prices. Today, they may be poised repeat this mistake by not offseting the contraction driven by rising rents (30-40% of headline and core CPI) and rising food prices (drought).

    It’s funny how those who get up in arms over redistribution of wealth don’t complain much when they are on the receiving end.

  62. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. July 2012 at 03:07

    “”That is a pure transfer from saver to debtor. Depending on your political leanings that could be acceptable behavior, or it could be theft.”

    “It’s funny how those who get up in arms over redistribution of wealth don’t complain much when they are on the receiving end.”

    Yes, but I could not think of a clearer example of how monetary policy has become mostly about politics—aka “whose ox is gored”— rather than long-term economic policy.

  63. Gravatar of Victor Matheson Victor Matheson
    26. July 2012 at 03:30

    Shane,

    Typically, deflation is considered bad because debt balances are “sticky” not because wages are sticky. Wages fall but mortgage payments don’t. Thus, in a balance sheet recession a case can be made that sticky wages that prevent labor market adjustments might be a good thing. Not sure I completely buy that argument, but I don’t think it is obviously crazy or logically unsound.

  64. Gravatar of StatsGuy StatsGuy
    26. July 2012 at 03:52

    Klein’s proposal aside, a really interesting thing just happened this morning…

    Draghi gave a speech implying QE, and the value of the Euro SPIKED UP.

  65. Gravatar of Michael Michael
    26. July 2012 at 04:48

    “Yes, but I could not think of a clearer example of how monetary policy has become mostly about politics””aka “whose ox is gored””” rather than long-term economic policy.”

    True, but this fact alone is not a justification for any given policy.

    Under a NGDP level target, this is less of an issue. Monetary policy will not tighten due to adverse supply shocks (or loosen due to positive shocks), inflation will be controlled over the long term, and lower than expected inflation (which favors creditors) would be offset by higher than expected growth (which favors everyone).

  66. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. July 2012 at 05:03

    “True, but this fact alone is not a justification for any given policy.

    Under a NGDP level target, this is less of an issue…. ”

    I think we agree. And this just confirms the point made in my post at 0:133.

  67. Gravatar of Becky Hargrove Becky Hargrove
    26. July 2012 at 06:07

    Vivian,
    A few thoughts about the ‘good’ rule: you added perspective as to what was so good about Taylor’s rule in the first place. NGDP level targeting appeals to some of us because we ‘like’ balancing and equilibrium, or weighing the whole and not just some of its parts. The whole or partial factor (what to emphasize?) is also equivalent to this post..is the Fed responsible for everything, or nothing but a rule? (an aside, probably there is no dual mandate with NGDPLT)

    Nick Rowe did a post the other day that might help (I’m not great with links) “How Many Monetary Transmissions Are There?” Here’s Nick: “So why are so many monetary economists fixated on just one of the millions of possible monetary transmission mechanisms? One which starts from the nominal rate of interest on very short term loans between banks? Aren’t they being just a little narrow minded by looking at only one, when there are millions?” The commenter Ritwik gave further clarification as to this transmission mechanism and here I’ll just summarize a little of what he added: Focus on any single element, no matter how important and someone is going to find a way to take advantage of that. For me, NGDP as representative of the whole makes it a bit more difficult to game.

  68. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2012 at 07:34

    Ok, that’s it, enough noise out of you folks about wealth transfers…

    MONEY and MONETARY POLICY is NOT a Social Good.

    It exists with a DEFAULT assumption of LESS LONG TERM INFLATION is good in and of itself precisely because money and monetary policy exists for:

    PEOPLE WHO HAVE MONEY. The people who have worth and value, not the lower marginal utility employees.

    For christ’s sake WHEN and HOW did you all jump from where money comes from – a few kick ass bastards have acquired lots of stuff, resources, and want to trade and protect their stuff…

    … to hey we all count equally when it comes to money?

    The folks with the gold make the rules.

    If you don’t start with this assumption, you will be CONSTANTLY banging into reality.

    Accepting this fact doesn’t hurt the debtors, or the zero marginal utility workers, or the bottom half – it HELPS THEM.

    Because it gets you inside the box of what is actually politically and organically possible, and gets you to create sustainable ongoing policies.

    Assume a beggar, assume he can’t be a chooser… THEN figure out the best kind of policy that will make the donor, the charitable FEEL MOST LIKE aiding the bottom.

    If you don’t start with this mindset and then approach money and government, you create the kind of mess we are in.

  69. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2012 at 07:38

    Note: this is WHY Scott’s strongest argument is the one Evan glommed on to right away but most of you pay no attention to.

    Scott’s strongest argument is that going back tot eh Depression, if we ran 4.5% NGDPLT, 78% of the time we would be calling for TIGHTER MONEY.

    This indicates that over time under his plan we will have LESS INFLATION.

    Get over it boys and girls, HELP DEBTORS by forcing them to KNOW that yes there will be a crawl of inflationary forces, but it won’t come riding to your rescue.

  70. Gravatar of Vivian Darkbloom Vivian Darkbloom
    26. July 2012 at 08:46

    “The whole or partial factor (what to emphasize?) is also equivalent to this post..is the Fed responsible for everything, or nothing but a rule? (an aside, probably there is no dual mandate with NGDPLT)”.

    I think I get the gist, and if I do, your parenthetical is really not an aside. If I understand it, NGDPLT is designed so that both sides of the mandate should be satisfied even if the “rule” is not targeted to either side. Thus, it would satisfy the dual mandate without explicitly mentioning either. Whether it is a “dual mandate” or a single mandate that satisfies both concerns is mostly a semantics issue.

    I’ve often wondered whether NGDPLT would require a new statutory mandate. Perhaps not, but the political challenge of getting it adopted one way or the other is likely to convince those who do favor one or the other side of the current mandate to be comfortable their preferences will be adequately accomodated. I think it would be preferable if the statutory mandate would be changed. It would be interesting to hear from Scott as to what such a new mandate might look like if he were to have his way. He may have written about that before, but I’ve never seen it. By the way, a “rule” would not necessarily completely eliminate Fed discretion, but merely limit it as compared with the status quo. This is consistent with Taylor’s recent writings on the subject.

    In many ways the divide on monetary policy reminds me of the current political standoff on tax policy. With respect to the latter, there will have to be a grand compromise where each side is comfortable that their preferences will be adequately met, but that compromise keeps getting delayed because each side unrealistically thinks it can win the war. In the meantime, we all lose. The same is true with monetary policy except that perhaps we can continue to muddle along with minor skirmishes in good times and an out-and-out free-for all in times of crisis. I would prefer that we settle with a grand compromise setting a rule that will establish a truce, if only for a while.

  71. Gravatar of Full Employment Hawk Full Employment Hawk
    26. July 2012 at 09:06

    “If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume “” Of Money. What better way to distinguish market monetarism from old-style monetarism””V matters too!”

    Which is why “Variable Velocity Monetarism” would be a better term for it than “Market Monetarism.”

    David Hume was a monetary genius. He was way ahead of not only conventional monetarism, but of the New Classical Economics. The New Classical models of the business cycle (and this includes Lucas) used a single price level that was perfectly flexible and therefore changed instantaneously. When applied to any real world economy, that not only implies that prices are perfectly flexible and change instantaneously, but (when there is a price level change) that all prices change simultaneously. One should not be surprised that such models fail when applied to real world economies in which prices not only change gradually, but, even more important, change SEQUENTIALLY. Hume was way ahead of the New Classical economists, and, if they had listened to him, would not have wasted a lot of time and energy with these models.

  72. Gravatar of Michael Michael
    26. July 2012 at 09:33

    Sorry, Morgan, but you’re wrong.

    The goal of monetary policy should be neutrality, not favoritism towards any one group. Ideally, $1 is $1 is $1 dollar, whether that dollar is held by Bill Gates or me or by a minumum wage worker, and whether the demand for money is high (as it is today) or low (as it was in, say, 1999).

    NGDPLT is a better approach to that than our current brand of flexible inflation targeting.

  73. Gravatar of Shane Shane
    26. July 2012 at 10:08

    Saturos, I think you can be left and not necessarily anti-capitalist. I guess it all depends on what we mean by the term. Is the left a set of likes and dislikes, or a political disposition that can attach to any number of policies? I’ll have to read Boudreaux more, but to tell the truth, I have to remind myself to even read Krugman at this point.

    Victor, Krugman’s point still makes no sense even taking into account what you say. Sticky wages are bad precisely because they slow the rate of deflation when demand is declining. If wages were declining, that could reduce nominal household spending, yes, but Krugman seems to assume that these wage declines would be a result of falling demand. In such a case, spending is already falling across the board, not just for households, and deflation is a symptom of the fall, not its cause.

  74. Gravatar of Doug M Doug M
    26. July 2012 at 11:07

    ssumner,

    “He’s confusing hourly real wages with annual real income. Monetary stimulus reduces hourly real wages and raises annual real incomes.”

    That is a contradiction, but I am willing to give you…reduces hourly real wages but raises aggregate real incomes.

    Matt waters,
    “Actually it isn’t true that inflation or deflation is a transfer from debtor to creditor. Instead UNEXPECTED inflation or deflation becomes a transfer between the two parties.”

    agreed.

  75. Gravatar of Greg Ransom Greg Ransom
    26. July 2012 at 12:28

    Greg, Is Stockman talking about monetary policy now?

    Yes.

  76. Gravatar of Benny Lava Benny Lava
    26. July 2012 at 16:25

    Matt Waters,

    You don’t seem to understand that we already bulldoze thousands of homes a year. Why just this year I took a tour of the city of Detroit and was amazed at the surplus housing stock. Thousands of decrepit homes and apartments waiting for the wrecking ball or a Devil’s Night blaze. This is not a tragedy. This is America. This is demand and supply. What you don’t understand, and what Modeled Behavior only slowly understood, is that we overbuilt the wrong kind of housing. McMansions in the middle of nowhere. Much like Detroit, people are learning there is no demand for it at any price. Sometimes this happens in markets, where there is no price floor because there is no buyer. Didn’t you read Reminiscences of a Stock Operator?

    Anyways there is a big demand for multi family units in neighborhoods that are closer to the urban core, or easy access to that urban core. Sometimes this happens in America. It is a big country. And in a big country, dreams stay with you.

  77. Gravatar of Benny Lava Benny Lava
    26. July 2012 at 16:28

    Matt Waters,

    Apropos of our conversation is this news story:
    http://marginalrevolution.com/marginalrevolution/2012/07/i-once-suggested-this-in-jest.html

  78. Gravatar of ssumner ssumner
    26. July 2012 at 18:02

    Shane, Krugman has to know that that model doesn’t apply when the central bank is targeting inflation. So why does he keep saying that?

    Saturos, Thanks for that info, I don’t think I’ve ever actually read my Wikipedia page, other than glance at it to verify it exists. Maybe I should pay more attention. If I suggested a change I wonder how they’d react?

    Statsguy, I suppose that’s because the euro is more valuable if people don’t think it will collapse.

    FEH, I agree about Hume, but in fairness Lucas does believe that monetary shocks have real effects.

    Doug, No contradiction; hours increase.

  79. Gravatar of Mike Sax Mike Sax
    26. July 2012 at 18:22

    “HELP DEBTORS by forcing them to KNOW that yes there will be a crawl of inflationary forces, but it won’t come riding to your rescue.”

    In other words, don’t help them. Help the creditors extract every possible penny out of them

  80. Gravatar of Mike Sax Mike Sax
    26. July 2012 at 18:23

    “HELP DEBTORS by forcing them to KNOW that yes there will be a crawl of inflationary forces, but it won’t come riding to your rescue.”

    In other words, don’t help them. Help the creditors extract every possible penny out of them

  81. Gravatar of Morgan Warstler Morgan Warstler
    26. July 2012 at 19:17

    Michael,

    “The goal of monetary policy should be neutrality, not favoritism towards any one group. Ideally, $1 is $1 is $1 dollar, whether that dollar is held by Bill Gates or me or by a minumum wage worker, and whether the demand for money is high (as it is today) or low (as it was in, say, 1999).

    NGDPLT is a better approach to that than our current brand of flexible inflation targeting.”

    You are fighting with my words, not my meaning.

    I favor 4.5% NGDPLT – which 78% of time historically would have had us running TIGHTER monetary policy.

    This would have had MANY MANY positive effects.

    Now for the punchline: these effects FAVOR the creditors, the competent, etc. They do not favor public employees or the bottom half – unless you count a growing economy as helpful.

    When I say Money is for those with money it means the top half, etc.

    I say this whenever folks here who THINK Scott is their salvation, get ahead of themselves and FORGET that 78% of time – it means TIGHTER MONEY, far less inflation than we have had historically.

  82. Gravatar of Michael Michael
    27. July 2012 at 08:45

    Morgan,

    “Now for the punchline: these effects FAVOR the creditors, the competent, etc. They do not favor public employees or the bottom half – unless you count a growing economy as helpful.”

    Absolutely I count growing (and full employment) economy as helpful.

    I’m fine with “favoring” competent creditors with low and predictable inflation (over the long term). That’s not favoritism, IMO.

    I’d rather not favor creditors with arbitrary bailouts, a 2% inflation CEILING in the face of supply shocks, and low inflation driven by a lack of demand.

    Moral hazard applies as much to creditors who make stupid loans as it does to borrowers who take them.

  83. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2012 at 09:21

    I’d rather not favor creditors with arbitrary bailouts, a 2% inflation CEILING in the face of supply shocks, and low inflation driven by a lack of demand.

    I agree as long as 78% of the time we had tighter money.

    Of course there should be no bailouts.

  84. Gravatar of Major_Freedom Major_Freedom
    27. July 2012 at 09:56

    Of course there should be no bailouts.

    What if the primary dealers purposefully reduce their lending and spending, which would reduce NGDP all else equal, so that the central bank is “forced” to buy up the primary dealers’ securities at prices that are higher than they otherwise would have been had they sold the securities in the open market without the central bank’s inflation?

    That’s a bail out, any way you slice it.

  85. Gravatar of Morgan Warstler Morgan Warstler
    27. July 2012 at 10:22

    “What if the primary dealers purposefully reduce their lending and spending, which would reduce NGDP all else equal, so that the central bank is “forced” to buy up the primary dealers’ securities at prices that are higher than they otherwise would have been had they sold the securities in the open market without the central bank’s inflation?

    That’s a bail out, any way you slice it.”

    Ding, ding, ding!

    And we have another argument for Morgan’s NGDP Futures program which puts printed money into the hands of SMB bettors.

  86. Gravatar of Major_Freedom Major_Freedom
    27. July 2012 at 10:44

    And we have another argument for Morgan’s NGDP Futures program which puts printed money into the hands of SMB bettors.

    Oops, you forgot state law number one: Only “credible”, “licensed” friends can deal directly with the Fed.

    We can’t have 300 million serfs receiving checks from the Fed, because then the whole purpose of inflation would be lost.

    If central banking was ever about helping the serfs, rather than exploiting them, then there would have been at least once attempt by the state send checks to everyone whenever NGDP fell, or whenever there was a recession.

    But for 100 years, it’s been about benefiting the banks and the treasury.

    ————

    Your idea, well, actually the futures idea is Sumner’s, is close my very old proposal, which is that given central banks exist, then for every US dollar account owner, the Fed credits their accounts the same amount at the same time.

    That is the only way to prevent “bail outs” of the type that follow from inflating only some preferred people’s bank accounts.

  87. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. July 2012 at 01:03

    John Cochrane has a very good Op-Ed today’s (published late July 27) in the WSJ arguing why we should not (and cannot) return to the gold standard. He also argues for a more rule-based monetary policy. But, get this;

    “More deeply, the history of discretionary, shoot-from-the-hip monetary policy is one misstep after another, and of turbulence induced by guessing what the Fed will do. Since the demise of the gold standard, thoughtful economists have been searching for a replacement rule””Milton Friedman’s money-growth rule, for example, John Taylor’s interest-rate rule, and inflation or nominal GDP targets.”

    http://online.wsj.com/article/SB10001424052702303918204577444270864399342.html?mod=WSJ_Opinion_LEFTTopOpinion

    Gee, that sounds awfully like my post at 0:133 am on July 26. Notice the listing of possible “rules” including an NGDP target.

    Is John Cochrane reading this blog?

  88. Gravatar of Curious Bystander Curious Bystander
    28. July 2012 at 01:53

    Cochrane – «Since the demise of the gold standard, thoughtful economists have been searching for a replacement rule»

    No doubt. Money (in its current form) is the only economic good which is not naturally scarce. So money scarcity can be only artificial. Man-made. That’s why economists are on the constant lookup of «best money scarcity» policy. One which would be both hard and accomodating.

    There was the «Follow the Philps curve» fad, the «low predictable inflation» fad, and now Scott Sumner is pushing for the “5% NGDP growth» fad.

    I’ll risk a prediction. No matter which fad will end up as the official policy, there’ll be «dissenters» considering it too tough, and not solving «their» problems by something as simple as Ctrl+P

  89. Gravatar of Saturos Saturos
    28. July 2012 at 05:40

    That really is a great article (which Scott will agree with entirely, I think).

  90. Gravatar of Vivian Darkbloom Vivian Darkbloom
    28. July 2012 at 05:44

    I now see that Cochrane has posted an un-edited version of that article at his own web site:

    http://johnhcochrane.blogspot.fr/2012/07/myths-and-facts-about-gold-standard.html#comment-form

    I subscribe to the WSJ and don’t know how easy it is to get past the pay wall if you don’t.

  91. Gravatar of ssumner ssumner
    28. July 2012 at 10:08

    Saturos, I certainly don’t support a stable price level.

    Vivian. I was the one who sold Cochrane on the futures targeting approach.

    But via email, not by him reading this blog.

  92. Gravatar of Triathlon Australia Triathlon Australia
    11. September 2012 at 06:42

    We all get into trouble when government focuses on stimulating a particular sector of the economy. It’s funny how some people never learn that lesson and are anxious to jump right back into the problems from the past.

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