Hawks try to rewrite history

LK Beland pointed me to a new Lars Svensson post, which demolishes the Riksbank’s defense of its tight money policy:

In an interview in Bloomberg, Riksbank Deputy Governor Per Jansson again tries to defend the indefensible, the Riksbank’s sharp tightening of monetary policy in the summer of 2010. From the summer of 2010 to the summer of 2011, the Riksbank majority increased the policy rate from 0.25 percent to 2 percent.

The increases “from 0.25 percent in the summer of 2010 up to 2 percent in the middle of 2011 was really mostly about normal things that central banks look at,” given that growth at the time was about 6 percent, inflation was around 2 percent and household credit growth was about 9 percent, [Jansson] said. “There were really, in real time, no comments suggesting that it would be a stupid idea to increase the interest rate.”

But in real time, the Riksbank’s inflation forecast was below the inflation target and unemployment and the unemployment forecast were far above the Riksbank’s estimate of a long-run sustainable rate. In such a situation, easing, not tightening, is the right policy, since it shifts the inflation forecast up and closer to the target and the unemployment forecast down and closer the long-run sustainable rate. It thereby leads to better target achievement. Since tightening instead leads to worse target achievement, it is indefensible. My colleague in the Execeutive Board, Karolina Ekholm, and I indeed dissented from this tightening policy with very clear and logical arguments, namely that easier policy would in this situation lead to better target achievement.

Jansson’s claim of no opposition is extremely misleading, to put it mildly. It’s public knowledge that there was strong opposition to excessively tight money in Sweden by 2011.  The hawks were explicitly ignoring the Riksbank’s legal mandate, and several Riksbank members were pointing that out.  Here’s what was actually happening in 2011:

Ingves hire help to explain the rise in interest rates

Riksbank Governor Stefan Ingves interest rate increases has been questioned by everyone from finance minister to bank forecasters.

Express can today reveal that he hired a star consultant to defend the interest rate increases.

Cost: 140 000.

Riksbank Governor Stefan Ingves has been under fire recently.  Internally, the Bank, he has met with resistance by the so-called doves – Lars EO Svensson and Karolina Ekholm – who time and again expressed its reservations about interest rate hikes and sharp interest rate forecasts.

So the criticism of the hawks was so strong that by 2011 they were hiring a consultant to defend themselves against the dissents of several members of the Riksbank, including Lars Svensson.

For years the hawks have been telling me that monetary stimulus would lead to high inflation.  Now that they’ve been proved wrong, the new strategy is to say, “who could have known that we weren’t doing enough monetary stimulus?” Pathetic.

PS. Who could have known?  The market.


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13 Responses to “Hawks try to rewrite history”

  1. Gravatar of Ray Lopez Ray Lopez
    18. March 2015 at 12:31

    Well the Swedes in 1992 or so had a financial crisis, and as I recall, ‘cured’ it through austerity. So the “hawks” were right.

  2. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 15:19

    On the less dark / kind of bright side, at least Sweden will, if it occurs, undergo a milder correction in the near future, than a more painful correction in the further future.

    Back in the US, the next correction we will experience will be less worse because of the mild deflation 2008-2009, than it otherwise would have been had the Fed followed MM advice.

    The doves are always wrong.

  3. Gravatar of benjamin cole benjamin cole
    18. March 2015 at 15:22

    In the United States, when $4 trillion of quantitative easing did not lead to inflation, a new misleading description of QE was created: “QE is only a swap of reserves for bonds.”

    The fact that bond-sellers (those who sold bonds to the Fed) have $4 trillion in digitized cash—in addition to the $4 trillion in reserves created, and placed by the Fed into commercial bank accounts of the primary dealers—becomes very obscure.
    Indeed, I wonder if some prominent economists even understand the mechanics of Fed operations, so often and easily is it chirped, “QE was just a swap of reserves for bonds.”

  4. Gravatar of Major.Freedom Major.Freedom
    18. March 2015 at 15:25

    Benjamin Cole:

    “In the United States, when $4 trillion of quantitative easing did not lead to inflation, a new misleading description of QE was created: “QE is only a swap of reserves for bonds.”

    Sorry to ask this, but have you actually looked at the data? Stock prices? Bond prices? Asset prices? Commodity prices?

    Did not lead to inflation? Say what?

    Since when was the only price effect of money printing higher prices of cheese and t-shirts?

  5. Gravatar of dtoh dtoh
    18. March 2015 at 15:30

    Benjamin Cole,
    As I have said often, monetary policy works through the exchange of financial assets by the non-banking sector for real goods and services.

  6. Gravatar of ssumner ssumner
    18. March 2015 at 15:36

    Ray, Yes, the fiscal hawks were and are right. But the monetary hawks . . . .

    Oh I forget, it’s Ray, who doesn’t know the difference.

  7. Gravatar of In Sweden hawks hide behind consultants | Historinhas In Sweden hawks hide behind consultants | Historinhas
    18. March 2015 at 16:31

    […] Scott Sumner links to a Lars Svensson post which comes hard on the hawks at the Riksbank, starting with its Governor Stefan Ingves (who hired an outside consultant to justify the wrong moves he advocated). […]

  8. Gravatar of flow5 flow5
    18. March 2015 at 17:19

    It’s more pervasive than you know. Dr. Richard Anderson re-wrote Volckerism. That’s why I visit the local branch to obtain statistics from each Bulletin when constructing a time series. The truth has been revised away.

  9. Gravatar of Ray Lopez Ray Lopez
    18. March 2015 at 20:05

    @ssumner – ah, I see, you are claiming Sweden’s early 90s recovery from the bank problems was fiscal not monetary? Fair enough, though I posit indeed Keynes and Freedman are flip sides of the same coin, though intuitively, much as I hate to admit it, Keynes seems to have the stronger medicine for times like these: if people hoard money, and there’s unemployment, indeed the government can spend more freely. But that assumes the government has a surplus to spend from, which it does not.

    Professor I would like to see your take on my original analysis (but I’ve seen others suggest the same thing, without the word narrative) found at Brilliant Krugman, dumb leftists – Ray Lopez 16. March 2015 at 05:23, which proves the Volcker Fed did not ‘break the back of inflation by raising rates’ back in the early 1980s. In fact, the Volcker Fed yo-yo’d and inflation at times went the opposite direction to the raising of rates (when rates raised, rate of inflation dropped, and vice versa). Proving once again the Fed has no power over the market, much as people think otherwise, except for a few days.

    PS–stock market rallies yesterday afternoon…in response to Fed…why? Topic for another post?

  10. Gravatar of Ray Lopez Ray Lopez
    18. March 2015 at 20:12

    Sumner is a genius, in his own way. I once visited SeaWorld San Diego, and talked to one of the employees there. They told me a woman employee who had done the impossible: made sharks perform in unison. Sharks are more independent than cats, and ‘herding cats’ is much easier than this. But after she died, nobody could figure out how she did it and the program she developed sadly died with her. I think of this when Sumner explains something in his authoritative style, that nobody else (including fellow economists like T. Cowen, P. Krugman, those UK Brits) seems to understand. Maybe Sumner is right, but is like that shark woman, and nobody can figure out how he does it.

  11. Gravatar of ssumner ssumner
    19. March 2015 at 05:49

    Ray, You said:

    “In fact, the Volcker Fed yo-yo’d and inflation at times went the opposite direction to the raising of rates (when rates raised, rate of inflation dropped, and vice versa). Proving once again the Fed has no power over the market, much as people think otherwise, except for a few days.”

    You’ve never heard of the liquidity effect?

  12. Gravatar of LK Beland LK Beland
    19. March 2015 at 05:52

    Full disclosure: I read it on Krugman’s weblog first.

  13. Gravatar of Ray Lopez Ray Lopez
    21. March 2015 at 21:37

    @ssumner – re liquidty effect: http://www.federalreserve.gov/pubs/feds/2009/200925/200925pap.pdf (“Whether short-term interest rates change in response to a change in the money supply is a perennially debated issue”) – the fact that this is a “perennially debated” (i.e., not settled) issue should give you a clue that it’s not yet a law of nature. The paper btw discusses both long and short term effects, so don’t just say it’s the long term. Why are my comments not going through? You moderating me now?

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