Hidden in plain sight

I don’t know how to directly post Youtube videos yet, so please play along and click on the link below.  Before watching the one minute video, please pay close attention to the instructions—you are to count only the number of times the three people wearing white pass the ball.  Ignore the three people wearing black.  Pay close attention, as the action moves along at a good pace.


If you have watched the video, you may be wondering what it has to do with monetary policy.  The three people in white represent the banking crisis, and also the efforts by Congress, the adminstration and the Fed to solve the problem during September-December 2008.

The other visitor who wanders into the picture represents the Fed’s passivity in the face of sharply falling NGDP expectations during late 2008.  I’d guess 99% of economists focused on he banking crisis and overlooked this important event.  Only the very few who are singlemindledly obsessed with looking for gor . . ., I mean looking at NGDP growth expectations as an indicator of the stance of monetary policy, actually noticed the problem.  By 2010, however, many economists noticed the “800 pound gorilla in the room.”

HT:  Lorne Smith



20 Responses to “Hidden in plain sight”

  1. Gravatar of Guy Guy
    24. February 2011 at 12:30

    Here is the embedded movie code. Not sure if your comments allow for it…


  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2011 at 12:43

    Perhaps that’s because the correct analogy is that the financial crisis was the elephant in the room and that trumps a gorilla. Or another way of putting it is that “the squeeky wheel gets the oil” even as the other wheels are falling off so the car goes through the rail and off a cliff. (I know, you’re wondering about now how many mixed metaphors I can squeeze into one comment. I’m not sure.)

    P.S. See if you can spot the elephant(s):


  3. Gravatar of Jonathan M. F. Catalán Jonathan M. F. Catalán
    24. February 2011 at 13:28

    What about those who just don’t agree with a specific suggested monetary policy?

  4. Gravatar of Selective Attention | Economic Thought Selective Attention | Economic Thought
    24. February 2011 at 13:32

    […] HT Scott Sumner […]

  5. Gravatar of marcus nunes marcus nunes
    24. February 2011 at 13:41

    I´m not very optimistic about economists noticing the “Gorilla in the room”. This is from Bullard:
    He said that a very accommodative policy for too long could risk spurring inflation in the U.S., which is currently low. Global inflation though could drive U.S. prices higher or cause other problems, he said.
    Or yesterday from Plosser:
    “Should economic prospects continue to strengthen, I would not rule out changing the policy stance to bring QE2 to an early close,” Federal Reserve Bank of Philadelphia President Charles Plosser said. “If the growth rates of employment and output begin to accelerate or if inflation or inflation expectations begin to rise, then it may be time to begin taking our foot off the accelerator,” he said

  6. Gravatar of Scott Sumner Scott Sumner
    24. February 2011 at 14:28

    Guy, What is movie code?

    Mark, Great video. Thanks.

    Jonathan, If they don’t agree with my proposed monetary policy, then they are wrong.

    Marcus, Regarding Bullard, I thought the entire point of QE2 was spurring more AD, and hence spurring more inflation, because it was too low.

    Those quotations are very depressing.

  7. Gravatar of W. Peden W. Peden
    24. February 2011 at 16:06

    Hmm, I was 1 off the correct number of passes, despite noticing the gorilla. That’s consistent with my usual performance: excellent peripheral vision, bad maths.

    Anyway, the metaphor is excellent. However, to excuse economists a bit, the banking crisis was at least a causal factor behind the economic crisis in 2008, even if it wasn’t the proximate cause.

  8. Gravatar of Doc Merlin Doc Merlin
    24. February 2011 at 19:45

    I don’t see how you can separate the two, they are part and parcel of a credit crisis as laid out by Reinhardt and Rogoff and what happens in the Taylor cycle.

  9. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2011 at 19:54

    Even more perplexing. You need to slow down and be more narrative for those of us who are slower than you.

  10. Gravatar of Doc Merlin Doc Merlin
    24. February 2011 at 19:56

    Er… sorry, Mark.
    I meant, that I didn’t think it was possible to separate the credit crisis from an NGDP fall. They were part of the same thing.

  11. Gravatar of david david
    24. February 2011 at 20:10

    Guy was referring to the HTML code used for embedding Youtube videos. It’s this:

    <object width="480" height="390"><param name="movie" value="http://www.youtube.com/v/vJG698U2Mvo?fs=1&amp;hl=en_US&amp;rel=0"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/vJG698U2Mvo?fs=1&amp;hl=en_US&amp;rel=0&quot; type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="480" height="390"></embed></object>

    (your comment system doesn’t sllow previewing, so I don’t know whether it’ll show up correctly)

  12. Gravatar of dirk dirk
    24. February 2011 at 23:03

    Scott, do you think they were wrong in bailing out the banks? If not, then maybe we shouldn’t blame them so much for the monetary mistakes at the time — after all, the distractions were great — and perhaps it wasn’t unreasonable for Bernanke to have thought that the financial crisis was the reason for the sudden demand for so much cash (wasn’t it?) — and that fixing the banking crisis might have changed the equation in the demand for cash. So I don’t blame them for losing sight DURING the crisis, but I don’t understand why by a couple months later the Fed didn’t shift their focus to monetary policy. Perhaps calls for fiscal stimulus at that point gave them a wait-and-see attitude?

  13. Gravatar of marcus nunes marcus nunes
    25. February 2011 at 06:05

    There is a great commotion about the oil price rise and how Central Banks have to tighten, etc. This is from the abstract of Bernanke et al 1997:
    Macroeconomic shocks such as oil price increases induce a systematic (endogenous) response of monetary policy. We develop a VAR-based technique for decomposing the total economic effects of a given exogenous shock into the portion attributable directly to the shock and the part arising from the policy response to the shock. Although the standard errors are large, in our application, we find that a substantial part of the recessionary impact of an oil price shock results from the endogenous tightening of monetary policy rather than from the increase in oil prices per se.

  14. Gravatar of OGT OGT
    25. February 2011 at 06:06

    Sumner- I don’t know if you saw this Feldstein piece on QE2, but I thought it was interesting as Feldstein points directly at the stock market:

    To be sure, there is no proof that QE2 led to the stock-market rise, or that the stock-market rise caused the increase in consumer spending. But the timing of the stock-market rise, and the lack of any other reason for a sharp rise in consumer spending, makes that chain of events look very plausible.

    The magnitude of the relationship between the stock-market rise and the jump in consumer spending also fits the data. Since share ownership (including mutual funds) of American households totals approximately $17 trillion, a 15% rise in share prices increased household wealth by about $2.5 trillion. The past relationship between wealth and consumer spending implies that each $100 of additional wealth raises consumer spending by about four dollars, so $2.5 trillion of additional wealth would raise consumer spending by roughly $100 billion….

    None of this appears to augur well for 2011. There is no reason to expect the stock market to keep rising at the rapid pace of 2010. Quantitative easing is scheduled to end in June 2011, and the Fed is not expected to continue its massive purchases of Treasury bonds after that.

    Without that increase in stock-market wealth, will the saving rate continue to decline and the pace of consumer spending continue to rise more rapidly than GDP? Will the strong economic growth at the end of 2010 be enough to propel more spending by households and businesses in 2011, even though house prices continue to fall and the labor market remains weak? And does artificial support for the bond market and equities mean that we are looking at asset-price bubbles that may come to an end before the year is over?

    I am a bit uncomfortable with implication that the Fed needs to directly target the stock market in order to induce Americans to dissave. I know we are in a ‘high correlation’ period, but an extended stretch like this seems dysfunctional for capital markets and the Fed.

    Jim Hamilton also had a good piece on recent oil price rises and the economy, indicating a .5% cut in GDP (assuming the Fed stands pat).

  15. Gravatar of OGT OGT
    25. February 2011 at 06:06

    Sorry, link to the Feldman piece:


  16. Gravatar of StatsGuy StatsGuy
    25. February 2011 at 08:03

    I have a friend in cogsci, so I’ve seen this and others before. Personally, I thought the Gorilla piece was not very impressive compared to this:


    (And we wonder why juries mis-convict black people at such a high rate due to sworn eyewitness testimony?)

    So you take two economists looking at a situation. One of them spent their life studying yellow hardhats, and – what do you know…

  17. Gravatar of mbk mbk
    25. February 2011 at 09:24

    Oh there’s worse. The latest cognitive performance news from Homo supposedly sapiens is ‘choice blindness’, a la:
    A-“Monetary policy is not effective at the zero bound”
    B-“Why do you claim it is effective at the zero bound?”
    A-“There are many reasons, and this is why I have always maintained that it is indeed effective at the zero bound”

    See for instance


  18. Gravatar of Scott Sumner Scott Sumner
    25. February 2011 at 15:35

    W. Peden, It’s too bad, my post is worthless if you see the gorilla–I didn’t.

    Doc Merlin, I hope Rogoff didn’t claim that financial crises reduce NGDP, as they certainly do not. Check out Indonesia 1997– NGDP rose strongly afterwards.

    david, Thanks, I think someone explained that to me a long time ago, but I forgot. Oh well, just one extra click–and I don’t do youtubes often.

    dirk, I think they did everything wrong. Bear Stearns should not have been saved. Given Bear Stearns was saved, Lehman should have been too. If Lehman failed, there should have been no TARP. Paulson should have told Bernanke to rescue the economy with easy money pursued “a l’outrance” (is that the French term?)

    Marcus, Thanks, I’ll use that in my next post.

    OGT, I agree with Feldstein, although I look at things from a different transmission mechanism. For instance, you said;

    “I am a bit uncomfortable with implication that the Fed needs to directly target the stock market in order to induce Americans to dissave. I know we are in a ‘high correlation’ period, but an extended stretch like this seems dysfunctional for capital markets and the Fed.”

    No, we need and I would expect more saving, not less. The point isn’t to decrease saving, it’s to increase both saving and consumption, by increasing total income. QE2 has done that, although it might well be inadequate as you say (too soon to tell.) But discouraging saving is not the solution. We need to discourage people from hoarding money. If they buy stocks, that’s another form of saving.

    Statsguy, I was impressed because I was fooled. I agree with you about juries and African Americans.

    mbk, That’s a good one.

  19. Gravatar of Tom Grey Tom Grey
    26. February 2011 at 10:59

    Scott, please continue to more clearly emphasize your analysis:
    dirk, I think they did everything wrong. Bear Stearns should not have been saved. Given Bear Stearns was saved, Lehman should have been too. If Lehman failed, there should have been no TARP. Paulson should have told Bernanke to rescue the economy with easy money pursued “a l’outrance” (is that the French term?)

    Since it agrees with me, I’m sure it’s correct!

    I think there is another gorilla in the room — all invested money is not the same, for macro purposes.
    Money invested in AAA rated securities by banks, allows those banks to expand at the (possibly excessive) leveraged ratios, while money invested in lesser rated securities can not be used by banks for their legal Tier 1 capital requirements.
    Most “housing investment” by quantity was in AAA rated products, which led to the leveraged bank expansion.
    The banking-financial-credit crisis was really inflated housing investment products crashing.

    A huge reduction in the rest of money.
    Which should have been followed by what? Had you been Fed leader, what would you have done in Sep/Oct 2008 to increase the money supply?

  20. Gravatar of ssumner ssumner
    26. February 2011 at 18:52

    TomGrey, Given want happened later, a banking crisis in early 2008 would have been much better, as the economy (worldwide) was stronger then. Given we bailed out Bear Stearns, people made plans on the TBTF assumption, so it was a mistake to lead people to believe Lehman was safe, then let it fail provoking a panic. Given it failed it would have been better to not do TARP, but rather to put pressure on the Fed to prop up the economy through something like price level targeting, or negative IOR, or massive QE. The short term banking consequences would have been worse, but the long term effects on NGDP growth would have been much better.

    The ideal is NGDP targeting, level targeting, but that’s too radical for the Fed to have done in 2008.

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