In 2008 things were “really bad.”

We are making progress.  Here’s SF Fed president John Williams sort of admitting that market monetarism was needed in 2008:

If the United States were hit by a new economic shock, the Federal Reserve could look for new ways to ease policy including targeting pre-crisis economic growth, San Francisco Fed President John William said.

But such a strategy, known as nominal GDP targeting, is not currently his preferred strategy, he told reporters after a speech here.

“Only if things are really bad” would he be looking at such an “outside-the-box policy,” Williams said.

“Right now we are sticking with this tried and true approach, which is keeping inflation near 2 percent, not letting it get too much higher, not letting it get too much lower,” he said.

I often argue that interest rate targeting works well except when it’s really needed; in a deep recession when nominal rates fall to zero.  I suppose the same is true of inflation targeting.  It works fairly well unless things are really bad.  But shouldn’t we have a policy instrument and a policy goal that are especially well-suited for a policy environment where we most need them to work?

HT:  Christopher Mahoney


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13 Responses to “In 2008 things were “really bad.””

  1. Gravatar of marcus nunes marcus nunes
    17. October 2012 at 17:21

    Williams confirms my view that the “magical 2%” is a big restraining factor. Again, the inflation picture over the crisis is relevant:
    http://thefaintofheart.wordpress.com/2012/10/17/inflation-in-all-shapes-sizes-and-for-every-taste/
    In other words, the “price stability” part of the mandate rules absolutely!

  2. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 18:36

    It is precisely when inflation is “most needed” that it intensifies the prolongation of true recovery.

  3. Gravatar of Bonnie Bonnie
    17. October 2012 at 18:38

    I agree. The point of policy choices should be to keep things from getting “really bad” – an ounce of prevention is worth a pound of cure. I’ve wondered every time I heard that line over the last few years, ‘we’ll ease more if things get really bad’, just how bad things have to be. Maybe 15-20% U-3 instead of 8-10%?? I suppose this Williams guy doesn’t understand that he just demonstrated a taste for shoe leather.

  4. Gravatar of Saturos Saturos
    17. October 2012 at 20:14

    “…not letting it get too much higher, not letting it get too much lower”

    Except of course when they allowed nine months of deflation in 2009.

  5. Gravatar of Saturos Saturos
    17. October 2012 at 20:15

    “…not letting it get too much higher, not letting it get too much lower”

    Except of course when they allowed nine months of deflation in 2009.

  6. Gravatar of Saturos Saturos
    17. October 2012 at 21:23

    Scott, where is this happening??!!
    https://twitter.com/DavidBeckworth/status/258698698966577153

  7. Gravatar of Saturos Saturos
    17. October 2012 at 21:23

    David also says this about you: https://twitter.com/Kelly_Evans/status/258695081408741378

  8. Gravatar of Saturos Saturos
    17. October 2012 at 21:25

    Kelly Evans has come a long way in just a year. Wish everyone was as open-mindede.

  9. Gravatar of Saturos Saturos
    17. October 2012 at 21:34

    Central Banking: Chuck Norris or Diego Maradona? (HT David Beckworth – I didn’t realize Britmouse was on Twitter)

    http://uneconomical.wordpress.com/2012/10/17/money-remains-at-the-heart-of-the-transmission-mechanism/

  10. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 22:27

    Bonnie:

    I agree. The point of policy choices should be to keep things from getting “really bad” – an ounce of prevention is worth a pound of cure. I’ve wondered every time I heard that line over the last few years, ‘we’ll ease more if things get really bad’, just how bad things have to be. Maybe 15-20% U-3 instead of 8-10%?? I suppose this Williams guy doesn’t understand that he just demonstrated a taste for shoe leather.

    Doctors don’t treat drug addicts by targeting/planning their withdrawal symptoms. The withdrawal symptoms are an unfortunate side-effect that are a part of the recovery process.

    You are assuming viciousness on the part of the “austerity” crowd when some of them (surprise) want to make people better off in the long run.

    Things are not bad in depressions, they are bad in the booms. You can’t equate feeling bad with bad health. In some instances, feeling bad is a good thing. If pleasure and pain really were the only thing that mattered, then why don’t you advocate that everyone start doing whatever feels good, no matter what it is?

  11. Gravatar of Saturos Saturos
    17. October 2012 at 22:45

    Kenneth Arrow still believes in liquidity traps: http://econospeak.blogspot.com.au/2012/10/arrow-v-taylor-debate-at-stanford.html

  12. Gravatar of Major_Freedom Major_Freedom
    17. October 2012 at 23:09

    Kenneth Arrow doesn’t think the Fed sending checks to non-lending institutions (banks) is a feasible policy.

  13. Gravatar of ssumner ssumner
    18. October 2012 at 05:06

    Saturos, Thanks, the Maradona analogy is a great one.

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