It’s the silly season

Tim Duy recently quoted Bloomberg:

European Central Bank Executive Board member Joerg Asmussen said the bank could start to raise interest rates to curb inflation if the economy picks up.

“The ECB will act when needed,” Asmussen said in a speech in Berlin today. “Like last spring when the economic outlook had improved and we started carefully raising interest rates.”  Still, inflation remains “in check” and will drop below the ECB’s 2 percent limit next year, he said.

Duy then made this comment:

I am not exactly sure that the ECB’s rate hikes last year are something to be proud of, nor would I describe the action as careful.  Those rate hikes arguably accelerated and deepened the European debt crisis, which necessitated a policy reversal in the fall and the massive ballooning of the ECB balance sheet.  One would think that the “careful” policy would have been to have not raised interest rates, thus lessening the degree of financial stress and perhaps avoiding subsequent large scale intervention.  Moreover, one has to question the success of any policy that helped trigger this unfortunate unemployment path:

I think Tim was being kind, this kind of statement is just bizarre.  Central banks absolutely hate doing embarrassing reversals.  It boggles the mind that someone could use this as a example of success.  Or am I missing something?

Matt O’Brien sent me a CNBC article showing that the Fed also has some rather strange employees:

Federal Reserve Bank of Dallas President Richard Fisher initially provided the only “No” vote on a motion before the Federal Open Market Committee at the height of the financial crisis””only to reverse his vote after an unrecorded lunch break, according to a heavily redacted transcript of Fed documents released Monday afternoon.

The vote took place during the first day of a two-day meeting of the FOMC on December 15 and 16. The subject of the vote is not revealed by the minutes released by the Fed. A large passage of the discussion prior to the vote is redacted.

The next day, however, the Fed announced a target range for the federal funds rate of 0 to 0.25 percent.

Immediately following the mystery vote, Federal Reserve Chairman Ben Bernanke requested a break for lunch.

Upon returning from lunch, Bernanke announced that Fisher had changed his mind.

That’s funny, I never knew Ben Bernanke was skilled at waterboarding.  Seriously, regional bank presidents should never, ever, be allowed on the FOMC.

Marcus Nunes found this gem in the WSJ:

Thirty-six of the 51 economists surveyed, not all of whom answer every question, say the central bank will refrain from another round of large-scale bond buying in 2012. The number who expect no action is up from 30 in the January survey.

“An entrenched upturn in growth, albeit anemic relative to history, is entering a sweet spot,” said Allen Sinai of Decision Economics. He noted that with the economy expanding at an adequate pace, the Fed should remain on the sidelines.

We have an “anemic recovery.”  But we don’t need monetary stimulus.  And why not?  Because we have an “adequate recovery.”  That seems to pretty much sum up macroeconomics circa 2012.

Here’s Arnold Kling discussing a recent talk by Bernanke:

Bernanke points out that on any given bad day on the stock market, more paper wealth gets lost than was lost in the subprime mortgage market. This poses a puzzle as to how the mortgage market problems could have had such greater effects. Some comments I would make:

1. Isn’t it interesting that the magnitude of the bailouts was greater than the magnitude of housing market wealth lost in 2007 and 2008? And isn’t it interesting that the economic collapse was much larger still in magnitude (particularly taking into account that economic activity is a flow rather than a stock)? This pattern of relative magnitudes is evidence in favor of Scott Sumner’s view that the financial crisis was an epiphenomenon in the context of an aggregate demand shock.

Sumner is the last holdout for conventional macroeconomic analysis. DeLong wants to go back to a pre-Hicksian version of Keynes, with all its deep logical difficulties (although empirically it makes for a spellbinding just-so story). Most economists, probably including Bernanke, want to wave their hands and talk about how breakdowns in the financial sector cause economic disaster.

And yet elsewhere in the piece Bernanke acknowledges exactly what I’ve been arguing.  It wasn’t just the financial crisis causing the recession, the recession also drove housing prices much lower (which obviously worsened the crisis):

On the surface, the puzzle of disproportionate cause and effect seems somewhat less stark if one takes the boom and bust in the U.S. housing market as the trigger of the crisis, as the paper gains and losses associated with the swing in house prices were many times the losses associated directly with subprime loans. Indeed, the 30 percent or so aggregate decline in house prices since their peak has by now eliminated nearly $7 trillion in paper wealth. However, on closer examination, it is not clear that even the large movements in house prices, in the absence of the underlying weaknesses in our financial system, can account for the magnitude of the crisis. First, much of the decline in house prices has occurred since the most intense phase of the crisis; the decline in prices since September 2008 is probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession. (Emphasis added.)

I’d go even further. A substantial part of the December 2007 to September 2008 decline was also due to slowing NGDP growth.



24 Responses to “It’s the silly season”

  1. Gravatar of marcus nunes marcus nunes
    16. April 2012 at 18:25

    “I’d go even further. A substantial part of the December 2007 to September 2008 decline was also due to slowing NGDP growth”.
    Right on. All attention was on the CRASH after mid-08. But Bernanke was “missing the beat” since mid-07!

  2. Gravatar of Mansoor H. Khan Mansoor H. Khan
    16. April 2012 at 18:45


    Please comment on my economics / banking related blog.

    Please start with the following article (Title: Here is how the banker’s game works):


  3. Gravatar of dwb dwb
    16. April 2012 at 19:18

    every year i get rated on several objectives. the better my rating the bigger my bonus. the fomc has three objectives: price stability, employment, and moderate interest rates. who rates bernanke, fisher, yellen, et al? really, its just as much the house and senate financial services committes fault for letting the FOMC get away with presentinh a forecast failing on two goals.

    if the silliness were only a season, it would be tolerable. its more like a silly era.

  4. Gravatar of Morgan Warstler Morgan Warstler
    16. April 2012 at 19:23

    Let me pose a thought experiment, which BTW getting people here to entertain is not so easy…. so extra points for trying.

    There is a great god called MARKET which generally loves some more than others….

    Suddenly, he is made angry and points an a group of people and says, “THEY SHALL HAVE MUCH LESS RELATIVE TO ALL OTHERS”

    Now, you are a policy maker, and you are not only not a god, but you TRULY accept the dominance of MARKET.

    Here’s the question:

    Why not just drag the losers MARKET hates into the public square and reduce them compared to everyone else?

    Why not do it AS FAST AS POSSIBLE.

    Why do we hide the losers in the basements and closets and have the whole town shit on?


    The question is NOT how could we have gotten our economy moving again without the losers losing.

    The question is how can we more quickly screw the losers into the ground without remorse.

    The fastest way out is out was Obama making like Clinton, throwing people out of the wagon, and leaving the Fed to solve the problem.

  5. Gravatar of 123 123
    16. April 2012 at 19:38

    Joerg Asmussen is skillfully defending the CPI level target. Interest rate reversals are not embarrassing at all when you are close to the level target.

  6. Gravatar of DonG DonG
    16. April 2012 at 20:46

    I saw 1.5 of Geithner’s three interviews on the Sunday news programs. Long interviews, but zero mentions of monetary policy. It would be nice, if the talking heads were better educated about the importance of monetary policy. The FOMC can get away with bad policy, if they are not challenged.


  7. Gravatar of Jason Rave Jason Rave
    17. April 2012 at 01:47

    This was a great post Scott.

    When I first heard Joerg Asmussen’s comments, implying that the ECB’s rate hikes last year were good policy making, it was the first time in a long while that I’ve actually felt angry that somewhat like that is in a position to affect policy and put tens of millions of people (i.e. Europeans) in a dreadful position.

    Also could I make a request please Scott. Your posts are always insightful and I like to share them on twitter, but because I have to copy and paste the links, sometimes the full link doesn’t fit. It would be great if you had a twitter button on your page that allows you to share a compressed URL.

  8. Gravatar of maximillian maximillian
    17. April 2012 at 02:26

    SS, do you think the NGDP decline was mostly caused by the wealth effect of people losing paper value in their houses?

  9. Gravatar of Justin Irving Justin Irving
    17. April 2012 at 03:38

    I never cease to be impressed by Professor Kling’s humility and open-mindedness. If half of economists were half as objective has him, the world would be a better place.

  10. Gravatar of Jason Odegaard Jason Odegaard
    17. April 2012 at 04:41


    I see your argument – and in this case, “GOD” called MARKET would want to keep NGDP growing on a steady path, as it’s the best method to punish economic folly as well as preventing the economically wise from suffering as well.

    The quickest way to “screw the losers into the ground” but not ruin the rest of the economy is, as Scott keeps pointing out, NGDP targeting. Incomes would continue to grow – but the losers would see their incomes fail to keep up, not growing while everyone else’s grew. Relatively, their income would fall. In nominal terms, it would likely Hold Steady (which is a great band, BTW), and not see drastic declines

    So in that world, the losers don’t end up “in the ground” but they don’t grow any further, the market encourages them to adjust to other employment opportunities.

  11. Gravatar of Steve Steve
    17. April 2012 at 04:42

    It seems Soros shares my views:

    Soros warns euro crisis could destroy the EU

    (Reuters) – Billionaire George Soros warned on Monday that the euro crisis is growing deeper, tearing at the fabric of European Union cohesion, because policymakers are prescribing the wrong remedies.

    He said the euro crisis is being dealt with by policymakers as a fiscal crisis though the crisis began as a collapse of the banking system in the United States and was compounded by a divergence of competitiveness among European countries.

    He said that because fiscal stimulus was ruled out, monetary policy remained the only tool available.

  12. Gravatar of ssumner ssumner
    17. April 2012 at 04:57

    Thanks Marcus.

    Mansoor, I don’t really cover banking over here.

    dwb, Agreed.

    Morgan, I agree Obama should have been more like Clinton.

    123, I don’t think “skillfully” is the right term, they aren’t even hitting the inflation target, and that’s not why they cut rates late last year.

    DonG, Agreed.

    Jason, Thanks. I’d love to add a twitter button, but I don’t know how.

    Maximillian, No, it was caused by tight monetary policy.

    Justin, Agreed.

    Steve, Thanks, I did a post on Soros a few months back.

  13. Gravatar of Steve Steve
    17. April 2012 at 05:32

    I skimmed the transcript for evidence that the committee was fraying, but it’s about 80% redacted.

    October 29, 2008
    CHAIRMAN BERNANKE. If it’s okay, maybe we could just go ahead with the votes on this. I’d like first to do the open market operations, which I hope are not too controversial.[Laughter]

    CHAIRMAN BERNANKE. Well, let me officially get to the point of adjourning the FOMC meeting just by first noting that the next meeting is Tuesday, December 16. Put that on your calendar.
    VICE CHAIRMAN GEITHNER. That’s a long way away. [Laughter]
    MR. PLOSSER. Can’t we meet before then? [Laughter]


    Also, note Plosser’s initial “vote” before the “lunch break” during the December 16, 2008 meeting (page 251/513:
    Chairman Bernanke Yes
    First Vice President Cumming Yes
    Governor Duke Yes
    President Fisher No
    Governor Kohn Yes
    Governor Kroszner Yes
    President Pianalto Yes
    President Plosser 552 U.S.C. (b)(5) I will vote yes.
    President Stern Yes
    Governor Warsh Yes

  14. Gravatar of Steve Steve
    17. April 2012 at 09:03

    Thinking about this a little more makes me think that Bernanke asked for a united front during the redacted discussion of economic conditions. But both Fisher and Plosser wanted to vote no anyway.

    Plosser probably decided to make a (redacted) snide remark before casting his vote, probably that the policy was a mistake but he would go along with it anyway.

    Fisher decided to vote no anyway, and then as you say, he got waterboarded during lunch. I like the visual of Bernanke waterboarding Fisher.

  15. Gravatar of 123 123
    17. April 2012 at 09:16

    ” they aren’t even hitting the inflation target”

    No. They are a tiny bit above the price level target, and they expect to hit it over the medium term, even though the inflation is above 2% now and will be below 2% in the nearest future

    “and that’s not why they cut rates late last year.”

    I don’t agree. Here is the decision, 100% Svenssonian:

    “Based on its regular economic and monetary analyses, the Governing Council decided to reduce the key ECB interest rates by 25 basis points. While inflation has remained elevated and is likely to stay above 2% for some months to come, inflation rates are expected to decline further in the course of 2012 to below 2%. At the same time, the underlying pace of monetary expansion continues to be moderate. After today’s decision, inflation should remain in line with price stability over the policy-relevant horizon.”

  16. Gravatar of Saturos Saturos
    17. April 2012 at 10:34

    “probably better viewed as largely the result of, rather than a cause of, the crisis and ensuing recession.”

    He just globs the two together, doesn’t he? Now if crises ipso facto imply recessions, then these would be largely supply-side recessions, wouldn’t they? How would that cause a housing price decline? And if you go further and say that financial crises cannot cause demand-side recessions, because “holding monetary policy constant” should mean offsetting any negative shock to NGDP – well then Bernanke’s got a lot of explaining to do, as to why it should be “obvious” that a financial crisis would cause a housing decline on its own.

  17. Gravatar of Saturos Saturos
    17. April 2012 at 10:34

    123 “even though the inflation is above 2% now”

    what are you talking about?

  18. Gravatar of 123 123
    17. April 2012 at 12:20


    ECB and Eurozone

  19. Gravatar of ISEM ISEM
    18. April 2012 at 07:32

    I think that you can do a nice comparison with what is being said by Soros and what is being done by our politicians. Soros has a great assumption that the “box is broken”, but he refers just to Euro currency. But I can see the connection with the broken box everywhere in the Western (!!) world. There is a clear connection with Canada Real Estate Trends, with Greece, Spain, Italy and as a newcomer also with Hungary. Dolar economy is maintained due to the fact that Dolar is currently irreplaceable. Money is power and currency is the key. If you quit the currency you would end in a deeper recession than before. EU has to fight, US has to fight, but the system is broken…

  20. Gravatar of ssumner ssumner
    19. April 2012 at 07:05

    Steve, Thanks for that info.

    123, I still think the ECB regrets raising rates in the spring of 2011, but obviously I can’t prove it.

    Saturos, Good point.

    ISEM, ????

  21. Gravatar of 123 123
    19. April 2012 at 09:08

    Scott, in the spring of 2011, Trichet thought the Greece would receive a full bailout with no default.

  22. Gravatar of ssumner ssumner
    20. April 2012 at 14:14

    123, Then he was a complete idiot–did he not notice the interest rates on Greek debt?

  23. Gravatar of 123 123
    21. April 2012 at 03:27

    in March 2011, markets reflected a 42% risk-neutral probability of a full bailout with no default. After adjusting for a risk premium, the probability of full bailout was something like 60%.

  24. Gravatar of ssumner ssumner
    23. April 2012 at 17:09

    123, That proves my point, there was a nearly 50-50 chance of default–why in the world would he ignore that?

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