Jeffrey Hummel on the Fed

Jeff Hummel has an excellent review of Ben Bernanke’s new book in the WSJ:

Mr. Bernanke credits targeted bailouts, starting in December 2007, with providing liquidity almost exclusively to solvent institutions with good collateral. Yet as his graphs demonstrate and his words fail to emphasize, for almost a year Fed sales of Treasury securities offset these injections. In doing so, the Fed was most definitely not acting like a traditional lender of last resort, which calms panics by increasing total liquidity, but was instead merely shifting savings into targeted institutions from other sectors of the economy. As many market monetarists have maintained, Mr. Bernanke’s crisis response was far too tight at the outset. Then, when Mr. Bernanke, running out of Treasurys to sell, finally orchestrated an unprecedented increase in the monetary base in October 2008, he partly offset the impact by paying interest on bank reserves, thus discouraging bank lending.




24 Responses to “Jeffrey Hummel on the Fed”

  1. Gravatar of TravisV TravisV
    29. March 2013 at 11:15

    Nice to hear the shout-out to market monetarists. However, this guy seems a little nutty. His homepage proudly declares:

    “I have been predicting that the U.S. government would default on its debt since 1993. But I have been ADVOCATING total repudiation of the government’s debt for much longer.”

  2. Gravatar of TravisV TravisV
    29. March 2013 at 11:16

    From August 2009:

    “Why Default on U.S. Treasuries is Likely”

    By Jeffrey Rogers Hummel

  3. Gravatar of Bill Woolsey Bill Woolsey
    29. March 2013 at 11:21

    Hummel authored one of the chapters in Boom and Bust Banking.

  4. Gravatar of ssumner ssumner
    29. March 2013 at 11:45

    TravisA, I focus on where I agree with people (unless it’s a NYT blogger.) 🙂

    Bill, Yes, I should have mentioned that.

  5. Gravatar of marcus nunes marcus nunes
    29. March 2013 at 11:59

    In the book, Bernanke´s “creditist view” comes out loud and clear. To him it´s all about the Fed not reacting, more than 1 year after the depression began, to the financial problems, not acknowledging that those problems were brought on by the Fed´s previous failure in keeping NGDP up.

  6. Gravatar of TravisV TravisV
    29. March 2013 at 12:05

    I used to be a fan of the Mercatus Center (they published Prof. Sumner’s recent paper, after all). But Yglesias just exposed their conception of “freedom” and it’s ridiculous!

  7. Gravatar of John Thacker John Thacker
    29. March 2013 at 15:39

    Yglesias winds himself up in a trap though. He essentially argues that this conception of freedom must be wrong because all these expensive places with stuff he likes score fairly poorly. The problem is that the one thing that causes them to score so poor are precisely the property development rules that he hates so much, as a map using a custom rule (which the tool so nicely provides) demonstrates.

    Here’s a map that ranks the states just by land-use restrictions. So there’s absolutely nothing in there for Yglesias to object to on a philosophical basis. Guess what, unsurprisingly, New York (like California and Maryland) scores terribly, down at #47, while states like Kansas and South Dakota do well.

    Does this cause Yglesias to immediately change his position and say that this must be a flawed measure of freedom? Would he himself claim that perhaps he should reconsider his own view that “lighter hand in property development rules would be great for the state and let it grow” since none of his favorite places have them? Would he change his mind and agree with all the restrictionists about how property restrictions make it a nice place to live?

    Or would he argue that those places were already nice and then people adopted those regulations for various bad reasons, or that the places would be even nicer without those laws and rules?

    Seems to be a double standard.

  8. Gravatar of John Thacker John Thacker
    29. March 2013 at 15:55

    Especially ridiculous is the claim that “That’s great if you want to build a tendentious case against New York, but in fact the state’s population is higher than it was ten years ago since it experiences large levels of international in-migration.”

    New York’s population may be higher than it was ten years ago, but that’s a pretty low bar to clear. The state did rank 47th among the 50 states plus DC in population growth rate from 2000 to 2010, after all. (And one of the states it beat had a massive hurricane.)

    Prices are a fine comparison, and certainly if New York had better land use policies it would have a lot more people moving in, no doubt. But if it had better land use policies it would score better on this index.

  9. Gravatar of Benjamin Cole Benjamin Cole
    29. March 2013 at 20:15

    Gee, you mean the most important thing is aggregate demand?

    Can you explain that again?

  10. Gravatar of Jon Jon
    30. March 2013 at 06:45

    “In doing so, the Fed was most definitely not acting like a traditional lender of last resort, which calms panics by increasing total liquidity”

    Scott, what’s the citation for defining this behavior as traditional or not? For as long as I can remember the fed has had a policy of sterilizing discount window activity. Further their stated reason to overweight t-bills vs longer paper was to have a pool of securities large enough for this purpose as a direct reaction to the Continental Illinois National Bank crisis in 1984. Prior to this time, policy was to weight the term structure of fed debt to mirror the term structure of treasuries outstanding.

    Indeed, this presumption of sterilization is what started the original fed out of ammunition stories and the treasury supplemental funding program as the sterilization tool–the success of which is why the fed is now comfortable holding no short term assets.

    Meanwhile TAF was not a credit allocation tool. I don’t see the evidence of credit allocation by the Fed.

  11. Gravatar of TravisV TravisV
    30. March 2013 at 06:53

    Martin Feldstein just published an absolutely atrocious column. Somebody needs to go after him for this!

    “When Interest Rates Rise” by Martin Feldstein

    “Long-term interest rates are now unsustainably low, implying bubbles in the prices of bonds and other securities. When interest rates rise, as they surely will, the bubbles will burst, the prices of those securities will fall, and anyone holding them will be hurt. To the extent that banks and other highly leveraged financial institutions hold them, the bursting bubbles could cause bankruptcies and financial-market breakdown.”


    “The reason for today’s unsustainably low long-term rates is not a mystery. The Federal Reserve’s policy of “long-term asset purchases,” also known as “quantitative easing,” has intentionally kept long-term rates low. The Fed is buying Treasury bonds and long-term mortgage-backed securities at a rate of $85 billion a month, equivalent to an annual rate of $1,020 billion. Since that exceeds the size of the government deficit, it implies that private markets do not need to buy any of the newly issued government debt.”


    “The low interest rate on long-term Treasury bonds has also boosted demand for other long-term assets that promise higher yields, including equities, farm land, high-yield corporate bonds, gold, and real estate. When interest rates rise, the prices of those assets will fall as well.”


    “The US is not the only country with very low or negative real long-term interest rates. Germany, Britain, and Japan all have similarly low long rates. And, in each of these countries, it is likely that interest rates will rise during the next few years, imposing losses on holders of long-term bonds and potentially impairing the stability of financial institutions.”

  12. Gravatar of TravisV TravisV
    30. March 2013 at 06:54

    Sorry, here’s the link:

  13. Gravatar of William J McKibbikn William J McKibbikn
    30. March 2013 at 07:47

    Dr Bernanke’s strategy was (and is) to starve Main Street USA in an effort to save Federalism from itself, plain and simple…

  14. Gravatar of Steve Steve
    30. March 2013 at 08:51

    John Thacker,

    The IRS publishes population migration data derived from tax returns. According to this data, from 2001-2010,

    1,940,142 people moved TO New York
    3,081,095 people moved FROM New York

    Overall, NY lost 1,140,953 people to net out migration.

    The biggest destination, by far, was Florida, again from actual tax return data
    After Florida, in descending order, were NC, PA, NJ, CT, VA

  15. Gravatar of Steve Steve
    30. March 2013 at 09:03

    Also, Texas is the big winner in terms of net population migration. Texas has, pairwise, received net in-migration from all 50 states during the 2001-2010 period. All roads lead to Texas.

    The biggest sources of Texas in-migration are CA, LA, and FL.

  16. Gravatar of John Thacker John Thacker
    30. March 2013 at 09:36


    I’m not sure why you think from my posts that I would disagree with that. I was pointing out that even with NY’s large numbers of international in-migration, it’s population growth has been abysmal, and Yglesias’s response on that score was very weak. (It doesn’t prove much to say that NY was still gaining population, when its growth rate was 47 out of 51.)

  17. Gravatar of Steve Steve
    30. March 2013 at 09:43


    I was agreeing with you — just giving you the actual data for extra ammo 🙂

  18. Gravatar of Steve Steve
    30. March 2013 at 09:45

    The original (poorly formatted) data is at

    The tax foundation has a nice tool that uses this data

  19. Gravatar of ssumner ssumner
    30. March 2013 at 10:08

    Marcus, That’s right.

    TravisV, I also had some issues with that survey, but for something as vague as “freedom” one can’t please everyone.

    Jon, In the 1930s the Fed increased the base when there were runs on the banks. If anything, they are now criticized for not increasing the base enough, as NGDP still fell.

    You may be right about the TAF, I haven’t studied that policy, but it sounds fairly neutral.

    TravisV, That Feldstein piece doesn’t sound very promising. Beckworth has refuted that view. The Fed’s holding of Treasury debt is roughly the same ratio as a decade ago.

  20. Gravatar of Jon Jon
    30. March 2013 at 11:04

    Scott, thanks for the info about allowing the base to expand the 30s to accomodate the lender of last resort activirs. That does not really make it clear that no-sterilization is traditional. Once the fomc sets a rate target, isn’t sterilization of discount window activity a foregone conclusion? At a minimum the tradition is 30 years old in favor of sterilization.

    Further, I think the fed in the 30s did sterilize. They just used different policy tools to do so: prominently the reserve requirements.

    IOR is a better policy tool when the other half of the government is pushing banks to increase their capital–IOR is a subsidy, reserve requirements are a tax.

  21. Gravatar of TallDave TallDave
    30. March 2013 at 20:00

    It’s been a very schizophrenic policy, one foot on the brake and the other on the gas.

  22. Gravatar of ssumner ssumner
    31. March 2013 at 02:50

    Jon, For the most part they did not use reserve requirements to sterilize in the 1930s. Only for 10 months in 1936-37, which is now viewed as mistake.

    You’d be right about sterilization if the Fed targeted interest rates, but they actually target inflation (or a weighted average of inflation and unemployment.)

    When you target inflation you need to add extra reserves when there is money hoarding due to illiquidity.

  23. Gravatar of Jon Jon
    31. March 2013 at 09:53

    Scott, yes… both now and in the 80s the point of sterilization was to hold liquidity independent from the policy target, say an inflation target.

    With that in mind, the problem isn’t the sterilization of the liquidity; it is the position of policy and the selection of the policy goal.

    Hummel seems too focused on the financial crisis or at least he is pandering when he links the issue if inadequate easing to the operation of the Feds liquidity programs.

    I agree the Fed was too focused on solving a liquidity problem and ignored the monetary problem… But Hummel doesn’t convey that too clearly.

  24. Gravatar of ssumner ssumner
    1. April 2013 at 06:10

    Jon, Certainly Hummel didn’t write the essay I would have written–I agree with you there. But it wasn’t just that the Fed had the wrong target, money was way too tight for even a 2% inflation target in late 2008—indeed we had deflation in 2009.

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