Maybe Shelby did us a favor
The Matt Yglesias comment from a couple posts back alerted me to a Ryan Avent post I missed while in Italy:
Mr Diamond spoke first today, and discussed one important aspect of his work: the nature of matching between workers and jobs. His reading of theory and data lead him to believe that there are structural issues pushing up the unemployment rate, but there is every reason to believe that a shortfall in aggregate demand is the main cause of lingering joblessness. Mr Diamond, readers may know, was for a time an Obama nominee to the Federal Reserve Board, whose nomination was stymied by Republicans until it was withdrawn. Whatever that might suggest, Mr Diamond is not in favor of aggressive Fed easing, though he thinks more could be done. Rather, he thinks that fiscal policy needs to do the heavy lifting.
That doesn’t sound too bad. I think he’s right about there being structural problems with the labor market, and also that demand is the main problem. But the monetary policy comment really disturbs me, despite his acknowledgment that more could be done. This is what terrified me:
Mr Diamond is not in favor of aggressive Fed easing
I don’t know what that means, but I do know that even policies generally viewed in Washington DC as “aggressive” fall so far short of what’s needed that they might almost be viewed as useless.
PS. The post title is sarcastic. It’s still a disgrace that the Senate didn’t confirm Diamond, but this indicates just how far away the Obama administration is from having an effective strategy to make Fed policy more stimulative. I wouldn’t say they “dropped the ball,” I’d say they didn’t even understand that there was a ball.
PPS. In my previous post I forgot to mention one very important indication that Woodford and I are right and the Very Serious People in Washington DC are wrong. The equity markets are screaming for easier money. They don’t do that when monetary policy is on target.
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5. October 2011 at 12:21
I forgot to mention one very important indication that Woodford and I are right and the Very Serious People in Washington DC are wrong. The equity markets are screaming for easier money. They don’t do that when monetary policy is on target.
Yeah, because what equity markets want must be what’s good for the economy (in the sense most of us care about). What’s good for GM is good for the country. If the S&P 500 companies demand a “large company subsidy”, that must vindicate the views of everyone who advocated a big company subsidy.
Keep the large corporations happy. Keep bailing them out of their screwups. Otherwise the economy might look like Soviet Russia or something, where the the State dictates production…
5. October 2011 at 13:06
Restoring or raising the price level to bootstrap out of a deflation-recession bails everybody out of a depressed economy.
I do not see what is wrong with that. Sometime I want to know if I should feel more compassion for people who hold just cash. Maybe I am viewing this wrong. Sometimes I wonder, because everybody seems to view inflation as immoral.
5. October 2011 at 13:09
Silas: In he case of inflation, it’s hard to see how the interests of business owners are in conflict with those of the unemployed.
Scott: Maybe Diamond just means stop the QE. That would be fine, and lots of QE is probably what most policy makers would consider “aggressive”. NGDP targeting is more likely to cause shrugs from those who are terrified by the Fed’s balance sheet, and might be less likely to be labeled aggressive.
5. October 2011 at 13:10
Perhaps he’s just practicing his central banker speak, in which “aggressive” only means “something we wouldn’t do?”
Silas – Why do you think S&P 500 companies control equity markets?
5. October 2011 at 13:20
K: Why not? Big business owners want first dibs on that easy cash before it bids up prices. They want there to always be cheap loans out there for the big players and no one else.
Adam: Irrelevant to my point: “the markets” that Scott_Sumner is referring to are not definitive proof of what we should regard as desirable policy, except to the extent it benefits holders of *those* securities.
5. October 2011 at 13:28
Silas, I hear your words, but I have no idea what they mean. 1) Corporate credit is not cheap at all. Investment grade spreads are worse than residential mortgage rates and 2) treasury yields have every bit as much impact on consumer lending rates as they do on corporate bonds.
5. October 2011 at 13:34
And I hear your words, but I have no idea why consumers care deeply about whether treasury yields are ultra low, or a little lower, or why you’re not aware of large, nearly-failed banks having access to cheap loans.
5. October 2011 at 13:50
Jason, it is not immoral is you take the newly printed money and only give it to the folks holding cash.
Somehow though the folks asking to fire up the printing machines never care enough to pay off the ones being inflated.
Morally, I’d much rather print $100 and give it to the guy with $100 and none to the guy with $0, and keep printing until the guy with $ finally figures WTF it is free and goes and spends some.
If you sacrifice caring about disparity, it is easier to get over the printing thing.
5. October 2011 at 13:58
K,
This is why I favor treating profits from SMBs as capital gains and not income.
The SMB market will take the found money, and go to town on the Fortune 1000 forcing them to spend the $ they are sitting on.
And so I don’t confuse you, I mean the 2% of SMBs that take in 50% of SMB revenue.
5. October 2011 at 14:51
I still think these people read Krugman’s early columns and agreed that the only solution was fiscal policy (even though Krugman didn’t exactly say that, he gave that impression).
5. October 2011 at 15:57
Silas, Stocks don’t like recessions.
Jason, The people screaming about inflation were not doing so when Bush was president and inflation was higher than now. That’s all one needs to know. Ditto for Reagan.
K, Maybe, But I’ve never seen anything from Diamond on monetary policy that seemed very enlightening. And the comment about fiscal stimulus being the key was certainly worrisome. If he’d mentioned something like level targeting I’d be much less worried. Of course it’s all a moot point anyway.
Adam, Evans is a central banker, and he wants to be aggressive.
Morgan. The Fed doesn’t give money away.
Meets, Perhaps, but I presume Diamond makes up his own mind.
5. October 2011 at 16:05
Diamond was blatantly ineligible for the Federal Reserve seat.
The Federal Reserve Act clearly states that there can be no more than one member from any one Federal Reserve district. The claim that he’s really from Chicago despite being from New York and teaching at MIT doesn’t really hold water.
5. October 2011 at 16:08
Incidentally, the provision of which Diamond fell afoul was sponsored by a Democrat from Oklahoma in an obvious attempt to get more farmer-friendly Western and Southern Fed governors, who would presumably be in favor of looser money, as opposed to all from the hard money-favoring (at the time) Northeast.
5. October 2011 at 18:33
Sumner,
you need to go rewatch the “the goldman sachs” video.
and then you need to apologize for making the same shitty argument for the 50th time.
GOLDMAN gains because they know they Fed is coming to the window and doesn’t mind overpaying.
Someone else should be getting to screw GS down a bit – actually a lot.
Half the banks open should be CLOSED, so stop with your banks have a hard time of it noise.
Stop pretending there aren’t MILLIONS of big fish in small ponds who should be flying to Vegas and shooting craps, and drinking whiskey feeling like big men because they just bought up all the dead bankers stuff for a song.
Stop saying it.
PLEASE STOP pretending that people who should be winning are not winning.
It makes you seem dumb.
5. October 2011 at 23:02
It isn’t so professor, that prof. Diamond is against monetary easing, in this interview:
http://gregmankiw.blogspot.com/2011/09/blog-post.html
you can get the impression that he would rather be for.
6. October 2011 at 04:50
Wadolowski:
If you carefully parse Bernanke’s statements, you can also get the impression that he would rather be for. But here we are.
Oh, and I realize that people think that the Fed requirement to have its governors from different regions is a stupid technicality that should be ignored. However, if you think that and let the Fed get away with it, then you can’t really be surprised when the Fed also decides to treat half of its dual mandate as a stupid technicality that can be ignored.
6. October 2011 at 05:55
Silas: “why you’re not aware of large, nearly-failed banks having access to cheap loans.”
Uh… you said said s&p 500. If you meant banks and GM, say “banks and GM.”
Morgan: “Morally, I’d much rather print $100 and give it to the guy with $100 and none to the guy with $0, and keep printing until the guy with $ finally figures WTF it is free and goes and spends some.”
I basically agree with this. I think of it as paying interest on money, as opposed to the current method of easing which involves reducing the interest on loans. Apart from the effective wealth transfer from creditors to debtors (hey, that’s the risk you take when you enter into a fixed rate nominal contract), paying interest on money is neutral from a distributional perspective. It also trivially gets around the zero bound. The current system isn’t set up to do it this way (it would *suck* for bankers), but it’s not hard to imagine better, fairer, more free market systems that would be.
But come to think of it, maybe if the Fed started paying interest into peoples checking accounts that might be a politically acceptable way of engineering helicopter drops. It’s obviously symmetric with conventional monetary policy so the economic arguments are simple and ready. It might even be legal: The Fed demands 100% reserves against checking accounts but pays interest on those reserves *only on the condition* that the bank pays the same rate of interest into those checking accounts. That would *really* burn the banks too (seignorage “profits” would flow to the owners of money), so I guess it’s a win-win.
6. October 2011 at 06:14
Or, if the Fed just took whatever the banks had on balance sheet as collateral for the new reserves, it wouldn’t really make any difference to the banks, which would make it a lot more politically feasible. And it’s not like the Fed hasn’t been taking crappy collateral before. And if it gets it done…
6. October 2011 at 11:45
John Thacker, Good point, but they’ve always ignored that provision in the past, so it certainly wasn’t why his nomination was blocked.
Wadolowski; You said;
“It isn’t so professor, that prof. Diamond is against monetary easing, in this interview”
I never said he was.
6. October 2011 at 17:06
K,
now see there, you are speaking my language… this is the first GREAT idea at this blog from any contributor.
“But come to think of it, maybe if the Fed started paying interest into peoples checking accounts that might be a politically acceptable way of engineering helicopter drops. It’s obviously symmetric with conventional monetary policy so the economic arguments are simple and ready. It might even be legal: The Fed demands 100% reserves against checking accounts but pays interest on those reserves *only on the condition* that the bank pays the same rate of interest into those checking accounts. That would *really* burn the banks too (seignorage “profits” would flow to the owners of money), so I guess it’s a win-win.”
Why it takes folks this long to figure out WORKABLE policy is highly annoying.
Anything that straight away benefits the Tea Party CAN and WILL happen.
6. October 2011 at 20:19
Scott,
I agree. Obama does not understand monetary policy. Next question. (We need a President who does, preferably a Democrat.)
8. October 2011 at 16:36
Mark, There is almost no chance we’ll get a president who understands monetary policy. It’s like asking for one who understands quantum mechanics.