Memo to liberal pundits

Since October 2008 I have devoted much of my life to educating people about the need for further monetary stimulus.   Thus I was pleased to see that in the past few days both Krugman and Yglesias have addressed the issue, although in somewhat different ways. 

It shouldn’t be hard to convince liberals of the need for more monetary stimulus.  So why is monetary stimulus discussed so rarely?  I see the problem as more intellectual than ideological.  Although I am a right-winger, my proposals would actually help Democrats more than Republicans, particularly in the 2010 and 2012 elections.  But there is so much confusion about monetary policy that it is even hard for people to see policies that are in their own interest. 

Let’s start with the confusion over the merits of setting an “inflation target,” which is discussed in both the Krugman and Yglesias columns.  My concern is that people will misunderstand what is meant by this term, as we are used to thinking of inflation as a “bad thing.”  Thus is sounds like inflation is the price we must pay for creating jobs.  This “trade-off” idea has some merit when the economy is faced with supply-shocks, but seriously distorts the real issues when the key problem is a demand shortfall.  Even worse, the press often treats fiscal policy asymmetrically, suggesting that whereas an expansionary Fed policy would be designed to boost inflation expectations, fiscal stimulus is aimed at boosting real growth.  But this creates a completely fictitious distinction; both policies have exactly the same objective; boosting aggregate demand.  Look at the simple AS/AD diagram:


Both fiscal and monetary stimulus have exactly the same objective, to shift AD to the right, which will increase both prices and output.  We would hope that more of the increase is output and less is prices, but that depends on the slope of the AS curve.  Unfortunately, the press often suggests that monetary stimulus is aimed at raising prices and fiscal stimulus raises output, which tends to make fiscal stimulus look better.

This problem becomes even worse when rates have fallen to zero.  Not one person in a hundred really understands how monetary policy works.  The average guy on the street can picture how lower interest rates could boost spending, but has no understanding of the long run relationship between M and NGDP, where interest rates play no role.  So to explain how monetary policy could work at the zero bound, we are forced to explain the mechanism using interest rates.  Higher inflation expectations result in a lower real interest rate, which boosts aggregate demand.  But that is equally true if the stimulus comes from the fiscal side.  Higher expected inflation will lower real interest rates (if nominal rates are stuck at zero.)

Nick Rowe recently pointed out that the focus on interest rates is really just a “social construction. ” (I wish I had thought of that term first.)  Here’s how I interpret Nick’s recent post.  Central banks traditionally set the monetary base at a level that is expected to hit their policy goals.  In my view the Fed has recently preferred about 5% NGDP growth, although they don’t state their goal in those terms.  The Fed also finds it convenient to set a target for the overnight bank rate (the fed funds rate) in the hope that the target will create the amount of money necessary to hit their NGDP growth goals.  When they need more money to hit their goals, they lower the fed funds target though open market purchases.  But the “actual policy” in “reality” isn’t the interest rate target; it is open market operations, which change the size of the monetary base.   

Normally the interest rate targets are just a convenient fiction.  Ordinary people like to visualize things in terms of interest rates, and indeed so do many central bankers.  Now suppose the fed funds target runs into a brick wall at zero percent.  You cannot lower nominal rates below the zero rate earned on cash.  Now it looks like the Fed has no more options.  Of course they can still do all the OMOs they wish, and can still keep expected NGDP growing at about 5%.  But the perception is that policy has failed, and that perception makes the Fed’s job much harder.  People will think the Fed has “run out of ammunition,” and that they won’t be able to counter the fall in AD.  Unless the Fed moves very aggressively to overcome those bearish expectations with an announcement of a very transparent and explicit policy, people will begin to fear deflation.  And here’s the problem; once the public starts to fear deflation it is much harder for the Fed to run its monetary policy via changes in the monetary base.  If deflation is expected then people and banks may hoard base money.  So increases in the base won’t send out the signal that money is being eased.  Hence you need something else.  And what you really need is an NGDP target. 

Unfortunately, economists are not used to thinking about NGDP.  Instead they tend to think about inflation and real output, which are the two components of NGDP, and also the two variables that are affected by increased in aggregate demand.  Why not have the Fed set an 6% real growth target?  Why do economists speak in terms of an inflation target?  It’s not because the Fed could not hit a 6% real growth target—I believe they could, for one year.  But real growth targets were discredited years ago, because in the long run they leave the price level completely unanchored.   So people talk in terms of inflation targets, not real growth targets.

With fiscal stimulus the language is completely different.  Unlike with the money supply, there is no thought of permanently raising the budget deficit.  The goal of fiscal stimulus is to merely pump up government spending for a year or two, in order to temporarily boost AD (and hopefully real output.)  The implicit hope is that once recovery is achieved then monetary policy will take over.  So the discussion of fiscal “multipliers” is often framed in terms of its effect on real output, not inflation.

Now take another look at the AS/AD diagram.  Both fiscal and monetary stimuli aim to boost AD.  In both cases it is assumed that prices and output will rise in the short run.  In both cases the assumption is that in a deep recession output will rise much more than prices, and in both cases the assumption is that at full employment prices will rise much more than output.  But because the language we use to describe these two types of stimuli are so different, fiscal stimulus “sounds” much more appealing.  It sounds like fiscal stimulus is directly aimed at jobs, and monetary stimulus is aimed at inflation, with a sort of vague hope that we might get some jobs as a side effect.

I have always believed that monetary stimulus is much more effective than fiscal stimulus in a deep recession.  That was certainly true for FDR—the dollar depreciation program had a much bigger impact than his fiscal stimulus.  We can argue all day about “jobs saved vs. jobs created,” but the fact remains that fiscal stimulus has failed to achieve its objective in the US.  The 10.2% unemployment rate is far too high, and President Obama would not be able to get another huge stimulus through Congress.  Monetary stimulus can provide virtually unlimited increases in AD, and (if done through inflation or NGDP targets) it can do so without raising the budget deficit.  It is our only realistic option for quickly and dramatically boosting AD.  Indeed with monetary stimulus the only real danger is going too far, and ending up with hyperinflation.  We are far from that point, however, for the foreseeable future the risk is too little spending, and too little inflation.

With nominal rates at zero, common sense suggests that monetary policy can’t do any more.  That’s why it is so important to see Krugman clearly stating that, at least in principle, monetary policy is still the number one option.  Liberals pundits should listen to Krugman’s economic analysis of monetary policy, and ignore his pessimistic political views on its feasibility.  The Fed is a political institution that responds to public pressure.  If the rest of Washington really understood the logic of Krugman’s views on inflation targeting, then the political pressure on the Fed would become almost unbearable.  But first they need to understand why monetary policy is so powerful, and that requires unlearning some social conventions about interest rates and inflation.



61 Responses to “Memo to liberal pundits”

  1. Gravatar of Anonymous Coward Anonymous Coward
    15. November 2009 at 14:28

    One other possibility is that leftists prefer fiscal stimulus because of the possibility for payoff possibilities?
    And right wingers prefer monetary stimulus because it makes it difficult for the other side to use the money to payoff political interests?

  2. Gravatar of JimP JimP
    15. November 2009 at 14:32

    You are much kinder to Krugman than I could bring myself to be. But you are quite right. Liberals (everyone in fact) should listen to Krugman when he says that monetary policy is the number one choice. The Woodford paper shows that very clearly.

    But the Woodford paper also does something else really important. It avoids the Krugman rhetoric of a “credible promise to be irresponsible”. Being irresponsible is something no central banker will ever deliberately do. Woodford shows, proves, that, in a canonical New Keynesian model (not just the odd world of the odd Scott Sumner) the cautious, the responsible, the correct thing to do is price level targeting.

    The Woodford paper is extraordinary – and just exactly what we need at just exactly this moment to avoid the Japan trap the deflationists are preparing for us. Deflation is a political choice – and Japan shows that a nation can continue to make that choice year after year – till it faces utter ruin. Let’s us not do that. Let’s us tell both the Obama administration and the Fed that we don’t want to do that, no matter what Barron’s et al may say. The economic moralists, the Alan Abelsons, the Larry Kudlows, the WSJ are always with us. Let’s rout them.

  3. Gravatar of JimP JimP
    15. November 2009 at 14:47

    The comment about the odd Scot Sumner was meant entirely tongue in cheek. I hope everyone gets that. I am a big fan – obviously. But Woodford puts the case in a way in which economists like Krugman or Brad DeLong can accept it. I sure do hope they will comment on it.

  4. Gravatar of Nick Rowe Nick Rowe
    15. November 2009 at 15:10

    Hi Scott: Good post. I think you are right about fiscal policy being seen as increasing real output and monetary policy as increasing the price level. Partly it’s just that fiscal policy appears to have a direct effect: the government spends to employ people who would not otherwise be employed; while monetary policy has an indirect effect.

    One typo: “social convention” should be “social construction”. It’s a reference to Berger and Luckmann

  5. Gravatar of StatsGuy StatsGuy
    15. November 2009 at 16:07

    It is unfortunate that Krugman spent so much time complaining that monetary action was not possible/effective – because it was a diversion from the real reasons to consider a mix of fiscal actions as a supplement to a strong monetary response. Those reasons (and I believe Krugman would agree, but doesn’t talk about them) are:

    1) The US private sector seems to have great difficulty making truly long term investments – infrastructure investments on the time scale of the Hoover Dam, for instance. We can argue why, but that’s just a fact. While government has a great deal of difficulty innovating, it does have (or, used to have) certain advantages over the private sector – a very low discount rate and the ability to appropriate benefits from “externalities”.

    2) Frankly, most Americans simply do not trust financial institutions to efficiently allocate capital all by themselves – especially given the structural and regulatory failures over the past dozen years that led to the bubblicious misallocation of “investment”. Conservatives have adopted terms like Moral Hazard and Too-Big-To-Fail to describe this issue, but I rather suspect it goes much deeper than that. Previously, Bill W has noted that the problem with fiscal expenditures is that it injects money unevenly… well, that presumes that monetary policy injects money evenly, which is not really true either. Monetary policy hugely benefits those with greater leverage and asset exposure, which can cause all sorts of problems (including exacerbating wealth inequalities).

    In this context, liberals (and indeed many right-leaning populists) don’t trust monetary policy because of the critical role of financial institutions as intermediaries.

    Ultimately, it comes down to this: in certain circumstances, we trust government to be responsible for allocating a _portion_ of the nation’s capital, rather than relying entirely on the private sector (banks, etc.). Maybe that argument seemed more politically risky to make than simply claiming we need a pure fiscal response to the recession. It is, however, the honest argument.

    Krugman would be a fool to reject an auto-pilot mechanism for stabilizing NGDP – one merely has to consider who lost (and who won) over the last year… how many middle class people sold their 401ks at the March bottom due to the incredible Fed-induced volatility and thus impoverished themselves? The world would be a vastly better place if we had spent the last year arguing over structural issues, such as whether to invest in wind, nuclear, solar, geothermal, etc., and in what mix.

  6. Gravatar of StatsGuy StatsGuy
    15. November 2009 at 16:12

    Note… when I wrote “Monetary policy hugely benefits those with greater leverage and asset exposure, which can cause all sorts of problems (including exacerbating wealth inequalities).”

    I was referring to the current ridiculously volatile monetary policy framework…

  7. Gravatar of ssumner ssumner
    15. November 2009 at 17:24

    Anonymous Coward, I am sure that the liberal preference for big government has a role in their bias toward fiscal policy. That’s why it is so impressive when Krugman admits that monetary policy is actaully the best option. (BTW, I feel guilty addressing you that way.)

    JimP. That’s a good point. Krugman likes to be sacrastic at times (as do I) but that is no way to sell something to central bankers. And we aren’t really talking about irresponsiblity, as we just want to maintain the normal 5% NGDP growth rate. So it’s both foolish salemanship, and not even really accurate.

    Nick, Thanks, I just changed it. I agree that fiscal policy seems more direct, but that’s because most people can’t ever really wrap their minds around the pure monetary policy transmission mechanism, and how it can be so powerful.

    Statsguy, You may or may not be right about the government’s proper role in infrastructure, but it is important to note that (unlike China) we are a very sophisticated, litigious economy where those projects take many years to get off the drawing boards and to get all the land rights approved, etc. So they play no role in the debate over fiscal vs monetary policy as a way of smoothing out the business cycle. China can do those projects quickly, as they can ram them down the throats of the local farmers who are misplaced.

    Statsguy#2, I’m glad you clarified that, otherwise I was going to jump all over that point.

  8. Gravatar of Jon Jon
    15. November 2009 at 17:27

    But the “actual policy” in “reality” isn’t the interest rate target; it is open market operations, which change the size of the monetary base.

    I thought Nick wasn’t being so rigid. “Inflation” is a product of the OMO and comes from the base expansion itself, but he accepted that natural-rate does matter too.

    I think he is right. The ability to escape a liquidity trap via inflation expectations depends on the base and OMOs alone, but the ability to drive economic growth or contraction stems from the interest-rate relative to the natural-rate.

    i.e., money growth can be structurally neutral but its through the differential with the natural-rate that neutrality can be violated.

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. November 2009 at 17:41

    ‘ When they need more money to hit their goals, they lower the fed funds target though open market purchases. But the “actual policy” in “reality” isn’t the interest rate target; it is open market operations, which change the size of the monetary base.’

    Here’s Milton Friedman in 1998:

    When they so-called ‘target the interest rate’, what they’re doing is controlling the money supply via the interest rate. The interest rate is only an intermediary instrument. There’s only one thing that all of the central banks control and that is the base, their own liability, and they can control that in various ways. They can control it directly by open market operations, buying and selling government securities or other assets, for example, buying and selling gold, or they can control it indirectly by altering the rate at which banks lend to one another.

    The central banks cannot control interest rates. That’s a mistake. They can control a particular rate, such as the Federal Funds rate, if they want to, but they can’t control interest rates. If central banks could control interest rates, you never would have had interest rates at 10-15% in the late 1970s. If they could control interest rates, would Brazil now be having interest rates in the 20-30% range? What central banks can control is a base and one way they can control the base is via manipulating a particular interest rate, such as a Federal Funds rate, the overnight rate at which banks lend to one another. But they use that control to control what happens to the quantity of money. There is no disagreement. No central banker today would disagree with the proposition that inflation is primarily a monetary phenomenon. Not one of them will disagree that every inflation has been accompanied by a rapid increase in the quantity of money and every deflation by a decline in the quantity of money. I believe that this argument about interest rates versus the base really takes you off the main track.

  10. Gravatar of Graeme Bird Graeme Bird
    15. November 2009 at 17:42

    There is a qualitative difference between fiscal and monetary policy in this regard. Monetary policy increases nominal GDP while it increases GDR and intermediate business spending.

    Whereas fiscal policy increases nominal GDP without increasing GDR and while REDUCING nominal business spending. But it is intermediate business spending that employs people and renovates business so as to escape from recessionary conditions.

    Increased deficits through more fiscal spending is therefore straight irrational lunacy as policy.

  11. Gravatar of Graeme Bird Graeme Bird
    15. November 2009 at 20:24

    Well I think we have the ultimate answer to monetary reform on the other threads. Use moral suasion to get all the states on board and companies on board to set labour and salary contracts in terms of NGDP.

    Then start setting monetary targets in terms of NGDR.

    Just a magnificent combination that will take care of itself. The only outstanding problem being debt levels.

  12. Gravatar of StatsGuy StatsGuy
    15. November 2009 at 20:59

    “(unlike China) we are a very sophisticated, litigious economy where those projects take many years to get off the drawing boards and to get all the land rights approved, etc. So they play no role in the debate over fiscal vs monetary policy as a way of smoothing out the business cycle.”

    Our sophistication also works to our advantage… Rather than allocating capital to mega rail projects, fiscal action can use tax incentives or grants – for example, R&D grants via DoE or credits/deductions for oil-import-displacing energy projects with long payback durations. The response to such initiatives (if they are targeted at truly efficiency enhancing goals) can be quite rapid.

    Yet to believe fiscal spending (other than simple stabilizers like block grands to states) has a countercyclical role, one must believe the dynamics above are more severe in a recession than in normal conditions. That is, the finance sector was even more dysfunctional than it usually is (e.g the “credit channel” argument), and/or the biases against long term investment (behavioral, corporate governance, etc.) are intensified in a recession.

    These are marginal arguments – in other words, they are arguments about dynamics that (allegedly) exist all the time, but are intensified (at the margin) by recessions. They are also marginal in the sense that recessions may shift out the boundary where government investment makes sense (thus expanding the range of opportunities), but that boundary is still very finite.

  13. Gravatar of Graeme Bird Graeme Bird
    16. November 2009 at 00:08

    You don’t want R&D grants. They are a menace to science. What you could do is take stand-alone R&D firms out of the tax system and make their salaries paid non-taxable as well. But stolen money science leads to the corruption of science itself. This is no small matter. I think its one of the biggest issues out there. R&D grants work in neoclassical models. But in the real world they are a menace. Tax exemptions still mean that the firm must make an accounting profit. Hence under conditions of growth deflation, resource allocation is not unduly hurt.

  14. Gravatar of Scott Sumner Scott Sumner
    16. November 2009 at 06:04

    Jon, Yes, I think in his model the effects on real output are driven by the real interest rate. I prefer to use a sticky wage model.

    Thanks Patrick, I agree with Friedman.

    Graeme, Wage contracts in terms of NGDP make sense. But it wouldn’t be easy to sell the idea. The point of stabilizing NGDP is to accomplish the same goal in an easier way.

    Statsguy, In other posts I have argued that what is called “Depression Economics” is actually “monetary policy failure economics.” Krugman seems to agree. Or alternatively, they are “expected depression economics” i.e. the economics of the role of policy when you are not only in a recession, but also expected to be in a recession even after a inadequate monetary stimulus is enacted.

    On the fiscal side, I prefer supply-side oriented tax cuts aimed at labor or capital (lower payroll taxes on companies, or lower taxes on capital to spur investment.) But of course these are the lesser of evils.

  15. Gravatar of Doc Merlin Doc Merlin
    16. November 2009 at 09:17

    Scott, I know you are an expert on the great depression, and I was wondering what you thought of this argument
    suggesting that the great depression was triggered by non-monetary policy effects.
    It fits my general intuition, but I wanted to hear your views.

  16. Gravatar of Matthew Yglesias Matthew Yglesias
    16. November 2009 at 09:18

    I think the issue is that Krugman is skeptical that the Fed will be susceptible to persuasion on this point. Ben Bernanke & co are all experts in monetary economics and Krugman probably doesn’t think they’ll change their mind based on a newspaper column. Congressional staff, by contrast, really could have their minds changed by a newspaper column — especially one written by a guy who’s an important academic economist in his other life.

    But as long as we’re dealing with pundits like David Ignatius who want to build public support for extra monetary contraction then I think it’s clear that more pro-expansion commentary from Krugman will be helpful.

  17. Gravatar of Anonymous Coward Anonymous Coward
    16. November 2009 at 09:19

    Yah, its a joke based on the pseudonymous and pseudo-anonymous nature of the internet. The fact that it causes some amount of awkwardness is also no end of amusement for me.

  18. Gravatar of ssumner ssumner
    16. November 2009 at 10:08

    Doc Merlin, I think tight money triggered the Depression. Wage fixing should not cause an AD shock, it is an adverse AS shock. Wage fixing is inflationary, not deflationary.

    Ohanian uses M1 and M2, which are not good indicators of moentary tightness. I do agree with Ohanian that the Hoover high wage policy made unemployment worse than it would otherwise have been, but the main problem was a huge adverse demand shock.

    Matthew Yglesias, I basically agree with your interpretation of Krugman, although I also think his newfound love for old-style Keynesiansim, as well as his general support for a larger role for government, might have at least slightly shifted his views toward fiscal stimulus. I’ve been disgusted by the Mellon-like views of many on the right (and apparently even centrists like Ignatius.) Against my fellow right-wingers I use “market-oriented” arguments, such as the low 5-year inflation expectations in the TIPS markets

    I agree the Fed is hard to persuade with newspaper columns, but I do think they are somewhat influenced by the general zeitgeist. And it isn’t just elected officials I’d like to influence, even people like Brad DeLong seem to think monetary policy can do no more. The potential effectiveness of monetary policy at zero rates is very counterintuitive. So I still think education has a big role to play here. And as you say, Krugman’s clearly an influential economics columnist, particularly with the Democratic Party.

    Most of my career has been spent studying the Great Depression, so I am also influenced by the fact that monetary stimulus under FDR seemed more effective than fiscal stimulus, especially in the spring of 1933.

    Anonymous Coward, Well thanks for commenting here, I hope to hear from you again.

  19. Gravatar of Lee Kelly Lee Kelly
    16. November 2009 at 10:51

    This is the conclusion of a speech delivered by Ben Bernanke in 2002 before the National Economics Club, Washington D.C. titled “Deflation: Making Sure ‘It’ Doesn’t Happen Here.”

    Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy’s underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.

    Interesting, no?

  20. Gravatar of StatsGuy StatsGuy
    16. November 2009 at 11:20

    Off topic:

    This is relevant to your previous post that we “don’t expect inflation, but expect to expect it…” Curious about your thoughts.

  21. Gravatar of JJ JJ
    16. November 2009 at 12:03

    I’ve been following and agreeing with Scott’s theories for a year now, yet I still got lost when he said interest rates play no role in the long run relationship between M and NGDP. I thought that interest rates are a byproduct of the fed’s OMO influencing M. Can somebody explain or point me to a post explaining this?

  22. Gravatar of Mark A. Sadowski Mark A. Sadowski
    16. November 2009 at 12:46

    I just discovered your blog. It’s refreshing to find a self described “right-wing” economist who truly understands monetary economics and who doesn’t think that inflation is the economy’s most important problem right now. I wish more economists who “get it” would try and counter the widespread delusion that we have exhausted monetary policy.

  23. Gravatar of JimP JimP
    16. November 2009 at 13:36

    Tim Duy joins the debate:

  24. Gravatar of Nick Rowe Nick Rowe
    16. November 2009 at 13:46

    Jon @17.27, and Scott’s response.

    Yes, in the short run when prices and/or wages are sticky, a change in monetary policy will have all sort of real effects, including real interest rates, real wages, output, employment. The particular pattern depends on which prices/wages/etc are assumed sticky.

  25. Gravatar of caveat bettor caveat bettor
    16. November 2009 at 14:00

    Scott: I’m looking for an official or at least credible source for NGDP futures settlement (that we discussed in a previous post of yours). Could you refer me to something that would work?

  26. Gravatar of Graeme Bird Graeme Bird
    16. November 2009 at 14:47

    “Graeme, Wage contracts in terms of NGDP make sense. But it wouldn’t be easy to sell the idea. The point of stabilizing NGDP is to accomplish the same goal in an easier way.”

    Right. But by stabilizing NGDP, rather than NGDR you will destabilize everything else. The contrary is not the case except in market clearing wages alone. Where a compromise is probably needed between the two figures. You will send distortion to producer price signals, creating bubbles and busts. Giving wall street unearned money and then having to bail them out. The most important prices aren’t consumer prices. But producer goods prices. Since they do double duty. And since this is the greater volume of spending in the economy.

    Look at this crisis. NGDP actually stayed pretty stable. Yet international trade collapsed. The volume of international trade isn’t netted out like the figures in GDP. So we get a much better idea of what really happened to GDR from Gross trade volumes if the GDR figures aren’t available. The emphasis on the consumer end is unproductive. All the interesting stuff is in intermediate production.

    In my country the money supply fell during 2008. Recessionary conditions were evident way back then. GDR would presumably have fallen off a cliff. And yet GDP was quite stable. Its like trying to measure with a broken thermometer.

  27. Gravatar of Greg Ransom Greg Ransom
    16. November 2009 at 14:47

    Scott, odd how you use political labels like a leftist — and not like a classical liberal.

    There is nohing much liberal about modern leftists, and there is little or no progress coming from modern “progressives”.

    And “right wing” is a label invented by Stalinists to smear classic liberals as racists and fascist — a smear all too common still on the left.

    I now of no believer in limited goverent classical liberalism who goes around labeling himself a “right winger”.

    So what is up with you use of labels, Scott?

    Always giving classical liberals the disparaging labels used by leftists for yourself — and always using the fashonable leftist labels for leftists, even when these labels are perverse given where leftists now occupy the political spectrum.

  28. Gravatar of Scott Sumner Scott Sumner
    16. November 2009 at 18:13

    Lee Kelly, Thanks for the quotation. Perhaps it is time for Bernanke to pull out the secret plan. Seriously, last October why didn’t Bernanke implement this zero inflation plan, rather than call for fiscal stimulus. My fear is that fiscal stimulus was part of the plan, i.e. the helicopter drop was not just a joke.

    Statsguy, I am puzzled by that, because they say inflation expectations are low, but there is fear of higher nominal rates. Doesn’t that mean there is fear of higher real rates? But real rates have been dropping (to extremely low levels) in recent months. 5-year TIPS yield less than 0.4%.

    jj, Google my “a short course in monetary theory” and you’ll find my views. You may have to add my name, or “themoneyillusion” to the phrase being googled. The basic idea is that prices are flexible in the long run, so you only get higher prices through the excess cash balances effect. Monetary policy only impacts interest rates in the short run. If prices were completely flexible, there would be no effect on interest rates at all.

    Mark, Thanks. I call myself a right-wing liberal (if that’s not an oxymoron.)

    Thanks JimP, I just left two comments.

    Nick, I agree.

    Caveat bettor, I am not quite sure what you mean. Earlier I emailed you that the BEA produces the numbers for NGDP. Is that what you mean by a source? (I don’t know futures market lingo.) Maybe another commenter can help out with suggestions. Again, I think it is a great idea, so I hope anyone else with ideas will chip in.

    Graeme, Several points:

    1. I agree the money supply can be misleading.
    2. I want to stabilize the macroeconomy. I can’t help the fact that that might also help banks. I favor NGDP targets in lieu of bank bailouts, not in addition to bailouts.
    3. Remind me, which country are you from? Australia?

    Greg, I see your point, but here’s how I’ll defend myself.

    1. I consider liberals to be relatively utilitarian in their value system.

    2. I consider myself a right wing liberal, someone who believes free markets are usually the best way to achieve utilitarian goals.

    3. I consider people like Krugman and Obama to be left wing liberals, people who believe big government is often the best way to meet utilitarian goals.

    4. I don’t consider far left people like Mao and Chavez to be liberals at all. They aren’t utilitarians. They want (or wanted) to screw the rich.

    5. And of course there are lots of right-wingers who aren’t liberal.

    6. I should call myself a right-wing liberal; I get sloppy sometimes.

    Does this make sense?

  29. Gravatar of Jon Jon
    16. November 2009 at 19:19

    Nick, Scott:

    Right, it Sticky prices explain how real-effects develop, but is that the whole story?

    It seems to me that Scott is flat out-rejecting the Austrian natural-rate approach. i.e., in his view real-output is stimulated directly by the excess supply of money.

  30. Gravatar of StatsGuy StatsGuy
    16. November 2009 at 21:03

    I think it’s policy uncertainty. As assets become more correlated (e.g. “the dollar is everything”), the variance of any given basket rises, and demand for protection against tail events increases. The markets are perceiving that outcomes have a bimodal distribution.

    Another way of putting it: the longer the Fed forestalls nominal price revaluation (or inflation), the worse it becomes (because sooner or later we’ll need to return to trend, and the gap grows every month)… but no one knows when it will hit. Yet, sooner or later, it _must_ hit (or, the US govt will need to declare bankruptcy).

    I suspect that TIPS yields are so low precisely because it doubles as an inflation risk hedge – you could buy TIPS, or you could buy higher yield treasuries and very expensive protection. Arbitrage should close the gap between these options.

    Here’s one of the more interesting quotes:

    “Potentially putting more pressure on longer-term government securities is Treasury’s plan to increase the average maturity of Treasury debt to a range of between six and seven years, up from 4.42 years currently. The Treasury aims to lengthen maturities over the next three to five years.”

    Based on that, a reasonable guess at when we get inflation is 3 to 5 years. 🙂 The yield curve on home mortgages agrees.

  31. Gravatar of Lee Kelly Lee Kelly
    16. November 2009 at 23:03


    In Bernanke’s introduction, he basically makes the same observation as you.

    Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has “run out of ammunition” –that is, it no longer has the power to expand aggregate demand and hence economic activity.

    However … a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition … a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand

    Bernanke then explains that prevention is better than a cure, and lists three methods of prevention.

    First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.

    Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy.

    Third … when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates.

    Why didn’t Bernanke take his own advice in early ’08? Perhaps he did not get his way with policy. In any case, he goes on to pose the scenario in which the fed funds rate hits its zero bound, and asks what policy the central bank could pursue.

    Under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

    Then on to specifics.

    To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system — for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities.

    The following quote is very interesting, because Bernanke suggests a long-term commitment to a a zero or low fed funds rate.

    One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period … A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields … Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).

    The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

    Finally, before moving onto fiscal policy, Bernanke mentions your favourite.

    Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34.

    After all of that, he gets onto what fiscal policy, and the surprising thing is that he primarily is concerned with tax cuts. There is no suggestion that the Federal Government should be doubling its deficit; the only mention of increased government spending is with regard to the so-called “automatic stabilisers.”

    the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers.

    So where did it all go wrong?

  32. Gravatar of Nick Rowe Nick Rowe
    17. November 2009 at 07:00

    Jon: Bill Woolsey keeps making the point, and he’s right, that even in a world with no borrowing and lending, and so no rate of interest, an excess supply of money would create an excess demand for goods. The interest rate channel is not essential to the story.

    But in a world where borrowing and lending do exist, the excess supply of money will create excess demand in the bond market as well as in the goods market, so we will observe an indirect interest rate channel as well. And with perfect capital markets, I think that’s the only channel.

  33. Gravatar of Nick Rowe Nick Rowe
    17. November 2009 at 07:02

    Jon: BTW, I think of the natural rate as more Swedish than Austrian, though I could be wrong.

  34. Gravatar of Stephen Neumeier Stephen Neumeier
    17. November 2009 at 07:31

    Do you consider the total debt to GDP ratio to be a factor in your economic model? It seems to me that an overleveraged economy is less stable. Is it necessary to reduce this ratio before we have a normal economy? Can you direct me to any research in this area?

  35. Gravatar of Adam P Adam P
    17. November 2009 at 07:38


    Bill is wrong. Quite wrong.

    Even in a world without borrowing and lending their is still a real rate of interest. It’s the marginal return to real investment. Their is also still a natural real rate.

    If the natural real rate is negative then people are (very) happy to save at zero return, thus (in the absence of expected inflation) will hold an unlimited amount of money. Thus, in a liquidity trap there is never an excess supply of money.

    Any money induced change in aggregate demand still works through a change in the real rate even if there is no borrowing or lending.

  36. Gravatar of Adam P Adam P
    17. November 2009 at 07:46


    If the change in behaviour did not involve a change in the real rate then people would no longer be satisfying their Euler equations. That is, they would no longer be maximizing utility.

    Do you or Bill really believe that monetary policy can make people stop maximizing their utility?

  37. Gravatar of Doc Merlin Doc Merlin
    17. November 2009 at 08:08

    “Sustained deflation can be highly destructive to a modern economy and should be strongly resisted.”

    Wasn’t the 19th century mostly price deflationary yet had the longest and largest economic growth in our nation’s history.

  38. Gravatar of Doc Merlin Doc Merlin
    17. November 2009 at 08:12

    @ Stephen

    Yes, you should check out John Geanakoplos’s work on this very subject.
    His papers are avaliable here:

  39. Gravatar of Doc Merlin Doc Merlin
    17. November 2009 at 08:29


    People don’t maximize their utility they try to maximize utility. Expectations and expected time preferences come into this. Most mainstream economic theories ignore this and just assume that people have perfect statistical future knowledge, because it makes the math tractable.

  40. Gravatar of Scott Sumner Scott Sumner
    17. November 2009 at 08:41

    Jon, Prices don’t cause changes in the economy, they reflect changes. Interest rates are prices.

    Lee Kelly, A couple points:

    The Fed did not cut interest rates aggressively last year. During May-September, and even the first week of October, there were no rates cuts at all. So the Fed certainly did not do what Bernanke recommends.

    More importantly, the combined fiscal/monetary option does not necessarily work. You still need an explicit price level or NGDP target–and we don’t have that.

    Nick, Big increases in the money supply tend to lower bond prices, not raise them. So I am very dubious of the bond market channel you describe, even with perfect capital markets. If prices are flexible a permanent 10% rise in the money supply will cause prices to immediately rise by 10%, and interest rates won’t change at all–even with perfect capital markets. In my view the key assets are stocks, commodities, and real estate. More money increases their value, which boosts AD. And that’s true whether or not wages and prices are sticky. Interest rates may go up or down with an increase in the money supply, but don’t have much causal impact on the economy.

    Nick#2, Yes, it is Wicksell’s theory.

    Stephen, I think we would be better off with less debt. Of course our tax system pushes people toward debt and away from equity. It also discourages savings. This makes the financial system less stable. But it isn’t really my area of research—I focus on monetary issues. Maybe another commenter can help you out.

    Adam, You said;

    “If the natural real rate is negative then people are (very) happy to save at zero return, thus (in the absence of expected inflation) will hold an unlimited amount of money. Thus, in a liquidity trap there is never an excess supply of money.

    Any money induced change in aggregate demand still works through a change in the real rate even if there is no borrowing or lending.”

    This is all true, but slightly misleading. It is also true that any permanent increase in the money supply is expansionary, even in a liquidity trap, and regardless of the current level of the real natural rate.

    Regarding your second sentence, it is equally true that in an economy without debt, monetary policy works through a change in the prices of stocks, commodities, and real estate. Indeed that is saying the same thing using different terminology. But in most real world discussions of the liquidity trap those mechanisms are overlooked, and the focus is on real bond yields. So I don’t disagree with your point at all, and indeed it is an important point, but some readers might draw the wrong conclusion.

    I prefer to focus on the prices of those real assets, which can be easily measured, rather than the expected real yields, which are completely impossible to measure.

    Adam#2, Again, I agree but this is just the flip side of the really important issue, sticky wages and prices. If wages and prices were not sticky, the real interest rate would not be affected by monetary policy. Because wages and prices are sticky, a monetary shock raises the prices of stocks, commodities and real estate relative to wages and some sticky prices. This causes more real output. Interest rates are just the flip side of asset prices, but what is really going on, and what is driving real output, is the stickiness of wages and some prices. Maybe this is a meaningless debate, as all new Keynesian and all monetarist models require some sort of stickiness (or related concepts like misperceptions). But I’ve always thought that focusing on interest rates is a mistake, for all the reasons I described in earlier posts criticizing use of either nominal and real interest rates as an indicator of monetary policy. As King pointed out, easy money can raise both nominal and real interest rates, and yet still have an expansionary impact on real output.

  41. Gravatar of Scott Sumner Scott Sumner
    17. November 2009 at 08:50

    Doc Merlin, That’s true, but there were some big recessions, and that was with a much more flexible labor market than we have today. As we moved into the 20th century, periods of deflation became more destructive. Nevertheless, I agree that if you had a steady 2% rate of NGDP growth, implying mild deflation, we could adjust.

  42. Gravatar of Scott Sumner Scott Sumner
    17. November 2009 at 09:31

    Statsguy, The nice thing about targeting expectations is that you don’t care if there is a bi-modal distribution. It is expectations that drive debt and wage contracts. As long as expectations are under control, you don’t need to worry about actual NGDP.

  43. Gravatar of StatsGuy StatsGuy
    17. November 2009 at 10:34

    “The nice thing about targeting expectations is that you don’t care if there is a bi-modal distribution.”

    Well, I think you still care in the sense that a bimodal distribution tends toward increased variance, which increases the risk premia associated with long term investments (as signalled by the huge spike in inflation insurance costs even as t-bill rates stay “low”). However, targeting expectations is still the best fix since it’s likely to be stabilizing… and might very well collapse the bimodal distribution back to a unimodal (and probably lower variance) distribution. So this is just another piece of data in support of expectation targeting.

  44. Gravatar of Jon Jon
    17. November 2009 at 10:44

    Nick#2, Yes, it is Wicksell’s theory.

    No… Wicksell was carrying forward from Böhm-Bawerk’s “Capital and Interest” (1884) where he introduces the concepts of a “natural rate of interest” versus the “contract rate of interest”.

    Wicksell published “Prices and Interset” in 1898 and was an avowed student of Böhm-Bawerk. No insult to Wicksell though, his presentation + ideas are much more refined.

  45. Gravatar of Lee Kelly Lee Kelly
    17. November 2009 at 13:47


    Well, it seems to me that Bernanke is advocating six policy tools for tackling deflation when the federal funds rate hits its zero bound:

    1. Expand the scale and range of the Federeal Reserve’s asset purchases (including foreign government debt and agency debt)
    2. Make low interest loans to banks
    3. Openly commit to holding the federal funds rate close to zero for a specified period
    4. Explicitly target a ceiling for yields on longer maturity Treausry debt
    5. Control the exchange rate for the U.S. Dollar
    6. A general tax cut and increased fiscal expenditure on unemployment benefits.

    My question: wouldn’t numbers 3 and 4 have somewhat similar consequences to a price level or nominal expenditure target?

    In any case, it’s a surprising talk. I find myself agreeing with Bernanke more than I ever thought I would have. In his talk he barely mentions anything about fiscal stimulus, so I would be curious to discover what changed his mind (political pressure? Expediency?). Regardless of whether you or I agree with everything in his talk, I think the economy would be in a much better shape today if he had followed his own advice.

  46. Gravatar of Nick Rowe Nick Rowe
    17. November 2009 at 18:24

    Jon: I had forgotten Bohm-Bawerk. Let’s say “Austro-Swedish”?

    Adam P. In a world without markets for apples, there is no price of apples. Everyone has a MRS for apples against other goods, and it will be equal to their own personal MRT for apples against other goods (they grow their own), but those MRS=MRT tangencies will have very different slopes across individuals.

    If there is no market for borrowing or lending of any form (no capital markets of any type) there is no rate of interest (the price of loans). Everyone will have their own intertemporal MRS=MRT tangency (they finance their own investments), but the slopes won’t be equal across individuals.

    So if I interpret what you say literally, it just isn’t right. But maybe there’s another way to think about it.

    Let’s try it another way. If people are borrowing constrained, there’s a lambda appearing in the Euler equation, as well as the real rate of interest. As the borrowing constraints bind deeper and deeper, the lambda gets bigger relative to the rate of interest, and in the limit there are no capital markets, the rate of interest disappears from the Euler equation, and all that’s left is the lambda.

    But people will still want to hold money as a medium of exchange if barter is costly. And someone who was borrowing constrained would want to borrow both to hold more money today for shopping and to do more consumption and investment today. An increase in their money holdings would relax their constraints on both margins.

    Not as clear as I want to make it (as usual).

  47. Gravatar of Adam P Adam P
    17. November 2009 at 23:02

    Scott (@8:41),

    Good that we agree but I would argue that it is your and Bill’s terminology that is misleading.

    After all, the statement “there is an excess demand for money” sounds as if the solution is simply to supply more money. Nothing in that statement leads on to worry about the monetary injection being permanent, which it needs to be. The statement makes it sound as if temporary money will do.

    My statement, that “you need to lower real rates” leads immediately to the conclusion that if nominal rates are at zero that you need expected future inflation. You then are led immediately to realize that the injection must be permanent because it’s the future price level your really after.

    And through it all, with or without credit, the transmission mechanism is through rates of return, intertemporal substitution. Qunatities only change behaviour to the extent they change these rates.

  48. Gravatar of Adam P Adam P
    18. November 2009 at 02:28


    I had in mind a situation where eveyone has access to the same investment technology and all assets are tradeable so we all face the same available rates of return. We all hold some physical assets, those who want to trade more consumption today for less tomorrow (borrowers) sell some assets. Those who want the reverse buy assets.

    Selling assets and borrowing are perfectly equivalent because someone without assets wouldn’t be able to borrow anyway.

    However, you’re right that with small, quite realistic, tweaks (say introducing non-tradeable assets like human capital) then borrowing constraints are meaningful and would bind and then just giving people more money can relax those constraints and directly change behaviour.

    The real answer is that I interpreted Bill in the context of the sort of standard canonical model that Scott has been using. You’re suggesting that he was speaking in the context of an entirely different model.

  49. Gravatar of Nick Rowe Nick Rowe
    18. November 2009 at 04:21

    Adam P: OK. I understand where you were coming from now.

    Assume the physical asset is land, for example. So buying or selling land is a very close substitute for lending and borrowing. You can always rent it out.

    Hmm. I need to think through a model with land as my other asset.

  50. Gravatar of Jon Jon
    18. November 2009 at 14:02

    Nick, Scott:

    I’ve been trying to think of the right descriptive framing: even if the expected real-return on the monetary base is negative, will there be infinite demand to hold money?

    Initially I thought yes… if expected deflation is greater than the natural-rate, then people will ‘earn’ their time-preference simply by hoarding cash/reserves. This would lead one to believe that once nominal-rates cannot descend lower, people cannot be induced to spend now rather than later. But this is wrong. People’s indifference curves surely do not look that way: due to diminishing returns to future consumption. i.e., eventually I accumulate so much expected future consumption that my natural-rate preference today must be different because of the diminishing value of future consumption.

    That is, the cash-rate (price which equalizes the supply and demand of cash balances) is different from the overnight-rate which is a credit-rate and equalizes the loan market.

    The demand curve for cash-balances is slopped and therefore hoarding preference is not infinite even at the zero cash-rate bound.

  51. Gravatar of Scott Sumner Scott Sumner
    18. November 2009 at 18:23

    statsguy, I think we agree about the variance issue. obviously less actual variance would be nice, but big gains come from stabilizing the expected growth path, which feeds into contracts.

    Jon, You may be right. I had heard that Wicksell was the first to make a business cycle theory of of the natural rate concept. I’m not a scholar in this area.

    Lee Kelly, When you move into an institution like the Fed, you find it is not always possible to get your way. Some of the FOMC members are more “hawkish” about inflation than he is.

    I still think you need an explicit target, although items 3 and 4 might have helped, I don’t see them as substitutes.

    Adam, I agree with your point about permanent changes being the key. I don’t agree that you necessarily need to lower real rates. If a policy is expansionary enough to dramatically raise RGDP growth expectations, then real rates may not have to fall. The sine qua non is you need higher asset prices. As a practical matter, however, I think we are very close.

    Jon, you may be right about the fact that the demand would not be infinite, but you lost me somewhere. You start by discussing negative real rates on cash, but then consider deflation, which causes the real return on cash to be positive.

  52. Gravatar of Adam P Adam P
    19. November 2009 at 06:42

    Scott yes, I think we’re actually in full agreement here. I would have said that it happens in two stages. First real rates fall, then agents react to the new real rate. Their reaction can indeed, and we hope would indeed, have exactly the offsetting effect on real rates.

    If it does have a more than fully offsetting effect then we know the intial policy was strong enough. And yes, a model would say it all could happen in one period so you need never really see the lower real rate, all you actually observe is the higher inflation and higher nominal rate. But when I reason it through and articulate it I still break it into two steps, cause and effect so to speak even if they both coincide on the calendar.

  53. Gravatar of Adam P Adam P
    19. November 2009 at 06:58

    Just to clarify my last, the offsetting reaction in question is simply to upgrade their expectations of future consumption growth. This raises the real rate.

    But the reaction is caused by the initial lowering of the real rate. In the standard model this is the only way it can happen.

  54. Gravatar of Jon Jon
    19. November 2009 at 08:11

    Scott: sure enough, I switch that around… a positive real-rate to money

  55. Gravatar of rob rob
    20. November 2009 at 16:10

    Today, Buttonwood at the Economist says:

    “Tim Bond of Barclays Capital has looked back through the American data since the mid-1960s. He points out that the difference between GDP as first reported (and therefore known to policymakers) and GDP (as subsequently revised) was around 1.4%. That is greater than the average level of the estimated output gap over this period.

    As an example, policymakers thought that American GDP dipped 7.7% in the 1974-1975 recession; in retrospect, the decline was only 2.5%. No surprise then that the Fed eased monetary policy by too much and the result was high inflation.”

    I’m guessing this would be yet another argument for why futures targeting would be the better approach. OTOH, if the futures are settled against an initial NGDP report — might futures be just as prone to miscalculation (since they are trying to predict a possibly miscalculated number?)?

  56. Gravatar of rob rob
    20. November 2009 at 16:11

    Forgot the link:

  57. Gravatar of Scott Sumner Scott Sumner
    25. November 2009 at 17:17

    Adam P, Yes, and I think another way of saying that would be that the real rate will fall for any given rate of expected GDP growth.

    rob, Others might want to chime in here, but I am pretty sure that the direction of error is not forecastable. As long as the initial figure is a Ratex forecast of the final figure you are ok. If the initial figure is consistently biased in one direction, then have the contracts be based on the revised numbers; the only problem is that it would delay the settlement of contracts. But that is not a severe problem.

  58. Gravatar of rob rob
    25. November 2009 at 20:05

    There’s a couple odd things in the air right now:

    1) Krugman seems to be finally giving the Fed a hard time. I think you have to credit him for this. Just one recent example:

    I think you are the main one who has pushed him into this position. If so, good work! (At a minimum, you have been an influence.)

    2) This carry trade meme won’t go away. The Fed said yesterday they think they might be creating a new asset bubble. (What?) I don’t get it. So, the story, as I understand it, is: banks are borrowing at cheap rates and buying stocks and bonds. But banks still aren’t lending for say, capital investments. This doesn’t make sense, does it? Why would banks borrow and take risks in the market, but not with businesses? On the face, this seems ass-backwards.

    My intuition is that the story must be wrong. (Either that, or I just don’t understand the story, which is at least equally possible.)

    Can anyone square this story with intuition?

  59. Gravatar of rob rob
    25. November 2009 at 20:16

    I’m tempted to film an old-fashioned Japanese-style horror flick called: The Bubble. Is there anything scarier these days than bubbles? I see mobs seeping through the streets of the city, fleeing asset prices in the sky…

  60. Gravatar of ssumner ssumner
    27. November 2009 at 17:27

    rob, Thanks for the Krugman post, it is the best I have ever seen from him. And I agree with you about the carry trade, and also the silliness about worrying about bubbles.

  61. Gravatar of Doc Merlin Doc Merlin
    28. November 2009 at 04:16

    “(What?) I don’t get it. So, the story, as I understand it, is: banks are borrowing at cheap rates and buying stocks and bonds. But banks still aren’t lending for say, capital investments. This doesn’t make sense, does it? Why would banks borrow and take risks in the market, but not with businesses? On the face, this seems ass-backwards.”

    Reminds me of something someone told me: in the Great Depression, it very easy to get loans at good rates, if you could prove you didn’t need one.

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