Michael Belongia’s critique of the Fed

I found this scathing critique of the Federal Reserve System to be quite interesting.  Because many of you are also very interested in the Fed, and critical of the Fed, I thought you might be interested in Michael’s views.  Obviously I don’t agree with every detail of paper, for instance I favor targeting NGDP rather than the price level, but I do agree with many of Michael’s views:

1.  The Fed should have a single nominal target.

2.  The Fed needs to be transparent and have specific and well-defined monetary policy goals.

3.  The Fed should focus only on monetary policy, and regulation of the large banks.

4.  Fed research should include more voices that dissent from current Fed decisions.  (Yes, I know that some of the branches have divergent theoretical approaches (i.e. RBC), but I am talking about the sort of critique you see in the blogosphere.)  I’d like to see more studies that challenge the focus on interest rate targeting.

5.  I agree with Michael that the fed funds rate is a target, not a policy instrument, (although I erroneously called it an instrument at times), and it is not the appropriate target.

6.  I agree that there should be just 5 Fed branches: NYC, Atlanta, Chicago, Dallas and SF.

7.  I agree that Fed should stop doing research on issues unrelated to money and banking.

8.  I agree that we need better data from the Fed.

BTW,  Michael’s writing style is often quite provocative and amusing.



18 Responses to “Michael Belongia’s critique of the Fed”

  1. Gravatar of Bill Stepp Bill Stepp
    13. December 2009 at 10:02

    Re 1-8, why not just abolish the Fed? Points 1-8 bite the dust.
    And did you see the obit. of Samuelson in the NYT?

  2. Gravatar of Andrew C Andrew C
    13. December 2009 at 10:16


    The link just takes me to the log-in page for Bentley’s Outlook system.

  3. Gravatar of malavel malavel
    13. December 2009 at 10:33

    Scott, the link seems to go to an Office Outlook Web Application.

  4. Gravatar of ssumner ssumner
    13. December 2009 at 10:41

    Bill, It won’t happen, and I’m not sure it should happen.

    malavel, Thanks. I can’t understand what was wrong, because the link worked fine for me fine. But try the new one I set up. You’ll need to open the PDF. I will never understand how links work.

  5. Gravatar of MIke Sandifer MIke Sandifer
    13. December 2009 at 11:02

    Dr. Sumner,

    I hsve read here and there about, making more significant changes to the structure of the Federal Reserve system. Do you think the points in the article you linked to go far enough?

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    13. December 2009 at 13:29

    I once got into a (in retrospect) pointless and protracted argument with Charles Plosser before the crisis (RBC term co-creator). I think our current circumstances have proved me right in the end although I’m sure he would never ever admit it (especially to me).

    Up until this point people who have held my views have been strangely underepresented at the Fed. Balance is key.

  7. Gravatar of Jon Jon
    13. December 2009 at 23:15

    Did anyone else notice that RBC analysis was the one example of contrarian research at the Fed… yet the proposal is to retain: “New York, Atlanta, Chicago, Dallas, and San Fransisco”

    Atlanta instead of St. Louis? Dallas instead of Kansas City? Chicago instead of Minneapolis? New York instead of Cleveland?

    That’s really an audacious move.

    Almost everything in this document struck me as a red-herring… including the wild notion of late that the Fed failed to supervise the banks. As far as I can see–most of the bank failures followed from the economy being squeezed from tight policy not from any fault at oversight.

    Perhaps the one interesting side-light in the article was the bit about the first several years of Greenspan’s Chairmanship… particularly as the behavior coincides with Greenspan’s imposition of a virtual gold standard.

  8. Gravatar of Doc Merlin Doc Merlin
    14. December 2009 at 01:21

    Hrm, actually you know what I would like to see… I’d like to see an analysis of the fed treating it as a weak banking and finance cartel.

    I second Bill’s disestablishmentarian impulse.

  9. Gravatar of marcus nunes marcus nunes
    14. December 2009 at 01:59

    But Greenspan thinks the Fed has done “extraordinary work”!
    The Fed has done all it could to reduce unemployment and should worry now about the risks to inflation!

  10. Gravatar of Scott Sumner Scott Sumner
    14. December 2009 at 06:10

    Bill, No I haven’t seen the obit, but will take a look at it.

    Mike, Yes, I think think they go far enough in a structural sense. Again, I prefer an NGDP target to a price level target, so I don’t agree with every suggestion. But I do think it is about the right amount of change in a structural sense.

    Of course I’d also like to see futures targeting–so that would be one additional change that would further reduce Fed discretion. But even without futures targeting, if the target became explicit, and it was a level target, I think we could get excellent monetary policy.

    Mark, I am also skeptical of RBC economics, at least as a theory of business cycles. I do think real factors are key in the long run, and play a supporting role in business cycles.

    Jon, I was thinking of the branches in purely geographical terms, and I think Michael was too. We both like the more heterodox branches. I certainly would rather keep the St. Louis, Richmond and Minneapolis branches if the decision was based on whether the branch provided alternative views.

    Doc Merlin, You said;

    I second Bill’s disestablishmentarian impulse.

    As you know, regarding the issue of abolishing the Fed, I am an antidisestablishmentarian. And that makes my philosophy . . .

    Marcus, That supports my view that the problem isn’t Bernanke, it is institutional, and indeed the problem is the entire state of modern macro. As long as most top macroeconomists think Bernanke is doing a fine job, why should they change?

  11. Gravatar of Jon Jon
    14. December 2009 at 09:51

    Scott, incidentially the list of districts to retain isn’t Michaels. That’s from congress…

  12. Gravatar of marcus nunes marcus nunes
    14. December 2009 at 10:19

    Krugman “double takes” on MP effectiveness.
    So he has endorsed J Gagnon. Now he counters that Samuelson was right since 1948!

  13. Gravatar of marcus nunes marcus nunes
    14. December 2009 at 14:17

    The week end (maybe Samuelson´s death) did something to Krugman:

  14. Gravatar of rob rob
    14. December 2009 at 16:06

    Indeed, the good doctor seems to have taken a sip of his potion over the weekend and turned back into Mr. Keynes.

  15. Gravatar of Scott Sumner Scott Sumner
    15. December 2009 at 07:25

    Thanks Jon.

    Marcus, I had the same feeling, that somehow Samuelson’s death reminded him of what he liked about Samuelson’s 1948 book. I’m sure there is some way to reconcile all of this, but I don’t think Krugman realizes that his writing style (which is very definitive, very authoritative) makes these changes look like flip flops. I tend to use more qualifiers, pointing out the assumptions required to make a statement operative.

    rob, Yes, my Dr. Jekyll post is looking prescient right now.

  16. Gravatar of TVHE » Monetary policy discussion in the US TVHE » Monetary policy discussion in the US
    20. December 2009 at 11:04

    […] Sounds like what we’ve been saying here.  From over there: […]

  17. Gravatar of TheMoneyIllusion » Michael Belongia on Econtalk TheMoneyIllusion » Michael Belongia on Econtalk
    12. January 2010 at 07:57

    […] views on what the Fed should be doing differently, they link to one of his papers, and I also have this earlier post that discusses some of his […]

  18. Gravatar of Michael Belongia on the Fed Michael Belongia on the Fed
    12. January 2010 at 08:50

    […] views on what the Fed should be doing differently, they link to one of his papers, and I also have this earlier post that discusses some of his […]

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