Mr. Bernanke, listen to what the markets are telling you

Peter Laan sent me this headline, from

Treasuries Drop After Bernanke Says Federal Reserve Poised to Take Action

Treasury prices dropped, meaning yields rose.  Isn’t that the opposite of Operation Twist?



25 Responses to “Mr. Bernanke, listen to what the markets are telling you”

  1. Gravatar of John John
    4. October 2011 at 11:14


    You should address this argument at some point because, like it or not, this is the mentality your ideas are up against. If I wanted to summarize the view on monetary matters that is taking over the GOP, I would summarize it with this quote from Rothbard’s “Man, Economy, and State.”

    “We conclude that there is no such thing as ‘too little’ or ‘too much’ money, that whatever the social money stock, the benefits of money are always utilized to the maximum extent. An increase in the supply of money confers no social benefit whatever; it benefits some people at the expense of others, as will be detailed further below.”

  2. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 11:18

    John, So Zimbabwe didn’t provide too much money? I’m not a fan of Rothbard; monetary economics must be approached from a pragmatic perspective, not via logical deductions from first principles.

  3. Gravatar of Kevin Donoghue Kevin Donoghue
    4. October 2011 at 11:47

    “Yields on 30-year bonds increased two basis points, or 0.02 percentage point, to 2.75 percent….”

    Okay, so arguably he has managed to produce a miniscule increase in the expected rate of inflation. Alternatively, he has added a smidgen to the risk premium. How do we tell which it is?

  4. Gravatar of Gabe Gabe
    4. October 2011 at 12:16

    I am confused…does the GOP run the Fed now? When some people wanted the Fed to reveal all of the info on the securities they bought(because political cronyism was suspected, possibly favoring Goldman Sachs, JP Morgan and others). The Fed fought back with all of the pro-fed GOP and Democrat lawmakers and the usual suspects in the media saying we had to maintain “independence” now as the Fed crashes the economy, people are blaiming on of the political parties for magicallly controlling the Fed?

  5. Gravatar of Gabe Gabe
    4. October 2011 at 12:19

    Sumner, why do we allow a secretive group of bankers to have the monopoly rights on issuing money? seems like a recipe for corruption to me. The decisions on when to print and when to slam on the breaks has a pretty big impact on all the financial markets…it seems that this strategic advantage of money printing may allow for some smart people to systematically screw the little guy.

  6. Gravatar of ssumner ssumner
    4. October 2011 at 12:22

    Kevin, I assumed the headline referred to the intraday swing. Stocks opened down sharply, so I assumed the yields also fell early. Perhaps the intraday increase after the speech was larger.

    But that’s just a guess.

    Gabe, No the GOP doesn’t control the Fed. The Fed is making cognitive errors, it’s not all bad motives. Remember that tight money sank the McCain campaign in late 2008.

  7. Gravatar of K K
    4. October 2011 at 12:30

    As far as I can tell, the only material thing that he said is that he thinks the economy is ‘close to faltering’. And the S&P rallied by 4%. Which lends a lot of credence to Scott’s assertion that the Fed still has lots of power. But as Scott points out, bonds dropped on the news, so the market is not rallying on the expectation of more operation twist. The only rationale that can be ascribed to the market, is that the Fed might let go of its inflation target. A level target would help. An *NGDP* level target could be huge. But *stop* messing around with treasury purchases. It’s *at best* a waste of time.

  8. Gravatar of marcus nunes marcus nunes
    4. October 2011 at 12:44

    Bernanke keeps playing the “it´s cold, it´s hot” kind of game and markets go on a roller coaster! And now he gave a rallying cry for a “sharing and planning society”!

  9. Gravatar of Gabe Gabe
    4. October 2011 at 12:45

    Jamie Dimon JP Morgan head…NY Fed board member…nice position from which to make bets on the economy.

    Volcker and Greenspan have both worked for David Rockefeller for decades. Ya the same guy who was head of Chase bank(now JP Morgan Chase…where Greenspan was a board member). Do you really think that all the important decisions are kept within the walls of the fed? or is it possible some good info slips over to David Rockefeller or Jamie Dimon…I realize this is considered conspiracy theorizing, by those who worship the network news, but everything I have said here is fact and you are not a student of human nature if you don’t see how inevitable it is that we the people are goign to get massively screwed when the central planners are given this much power.

    I see Sumner is consistenly and earnestly advocating a MORE sensible policy(although not perfect IMO)…however I have to wonder how long it will be before he realizes what he is really up against.

    How long will you have to be ignored by these so called academics before you realize the proposals you make are not be ignored because they are bad ideas? but because your ideas don’t fit in with the plan pre-conceived by others who are much more powerful than you? They won’t talk with you in a public forum because they are scared of detailed questions, they are not interested in your improvements, they are not open discussion/debate or discovery. They are open to having manufactured crisis in order to create conditions where they can accrue additional power.

    Crisis/Reaction/Pre-developed “solution”

    before the internet a economist like you could not get his ideas and questions widely circulated in this way. You would have had to rely on more controlled avenues and you would have been stiffled, now anyone who follows monetary policy seriously is aware of your arguments. The Fed is ingoring your argument and it discredits them even more in my eyes.
    Does it discredit them in your eyes?
    Hopefully things will change.

  10. Gravatar of John John
    4. October 2011 at 12:49


    It would be perfectly feasible for prices to get a bunch of extra zeros on the end and have the monetary system survive. The danger is that people reject and refuse to hold a currency that losses its value too quickly to function as a suitable medium of exchange.

    About the “pragmatic approach” to to econ, in econ you can’t have controlled experiments and the causal links driving something like inflation, unemployment, or GDP are far too dense for modeling and mathematical analysis. But even putting that aside, the minute you begin to select relevant data, you are working off of a theory whether you know it or not. It is impossible to be “pragmatic” or neutral when studying the social sciences. Theory always has to come first. The physics envy of economics is a major barrier to solid analysis.

  11. Gravatar of Gabe Gabe
    4. October 2011 at 12:52

    Scott:”Remember that tight money sank the McCain campaign in late 2008.”

    I am sorry but I thought what sank McCain was that he was obviously supportive of two or three very unpopular wars and he said he didn’t care if we stayed there 100 years and we should bomb, bomb Iran.

    Remember Obama was going to end at least one war and he was viewed as not a old corupt white guy.

    At the same time he had been a big fan of big governemnt republicanism, TARP, the bailouts, he even toyed with carbon taxes. All of this stuff right as the teaparty movement was being birthed…and he was the anti-teaparty.

    McCain also had a line in the debates…”I don’t really know much about economics” that kinda was uninspiring…the guy never had a chance at president.

  12. Gravatar of John John
    4. October 2011 at 12:54

    In a further note, there are no constant relationships between aggregates. While the quantity theory of money may be true, there is no precise relationship between changes in the amount of money and the price level, even if you could measure either one, which you really can’t. So you’re talking about being pragmatic by studying the relationship between things you can’t measure without even having the ability to isolate those two variables. That hardly sounds scientific or pragmatic to me. That’s why it IS so important to study economics using deductive reasoning. Since you have to have a theory to even pick out relevant data, you have to make that theory as solid as possible before you try and apply it.

  13. Gravatar of Gabe Gabe
    4. October 2011 at 12:59

    “The Fed is making cognitive errors, it’s not all bad motives”

    “bad” is subjective, I’m sure THEY think it is good if they get more power. Pretty sure they think the world will be better if they control every single thought, human resource and industry.

    Even Mao had good intentions.

  14. Gravatar of David Pearson David Pearson
    4. October 2011 at 13:09

    It seems Bloomberg changed the title on the linked article to:

    “Treasuries Decline on Bets Europeans Will Contain Debt Turmoil”

  15. Gravatar of John Thacker John Thacker
    4. October 2011 at 14:27

    McCain also had a line in the debates…”I don’t really know much about economics” that kinda was uninspiring

    He said than in an interview in the context of “I don’t really know much about economics but I’m learning and willing to listen to my advisors.” Honest but uninspiring as you point out.

    Also miles better than “I don’t know really know much about economics but I think I do and I’m not willing to learn or listen to my advisors,” which is what we’ve gotten from Obama if books can be trusted.

    McCain did have the virtue of voting against the farm bills, the energy bills, and a number of GWB’s Big Government Republican bills. Not quite as big government as you think. (But, however, a real jerk with a tendency to ascribe nasty motives to his opponents.)

  16. Gravatar of John Thacker John Thacker
    4. October 2011 at 14:27

    McCain’s “I don’t really know much about economics but I’m trying to learn” actually made me more likely to vote for him.

  17. Gravatar of Gabe Gabe
    4. October 2011 at 14:37

    I never came close to voting for McCain. I was just talking about some of the factors that killed him from a realistic perspective. The 2 big ones were 1) supported a war that had gotten really unpopular. 2. Supporter tarp and bailouts.

  18. Gravatar of Jason Odegaard Jason Odegaard
    4. October 2011 at 15:00

    Gabe you said:
    “Pretty sure they think the world will be better if they control every single thought, human resource and industry.”

    Modern central banking (like at the Fed, ECB, BOJ, BOC, BOE, etc) is pretty much the opposite of the control you suggest.

    Also keep in mind the current Fed chair has never worked on Wall Street. He spent most of his life in academia (though he did work at a Mexican restaurant before that, from what I understand).

  19. Gravatar of Scott Sumner Scott Sumner
    4. October 2011 at 18:09

    K, I completely agree on Fed tactics. We are on the same wavelength.

    Gabe, I favor having the market determine the money supply and interest rates, not the Fed. Maybe someday . . .

    Marcus, I should read the transcript, but I’m almost afraid to.

    Gabe, I hear you, but I keep going back to the FACT that Fed policy is killing bank stocks. It’s not all conspiracy, there is such a thing as cluelessness.

    John, So you agree there can be too much money?

    All my empirical work is informed by theory. But you still need to deal with the real world, not just the world of logic. Money is highly complicated, and there are dozens of relevant theories. It never “all boils down to X.”

    Gabe, I agree, but nonetheless when the economy fell apart in the last two months, so did McCain poll numbers. Is that a GOP conspiracy?

    John, If you can’t measure anything there is no point in you coming over here to discuss the economy. All you know is how your two neighbors are doing, nothing more. I happen to think aggregate data has some information value. I happen to think we know that unemployment has risen sharply, not because I know a few unemployed people, but because the data says so.

    Gabe, Not a good comparison. Mao knew he was killing millions, and didn’t care. That’s documented.

    David, I think that’s true, but didn’t stocks also rally later in the day on euro news? It doesn’t make the first story false, it’s a more recent event.

    Maybe my mistake was assuming reporters know what they are doing. Insert joke here.

    John Thacker, And we find out that Obama also knows nothing about economics.

    Jason, Good points.

  20. Gravatar of John John
    4. October 2011 at 20:21


    I wasn’t saying that there can be too much money. If the bank account of everyone in America was suddenly credited with a trillion dollars (like the opposite of Hume’s thought experiment), prices would just have to adjust upwards and could stabilize at a much higher level. So long as people still desire to use dollars for their transactions, dollars would still function as money.

    As far as the data goes, I wasn’t saying it is impossible to measure, I was just saying that it is impossible to compile certain types of data in a scientific manner. For example, how much should housing be weighted in the CPI? There isn’t a satisfactory way to answer that. Or take GDP. Why should every dollar the government spends count as productive output in contrast to the private sector which relies on voluntary contributions? Or how/should you include unpaid work in GDP?

    I wanted to make an unrelated point about Obama. He reminds me of one of those old Soviet planners who think they can dictate economic outcomes by ordering people around. For instance, right now he is denouncing Bank of America for charging $5 a month for debit cards and threatening to sick consumer protection bureaus on them. The whole thing is absurd and I think liberals are very naive for thinking that type of thing doesn’t affect businesses. Especially net private investment which has been the most lacking element in this recovery.

  21. Gravatar of dwb dwb
    5. October 2011 at 04:13

    Dr Copper says operation twist is a failure (no shock there). The Fed is ready to do more… is it too much to hope they start buying treasuries in unlimited quantities until unemployment is solidyly trending down????

  22. Gravatar of John John
    5. October 2011 at 05:30


    With the CPI around 3.8 over the past 12 months and producer prices rising 18% in that same time period, it seems like the Fed would have to create significant inflation to drive unemployment down to 5-6%. Once they decide to tighten again to get rid of that inflation, all the jobs they just created would disappear and we’d be back at square one. Jobs created by inflation depend on inflation continuing and accelerating to exist. Even if they did what you’re suggesting, as soon as they stopped buying treasuries in unlimited quantities, unemployment would bounce back.

  23. Gravatar of Scott Sumner Scott Sumner
    5. October 2011 at 16:53

    John, I agree about the CPI and Obama. NGDP is better than nothing as a target.

    dwb, Yes, too much to hope.

    John, Inflation is set to fall sharply. The Fed doesn’t need to produce high inflation. If they did a 3% inflation target for 3 years, level targeting, RGDP would start growing much faster. BTW, I obviously don’t favor inflation targeting, but I’m not in charge.

  24. Gravatar of John John
    5. October 2011 at 17:12

    Based on the last 6 months or so, it looks like the Fed is shooting for a 3.6-3.8% inflation target. If inflation falls, maybe they’ll step up and keep it close to four percent. In any case, inflation over the past year is close to where it was during the 1982-4 recovery. Just goes to show that inflation tells you nothing else about the economy. What it does show is the theft undertaken by the Fed/treasury team.

    My question is, if inflation stays around 4% are you going to admit that monetary policy has “shoot its wad” to quote Obama?

  25. Gravatar of Scott Sumner Scott Sumner
    6. October 2011 at 15:49

    John, Yeah, the Fed is shooting for 3.8% inflation. God I hope you are joking, or I am wasting my time here.

    You sure are right about inflation telling us nothing about the economy!

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