Now that Ben Bernanke is free to speak his mind . . .
What does Bernanke now say about the market monetarist claim that monetary policy was not expansionary enough during the 2008-09 crisis? This:
(Reuters) – Former Federal Reserve Chairman Ben Bernanke said the U.S. central bank could have done more to fight the country’s financial crisis and that he struggled to find the right way to communicate with markets.
“We could have done some things on the margin to mitigate somewhat the crisis,” Bernanke, 60, said on Tuesday in his first public speaking engagement since he stepped down in January after eight years heading the Fed.
“Although we have been very aggressive, I think on the monetary policy front we could have been even more aggressive.”
Bernanke said he could now speak more freely about the crisis than he could while at the Fed – “I can say whatever I want” – and in remarks to over 1,000 bankers and financial professionals in the capital of the United Arab Emirates, he made clear that he had regrets.
Janet Yellen has only been in charge for a few weeks, and yet I think we are already discovering that Ben Bernanke was not the problem.
It’s the zeitgeist, stupid.
PS. Marcus Nunes sent me a post by Philip Pilkington:
A revolution in how we understand economic policy is now visible – but the question remains as to whether the Bank will seize the moment. Monetarism, you see, has two components. The first is that the central bank should try to control the money supply. In light of the Bank’s report that part of the monetarist doctrine is now a dinosaur fit only to be displayed in the museum of failed economic ideas.
The second component, however, is alive and well. That is the idea that the central bank should use unemployment to control inflation. Although the central banks of the world rarely say it in public, since the monetarist era they have used interest rate hikes to generate recessions and increase unemployment any time they fear an uptick in inflation.
I’m not sure what the “second component” refers to, perhaps new Keynesianism (which is loosely related to monetarism.) This quote provides a good opportunity to distinguish market monetarism from either the original or new Keynesian varieties. We don’t favor controlling the money supply (he means aggregates), nor do we favor using unemployment to control inflation. Indeed we don’t want the central bank to control inflation at all, but rather target NGDP growth.
PS. His comment about the money supply after Thatcher took office is slightly misleading.
Inflation began to subside, not because the money supply stopped growing – it didn’t – but rather because wage growth was contained through high rates of unemployment and the demolition of trade unions.
Yes, it didn’t stop growing, but consider this data: In 1969 the UK base was 3618 million pounds. By 1979 it had soared to 10446 million pounds, up 189%. Then the BoE stopped printing money at such a furious pace and growth slowed, so that the base reached 17621 million pounds in 1989, up 69%. That’s certainly a significant slowdown, and largely explains why prices rose only 85% during the 1980s, after rising 222% during the 1970s.
Tags:
22. March 2014 at 11:45
Cart before the horse. It’s as if you think that if they put more points on the scoreboard then the teams will score.
22. March 2014 at 12:47
Base money growth each year under Thatcher (M0)-
http://books.google.co.uk/books?id=beboAAAAIAAJ&pg=PA110&lpg=PA110&dq=UK+m0+1980&source=bl&ots=Dt2S53mYU6&sig=pUxTCisgVz88wiuvdnqRWKn_e-Y&hl=en&sa=X&ei=7rhlT6VljtnyA82agJgI&ved=0CFsQ6AEwBw#v=onepage&q&f=false
Base money growth in 1981 (the year that NGDP growth and inflation in the UK collapsed) was 2%, and it had more than halved in 1980. You don’t always find as neat a relationship between the money supply and inflation, but the link in the 1980s in the UK was very strong. M0 growth had been in double digits through most of the 1970s, and its velocity followed a predictable upward trend until inflation expectations were brutally removed in the early 1990s and there was a regime change to transparent inflation targeting after six decades of fast-and-loose cloak-and-dagger macroeconomic policymaking in the UK.
(The other money supply definition in that chart, M4, was distorted considerably in the 1980s by massive regulatory and tax changes, and suffers from aggregation problems so ably outlined by W. A. Barnett in his book “Getting it Wrong”. It also includes wholesale deposits and financial business deposits, which have a very tenuous link with GDP. Definitions of broad money that excluded such deposits gave a closer link with inflation in the period but were nonetheless distorted by massive regulatory and tax changes. It’s hard to believe, but as late as 1979 there were government restrictions on how many pounds you could exchange for a foreign currency.)
22. March 2014 at 12:49
Also, data for currency-
https://timetric.com/index/notes-coin-circulation-annual-perc-change-monthly-uk-boe/
– and bank rate-
http://www.bankofengland.co.uk/boeapps/iadb/repo.asp
22. March 2014 at 13:03
W. Peden, Thanks, That’s what I would have expected.
22. March 2014 at 13:10
Incidentally, there was also a big cut in reserve requirements (equivalent to about 6% base money growth in the estimates I’ve seen) in the early 1970s, which should counteract the myth that M0 gave no guide to the inflation of the mid-1970s in Britain.
22. March 2014 at 13:17
Quote the rest of what Bernanke said:
“That was actually very hard for me to get adjusted to that situation where your words have such effect. I came from the academic background and I was used to making hypothetical examples and … I learned I can’t do that because the markets do not understand hypotheticals.”
So the markets are stupid, according to Bernanke.
Sumner agrees:
“It’s the zeitgeist, stupid.”
——————-
Yet how does this gel with the oft repeated statement seen on this blog to the effect of: “The markets are the most right!”?
Seems like the markets are right when they agree with you, and wrong when they disagree with you.
Ah to be a closeted socialist. Must be hard to keep that underbelly from forcing the door to swing wide open. Markets….are…always….right….except….when they’re not!!!! Whew.
22. March 2014 at 13:48
Must be hard for you being a closeted hate-filled narcissist, “Major Freedom”.
22. March 2014 at 14:01
all that silly gumf you spout about “violence”, just to try and justify your nasty feelings. Must get tiring.
22. March 2014 at 14:07
Philippe:
Ah, another sociopath crawls out from under their rock. First I read eager desires to have me shot, and now I read that wanting to reduce violence against innocent people is “silly” and “nasty” and being “hate-filled.”
The freak show just keeps getting better…
22. March 2014 at 14:28
I don’t think that wanting to reduce violence against innocent people is silly, nasty or hate filled. I think that you are silly, nasty, and hate-filled.
You spout crap about “wanting to reduce violence against innocent people” as a way of trying to justify your hate-filled and narcissistic outlook on the world, and the nonsense ideology that you subscribe to. Instead of being honest, you feel the need to make up this self-righteous garbage instead. Apparently you don’t have any better arguments. It’s pretty pathetic really. And no-one’s falling for it, by the way, so it’s pretty pointless too.
22. March 2014 at 15:41
Fed culture is suffocating monetary policy ( and thus the nation)?
Or the collection of inflation-hysterics sent to the FOMC board by regional Fed banks?
And what I feared is coming true: Yellen is worse, and already trapped into tapering until there is no QE, or she will be condemned for flip-flopping and lacking resolve…
But then, Yellen has rhapsodized about a 1 percent inflation target…
When did people who care about monetary policy become so incurious about using monetary to promote growth?
22. March 2014 at 15:43
Maybe the most astonishing thing I read in the Sept 2008 transcript – and that’s saying something – were the remarks from Mr. Dudley, the head of OMO. He said that while the raw prices of the forward fed funds market looked like they were predicting a drop of 25 bp, the market really had a barbell shape. That 25 bp price really reflected a market split between those who expected the rate to stay fixed and those who expected an economic apocaplyse to send rates to the floor.
Keep in mind that the Fed had been communicating a determination to raise rates. They left rates at 2%…and the bottom fell out of the economy. So forward rates were kind of doubly right.
I kind of see your point about Bernanke, but to see the committee discuss all these groups – European central banks, domestic commercial banks, domestic borrowers, etc., begging for liquidity, and approving all these drastic one – off liquidity tactics while refusing to even think about buying some damned treasuries, some leadership would have nice…though I agree that it’s kind of stupid to have an institution that depends on leadership, when you have a market…and the market was telling them the answer right there at the meeting.
In this post I have the transcript of Dudley:
http://idiosyncraticwhisk.blogspot.com/2014/03/the-fed-in-2008.html
22. March 2014 at 18:30
Philippe:
Right, you’re a violence advocating thug who hates peace and who hates it when his violence advocacy is tested and challenged even indirectly and unintentionally be me just by virtue of my peace advocacy.
To you, my desire to end the violent exploition you support, makesme “narcissistic”. Damn me for refusing to play along with your parasitism.
22. March 2014 at 22:03
“I think we are already discovering that Ben Bernanke was not the problem.
It’s the zeitgeist, stupid.”
That may be true, but succumbing to zeitgeist doesn’t earn you a chapter in “Profiles in Courage.”
23. March 2014 at 01:52
I looked up the word “zeitgeist” and Scott Sumner has used exactly the right word.
When FOMC members use the word “inflation” 129 times in a Sept. 2008 meeting (within days Ben Bernanke would tell Congress we might not have an economy anymore) something is in the air.
We might ask economists what is wrong with the FOMC, but we might also ask psychiatrists and sociologists. Maybe pathologists?
23. March 2014 at 02:05
“Janet Yellen has only been in charge for a few weeks, and yet I think we are already discovering that Ben Bernanke was not the problem.”
I agree Bernanke was not the problem, and I’ve been more charitable in my assessment of Bernanke than most of my fellow market monetarists. But I don’t see how these comments support that. It seems to me that Bernanke is saying that he did what he thought was right at the time, but would have done even more if he knew what he knows now. So he’s admitting mistakes while claiming overall he (and his colleagues) did a good job with the information they had.
The only time he mentions worrying about criticism was in reference to bailouts, not monetary policy.
23. March 2014 at 04:51
Kevin, That’s interesting data. Do you know what happened to the yield curve before and after the meeting?
Steve, It’s not about courage, it’s about awareness. He didn’t understand money was too tight at the time.
Ben, Good point. You can’t go from not needing a rate cut to armageddon in a few weeks. If they had looked at NGDP growth they would have understood what was going on.
Negation, That’s a fair point. The Fed seems to have been swayed by a lot of outside criticism. Not just of the bailouts, but also QE.
23. March 2014 at 05:46
The great open question is whether the Fed can learn from recent past history. We will certainly live to see another dip in NDGP expectations – how will the Fed respond? To me, open question.
23. March 2014 at 05:57
Benjamin Cole:
“We might ask economists what is wrong with the FOMC, but we might also ask psychiatrists and sociologists. Maybe pathologists?”
What is wrong are the ideas. The thing about socialism is that since there can be only one plan, it is inevitable that there be disagreements among the socialist minded population who believe that their plan is best.
The problem is not the idea of the content of the one plan, but the idea that there should be one plan in the first place. That is the source.
23. March 2014 at 07:20
“[W]e are already discovering that Ben Bernanke was not the problem.” Bernanke could have done better (as he grants in this Reuters article) and he could have done worse. We already knew that, so what is there to discover? Yellen seems to be following in his footsteps, so we can say the same about her performance.
I suppose the Zeitgeist does have some role in explaining why they are/were both mediocre.
23. March 2014 at 07:44
“…we are already discovering that Ben Bernanke was not the problem.”
It wasn’t the fault of Mao or Stalin. They just had to deal with so many people who disagreed. If only they shut up and did what they’re told.
23. March 2014 at 10:02
Bernanke also said that fiscal policy was inadequate!!!!
See
http://www.businessinsider.com/bernanke-on-tight-fiscal-policy-2013-12
and
http://www.cbsnews.com/news/bernanke-fiscal-policy-is-stunting-the-recovery/
23. March 2014 at 10:55
Major Freedom:
How do you handle air and water pollution?
Is there an advanced economy without a central bank?
23. March 2014 at 11:34
Benjamin Cole:
“How do you handle air and water pollution?”
Ruthless and relentless individual private property rights enforcement.
In our society, as opposed to an anarcho-capitalist one, that means underground, counter-economy, agorist activity which stops polluting violators of property rights who have state sanctioned approval.
“Is there an advanced economy without a central bank?”
Is there a modern, advanced, futuristic, technologically enlightened, awesome wicked wow economy in the world today that doesn’t have murder, rape, or theft?
Checkmate, libertarians.
23. March 2014 at 11:41
I think we can say something newly interesting about MM.
“Under NGDPLT, it becomes the job of Fiscal policy to control inflation.”
1. The Fed becomes a non-issue.
2. We have a futures market, or a computer controlling money supply to make sure we hit 4% NGDPLT every month rain or shine.
So while yes there can be different shocks that hit the system, ultimately the single biggest predictor of whether our 4% NGDP will be real growth or inflation is GOVT. POLICY.
Think about it… The Fed guys don’t like inflation. Right? Right.
So if they move to a NGDP level target, and we have 4% inflation and we still have unemployment, the fed is gong to walk out in front of Congress and say “THIS SHIT IS YOU GUYS FAULT”
Ultimately, the Fed becomes the REPUBLICAN CBO, and it spends its time finding all kinds of sticky wage policies or no growth policies that are BAD, BAD, BAD and rages against the Big Govt. machine.
This is of course a different way of my saying that NGDPLT shrinks govt., bc most new govt. spending will ALWAYS count as inflation not real growth.
23. March 2014 at 12:01
“Ruthless and relentless individual private property rights enforcement.”
Don’t you need the state to do this? Ultimately, doesn’t the state have to point a gun at you and coerce you not to pollute?
See Major, you’re an evil statist-socialist like the rest of us.
23. March 2014 at 12:37
CA
It’s pointless don’t even bother trying to argue with MF, he doesn’t realize that the most wealthy and powerful corporations in his anarchi-capitalist system would evolve into quasi governmental entities.
23. March 2014 at 13:17
Philip Pilkington’s comments are misleading in many other ways as well:
“Fast forward to March 2014, and the Bank of England has begun to bury its monetarist legacy. In a quarterly report released last week, the Bank admitted it had no ability to control the money supply. Rather, it sets the rate of interest, and increases or decreases the supply of money in response to the demand by the government and the general public. It is spending and investment decisions that drive the level of money in the economy.”
When the BOE came out with the recent paper (“Money Creation in the Modern Economy”), that everyone from MMT (e.g. Pilkington) to ABCT (e.g. Zero Hedge) took as confirmation of their views, to my knowledge absolutely no one mentioned the fact that the BOE also released an associated Excel file named “Money creation in the modern economy: Long-run data annex”. It can be linked to in footnote #1 on page 22 of the paper on money creation, or from the BOE 2014Q1 Quarterly Bulletin webpage itself:
http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
The Excel file contains quarterly data on currency, the monetary base, NIB M1, MZM, M3/M4/M4ex, Aggregate Divisia, Household Divisia, PNFC Divisia and NGDP. The data for currency, the monetary base, M3/M4/M4ex and NGDP extends all the way back to 1870.
Let’s take this Excel file out for a spin and see if what Pilkington says makes any sense. I’m going to focus on the period 1963Q1 through 1997Q4 for the following reasons: 1) this period spans Great Inflation and the Great Disinflation, 2) during this time M3/M4/M4ex monetary aggregate is M4 throughout, 3) the M4 lending counterpart is available for the entire period, and 4) it will potentially antagonize Philip Pilkington.
The historical lending counterpart data (seasonally adjusted) can be found here:
http://www.bankofengland.co.uk/statistics/Pages/abstract/part2.aspx
It’s worth noting that monthly frequency data for M4 and its lending counterpart only extends back to 1982.
In the Post Keynesian empirical literature on endogenous money the usual approach is to conduct Granger causality tests between the monetary base and the lending counterpart, and between the money supply and/or the money multiplier and the lending counterpart. Accomodative endogeneity (e.g. Basil Moore) predicts that causality is strictly one way from lending to the monetary aggregates (i.e. “lending creates deposits”), Structural Endogeneity (e.g. Thomas Palley and Robert Pollin) predicts that the causality is bidirectional, and Liquidity Preference (e.g. Peter Howells) only predicts bidirectional causality between broad money supply and lending.
Before we look at any of these things let’s confirm that money actually matters over 1963Q1 through 1997Q4 in the UK.
Granger causality tests show that the monetary base and NIB M1 Granger cause NGDP at the 1% significance level. In addition, NGDP Granger causes the monetary base at the 10% significance level and MZM at the 1% significance level. No statistically significant relationship exists between M4 and NGDP (which confirms W. Peden’s comment above).
So there is a significant correlation between money and NGDP, and the direction of causality depends on the aggregate. But note that the only monetary aggregate that the central bank has the option of directly controlling, the monetary base, does in fact Granger cause NGDP.
Now let’s look at the relationship between lending and the monetary aggregates. The monetary base and M4 Granger cause lending at the 10% significance level. Lending Granger causes MZM at the 5% significance level and M4 at the 1% significance level. No significant relationship exists between NIB M1 and lending. I also ran Granger causality tests between lending and the money multiplier for NIB M1, MZM and M4 but the results were all negative.
So in short, the results for the relationship between broad money supply and lending partially contradict the predictions of Accomodative Endogeneity, and are supportive of Structural Endogeneity and Liquidity Preference. But the results for the relationship between the monetary base and lending are the exact opposite of what Accomodative Endogeneity predicts, and partially contradict Structural Endogeneity.
These are not results that should make Philip Pilkington happy.
P.S. I wonder, does the fact that the BOE included NGDP but not any price indices in the Excel File indicate Inflation Targeting (IT) is on its way out, and MM/NGDPLT is on its way in? No, probably not, that would be the same kind of wishful thinking that we are seeing from MMT and ABCT. (But you never know.) 😉
23. March 2014 at 13:37
CA:
“”Ruthless and relentless individual private property rights enforcement.””
“Don’t you need the state to do this?”
No.
“Ultimately, doesn’t the state have to point a gun at you and coerce you not to pollute?”
No. Private protection can do so in a world without a single monopoly claiming to be the only institution that can.
“See Major, you’re an evil statist-socialist like the rest of us.”
I think you’re presuming too much.
Government is not the only method of protecting property rights. Indeed, it can’t be a way, since its existence is predicated on violating property rights.
Bastiat said it best:
“Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society. As a result of this, every time we object to a thing being done by government, the socialists conclude that we object to its being done at all. We disapprove of state education. Then the socialists say that we are opposed to any education. We object to a state religion. Then the socialists say that we want no religion at all. We object to a state-enforced equality. Then they say that we are against equality. And so on, and so on. It is as if the socialists were to accuse us of not wanting persons to eat because we do not want the state to raise grain.”
23. March 2014 at 13:43
Edward:
Again I see you trying to shut the debate down so that your beliefs are not challenged. And why do you believe it’s “pointless”? Because you have things already made up in your mind and you won’t consider alternatives. Ergo:
“…he doesn’t realize that the most wealthy and powerful corporations in his anarchi-capitalist system would evolve into quasi governmental entities.”
This is the age old argument that government is justified because it is inevitable.
This is the same tactic that the communists utilized to justify communism. Marx tried it. He said that communism will arrive “with the inexorability of a law of nature.”
This was an attempt to shut down any debate about the merits of communism. If people were convinced it was inevitable, then they would not even consider challenging it, and thus Marx’s desires.
You’re doing the same thing. You’re claiming that human choice is an illusion. That humans are robots who cannot help themselves in consenting to a monopoly on protection. If anarchy were to ever arise for whatever reason, then “nature” will soon put it to an end.
That is a myth. It is a myth because government is a means chosen by man. It is not a physical law of nature.
You don’t want CA to think about this. You want him to just take you on your word that the state is inevitable.
You’re afraid.
23. March 2014 at 13:46
Mark:
“Philip Pilkington’s comments are misleading”
Redundant?
23. March 2014 at 14:07
“Private protection can do so in a world without a single monopoly claiming to be the only institution that can.”
Frankly Major, I find our current system much more preferable to having many independent armies pointing guns at each other. Under your scheme of individual fiefdoms, I could envision one property owner going to war with another simply because the other guy slept with his wife.
23. March 2014 at 14:39
Michael, An open question to me as well.
Morgan, Great comment.
Mark, I suspected that much of what he had to say was unfounded.
23. March 2014 at 14:57
CA:
“Frankly Major, I find our current system much more preferable to having many independent armies pointing guns at each other.”
First you have to understand what it is you prefer not to have. Then you can claim to have a reasonable foundation for rejection. What you said though makes me believe you could use some more information.
See, pointing guns at innocent people is what you want. You might not realize this, it’s the implication of your current preference. Your preference requires some people to point their guns at innocent people so that they pay only one protector, which presumably is your preferred protector, or the gun toting person themselves.
How else could you *manifest* your disagreement with me on who is to protect me and for what price?
Why won’t you let me have the option of determining who protects me and for what price? Why do you a priori want guns to be pointed at me to compel me to hire and pay Obama and his cronies, who are among the most evil and corrupt people in the country?
Suppose I want to hire and pay Mr. X to protect me. Suppose I thought about your arguments and have decided to reject your recommendation to hire and pay your protector Mr. Y. As it would stand at this point, you and I are in a state of “anarchy.” There is no initiations of force or threats of force from either me to compel you to pay X, or from you to compel me to pay Y. There is no territorial monopoly of protection. There are two protectors. One chosen by me, and one chosen by you.
So seriously ask yourself what you would then want to do. You say you do not “prefer” such an arrangement. What you are really saying is that you do not prefer me to be able to choose for myself who is to protect me against violence.
So how will you manifest your “preference”, which happens to be my life(!), and how will you manifest your “preference” for who will protect me?
Will you point your gun at me and threaten me with death if I don’t pay Mr. Y? Or will you only be ready and willing to use violence against me, if I were to initiate against you first?
If the former, you’re not against pointing guns at innocent people, and I have no good reason to reason with you. You would have shown yourself to be just another thug in the closet who would shoot at innocent people if you had the opportunity to get away with it.
Or would you choose the latter? To only use force to defend yourself against initiations of force? If so, then congrats, your premises are actually anarcho-capitalist.
“Under your scheme of individual fiefdoms, I could envision one property owner going to war with another simply because the other guy slept with his wife.”
I can envision world war with governments. I can envision genocide with governments.
What’s worse? Genocide, or squabbles among a couple of neighbors?
You envision a lack of protection for the man who slept with the other guy’s wife. OK, sure, that might happen. But what is the justification for pointing a gun at the other neighbors on the street so that they hire and pay just one policeman, who himself might be a rapist?
I am not promising perfection. I am promising the best method. What you are doing when telling me what you envision, is a possible event that you have not thought much about yet because you have just let the police worry about it for so long. Well, with private “fiefdoms” as you call them, you would not longer have the luxury of protecting yourself through the method of others having guns pointed at them by the very protectors you want to protect you.
I am not saying you have to fire Obama and his cronies. All I am saying is refrain from imposing your preference onto others at gunpoint. For then you would be a part of the very thing you claim to be against.
CA, I invite you to explore anarchist solutions to social problems. It takes a different mindset, but it’s the most effective and just method. See the state for what it is: A criminal gang writ large. That’s all it is and all it ever has been. We are living in an age of illusion, just like the ancients did and their religions. Today’s religion is statism. Why put yourself, and why should we put ourselves, through an unnecessary, socially destructive institution?
23. March 2014 at 18:05
Morgan wrote:
“Ultimately, the Fed becomes the REPUBLICAN CBO, and it spends its time finding all kinds of sticky wage policies or no growth policies that are BAD, BAD, BAD and rages against the Big Govt. machine.”
Not really. In your worldview, rent-seeking (i.e. money to those who haven’t earned it) = inflation. And all of our elected officials play this game.
23. March 2014 at 18:39
Michael Byrnes:
I think the argument is that rent seeking reduces production, ceteris paribus, which increases prices, ceteris paribus.
I think the real problem is that we can’t directly observe the extent of this, nor can we observe market prices and interest rates, since money is socialist.
23. March 2014 at 18:49
The Fed has to keep interest rates low to ensure that “spending” is allocated among the various industries in a way that is profitable to them.
By its past artificial lowering of rates, it has influenced market actors who are just chasing profits, to create, among other things, a bloated financial sector. Only an economy with sufficient real savings should have this. But we have it because investors have been misled by years and years of interest rates the effects of which are investments made *as if* the real savings were there all along.
Spending on derivatives, stocks, and bonds doesn’t show up in “NGDP”. In order to force NGDP upwards when market forces want it down, The Fed has to blow up certain higher order stages like finance, before the money trickles out and increases spending on final goods which NGDP tracks. The Fed’s task is to ensure bloated banks remain bloated. It’s stuck between a rock and hard place.
23. March 2014 at 19:23
“We could have done some things on the margin to mitigate somewhat the crisis,” Bernanke, 60, said on Tuesday in his first public speaking engagement since he stepped down in January after eight years heading the Fed.
“Although we have been very aggressive, I think on the monetary policy front we could have been even more aggressive.”
Isn’t this what’s called minimization? To mitigate somewhat is a different issue than not conducting policy in an aggravating manner – an important distinction in preventing the repetition of those mistakes under similar circumstances.
23. March 2014 at 22:05
Mark A. Sadowski,
Great stuff. I hadn’t noted that datasheet, and will enjoy having a look at it.
As a historical note, Milton Friedman and Karl Brunner both recommended to Thatcher in the early 1980s that the UK should focus on targeting M0, because broad money had been so distorted by measures in the 1970s. (Like the infamous “corset”, which encouraged banks to invest in close substitutes for CDs without actually changing the liquidity of their assets; as the joke went, “A corset is a device for disguising figures”.) Had the Thatcher government done so, we could have both avoided the violent and destructive rapid disinflation of the early 1980s (which also corresponded with a rise in the short-term natural rate of unemployment due to structural reforms) and the mini-reinflation of the late 1980s/early 1990s, which was considerably worse in the UK than in the US.
It is almost impossible to overstate the level of ignorance in UK policymaking during this period, e.g. the relationship between interest rates and the k of M0 was almost totally ignored when interpreting M0 figures; fiscal policy was held to be the number 1 measure to control M3; and the Thatcher government clearly thought enough of credit controls to keep them for three years after coming to power. And this was among the people who WEREN’T Keynesians or Marxoids!
23. March 2014 at 22:09
Also, historical UK inflation data-
https://timetric.com/c/E3R697X/?
Notice the scale! Even in the very country of Keynes, the experience of unrestricted Keynesianism from 1971-1975 left even people in Cambridge looking for alternatives like the New Cambridge School and Post-Keynesian ideas in direct contradiction of the General Theory and what is perhaps Keynes’s best work (How to Pay for the War).
24. March 2014 at 03:29
Bernanke also says “we did good in a very complicated situation and in a very complex political situation, and the result is what it is.” He also says that the *first thing* he learned from this is that the US was overconfident and not invulnerable to financial crises.
Nope, not buying Scott’s inference.
Still wish that MF could restrict his determination to argue libertarian political philosophy with everyone to, you know, the threads that are actually about libertarian political philosophy.
24. March 2014 at 05:19
“Not really. In your worldview, rent-seeking (i.e. money to those who haven’t earned it) = inflation. And all of our elected officials play this game.”
Michael,
I agree with you that both sides do it, my point is that in as much as CBO is a Dem organization, the Fed is / would be the opposite. I don’t mean CBO is really seriously biased, I just think they willfully put on blinders (they may be require to by law) that assume govt. is productive.
My real point is that under NGDPLT cruise control / automatic pilot, we still know whether our 4% is real growth or inflation, so a good year is one that is mostly real growth, and bad year is one thats mostly inflation.
And the policies that will strong together a couple good years or bad years in a row, are obviously in line with my world view: government needs to make productivity gains YOY much closer to the private sector.
24. March 2014 at 05:26
Dear Market Monetarists,
Christopher Mahoney wrote this excellent piece on Austrianism vs. Market Monetarism:
http://capitalismandfredom.blogspot.com/2014/03/the-unsound-doctrine-of-sound-money.html
Is that the right way to think about it?
24. March 2014 at 05:55
Frances Coppola takes on Prof. Sumner:
http://www.creditwritedowns.com/2014/03/interest-rates-deflation.html
24. March 2014 at 08:19
Tim Duy:
“Williams Acknowledges Forecast Change”
“Those who expected Federal Reserve Chair Janet Yellen to push for a more dovish policy path continue to be dissapointed.”
http://economistsview.typepad.com/timduy/2014/03/williams-acknowledges-forecast-change.html
http://economistsview.typepad.com/timduy/2014/03/post-fomc-fedspeak.html
24. March 2014 at 09:14
TravisV,
“Christopher Mahoney wrote this excellent piece on Austrianism vs. Market Monetarism:…”
Christopher Mahoney:
“Most German economists and politicians–on both the right and left–are Austrians.”
This is absolute nonsense. Most German economists are Ordoliberals:
http://en.wikipedia.org/wiki/Ordoliberalism
While Ordoliberalism may have some ideas in common with ABCT, owing to the fact that they both have classical liberal roots, Ordoliberals believe in a social market economy, a concept which promotes a strong role for the state with respect to markets.
ABCT (perhaps oddly) is almost entirely an American phenomenon, and most American libertarian adherents of ABCT would likely view Ordoliberalism as a form of socialism.
With all due respect Christopher Mahoney needs to do less pontificating, and more reading and traveling.
24. March 2014 at 10:23
Mark Sadowski,
Fair enough. However, I still thought the essay did an excellent job overall by illustrating the appeal of the Austrian view (why it’s so attractive to extremely intelligent people). He bent over backwards in an effort to be charitable to that school of thought.
As a result, the reasoning behind his decision at the end to side with the monetarists is that much more persuasive.
One other guy with a stellar track record of taking the most charitable view of those who disagree: Scott Sumner.
You might want to give that a try yourself sometime Mark Sadowski!
24. March 2014 at 11:27
TravisV,
“One other guy with a stellar track record of taking the most charitable view of those who disagree: Scott Sumner.
You might want to give that a try yourself sometime Mark Sadowski!”
One reason why I have never started a blog is I might feel the urge to be more charitable. Not having a blog gives me the complete freedom point out that when people write BS it is in fact BS.
Mahoney portrays himself as being highly knowledgable about Germany and Europe when it is clear he knows diddly squat about either.
Christopher Mahoney:
“Germans don’t use our textbooks and vice versa. Bismarck was right about the language barrier.”
The bestselling economics textbook in Germany is “Grundzüge der Volkswirtschaftslehre” (“Principles of Economics”) by Gregory Mankiw:
http://www.amazon.de/Grundz%C3%BCge-Volkswirtschaftslehre-N-Gregory-Mankiw/dp/379102163X
“Principles of Economics” has been translated into Chinese, Czech, French, Georgian, German, Greek, Indonesian, Italian, Japanese, Korean, Portuguese, Romanian, Russian, Spanish, etc.
Special Australian and Canadian editions also available.
Economics education is totally dominated by American textbooks.
24. March 2014 at 11:31
“One reason why I have never started a blog is I might feel the urge to be more charitable.” – M. Sadowski
One of the mysteries of the blogosphere revealed at last!! Haha
24. March 2014 at 12:48
Mark, you could always let people know up front… you could call it:
“Mr. Scrooge’s Charity Free Econo-Blog.”
http://gnomeaggedon.files.wordpress.com/2009/07/scrooge-mcduck.jpg
24. March 2014 at 16:22
Mark Sadowski,
Notice the slogan featured prominently on Arnold Kling’s blog:
“taking the most charitable view of those who disagree”
Kling and Sumner are both brilliant guys and so are you. Over time, I’m sure you’ll appreciate the wisdom of their “charitable” approach more and more…..
25. March 2014 at 04:23
“It’s the zeitgeist stupid”
Scott,
You’re just like the Greeks, blaming the Germans for all of your problems.
25. March 2014 at 05:32
W. Peden, Good observation.
Saturos, That’s an interesting claim, given my post had absolutely nothing to say about whether Bernanke accepted MM. Nothing at all. I simple quoted his words and let the readers decide. You seemed to think the quote supported MM, or you would not have drawn the inference that I was drawing the inference that it was supporting MM. What if my quotation had Bernanke saying “I think the MMs are wrong, money was not too tight.” Also assume everything that I wrote was exactly the same. Would you have made the same criticism? Why or why not? 🙂
25. March 2014 at 08:16
Saturos:
“Still wish that MF could restrict his determination to argue libertarian political philosophy with everyone to, you know, the threads that are actually about libertarian political philosophy.”
Still wishing that you and most others restrict your anti-libertarian philosophically based policy prescriptions to, you know, the threads that are about anti-libertarian philosophy.
Did you think you weren’t advancing anti-libertarian philosophy? It almost entirely encompasses your posts. Why do you get to do it, but not me? Is it because you’re translating your philosophy to seemingly non-philosophical technocratic language, whereas I am not?
25. March 2014 at 08:39
Dear Major_Moron
http://www.demos.org/blog/10/28/13/libertarians-are-huge-fans-economic-coercion
25. March 2014 at 14:38
Here are a few more graphs on interest rates in 2008:
http://idiosyncraticwhisk.blogspot.com/2014/03/interest-rates-in-2008.html
Oddly, IOR coincided on all three occasions with a trough in long term rates. My previous graphs showed declining inflation expectations after the first two IOR events. So, the events don’t seem to have been associated with any pattern regarding short-term rates, but with a decrease in long term inflation expectations and an even larger increase in long term real rates, netting out to increases in long term rates, at least for a few days.
Inflation expectations were declining steeply. Declines in the Fed Funds target seem to have been associated with temporary halts to that decline, but inflation expectations didn’t increase until the dual implementation of near-zero rates and QE1 in December 2008.
25. March 2014 at 17:29
Major_Freedom,
Here are recent writings by Bob Murphy:
http://threeccorp.com/CCCArchives/Article/tabid/579/ArticleId/107/The-END-of-the-Bernanke-Era.aspx
And Jeremy Grantham:
http://finance.fortune.cnn.com/2014/03/24/jeremy-grantham-federal-reserve
Notice how they both rely on the claim that interest rates are “artificially low.” Therefore, they know that a GIANT EPIC crash is coming.
I’m glad you don’t necessarily agree with them that a giant epic crash is coming.
Can you see how Bob Murphy’s fear-mongering makes the Austrian school look bad?
25. March 2014 at 17:33
Bill Woolsey did a great job of showing where the Austrian theory goes horribly wrong here:
http://uneasymoney.com/2012/10/03/two-problems-with-austrian-business-cycle-theory/#comment-10223
David Glasner’s post on the same subject was also great:
http://uneasymoney.com/2012/10/03/two-problems-with-austrian-business-cycle-theory
25. March 2014 at 17:46
TravisV:
No, because I view predictions of rainbows and lollipops as equally good or bad as predictions of hard times.
Having said that, I do accept the theory that when a central bank exists, and we don’t have access to free market pricing, and, the distorted signals happen to take the form of interest rates which are below what a free market would have generated, then yes, a correction (what you call “apocalypse”) is an inevitability. The only questions are when and how acute it will be.
Regarding Bill Woolsey, I’ve already shown that post to be riddled with confusions and errors in a previous post here, although I won’t be able to post it for you because I don’t know where it is the last time you brought that post up.
I feel like you and I are talking past each other. You are bringing up posts and arguments that have been responded to many times before, and yet I still see you posting them as if they are unchallenged. How many times do I have to respond?
I haven’t yet read Glasner’s post, but I will. I am guessing it will contain similar confusions as Woolsey’s. When you start with the idea of “Why should socialism be THAT bad? It’s got to be something more easily manageable and these great corrections we see must be something else”, then you’ll never get ABCT.
25. March 2014 at 17:58
MF,
Here are your comments on Woosley:
http://consultingbyrpm.com/blog/2014/02/potpourri-185.html#comment-254247
25. March 2014 at 18:12
OK, I just finished reading Glasner’s post.
1. He errs when he claims that the ABCT notion of “unsustainability” is something other than a real goods constraint. Mises went to great lengths to show it is real, not nominal, when he spoke of the analogy of the master builder, which I am sure you have heard about ad nauseum.
2. He doesn’t seem to appreciate the regulating nature of interest rates. Interest rates regulate the temporal structure of the economy. Distortions to these rates have “macroeconomic significance” because ALL investors utilize the exact same interest rate term structure (which is distorted by the Fed). The reason why these distortions would have such significant effects is because investors in a division of labor society make decisions every day that are constrained to the prevailing interest rates. When you have millions of investors allocating capital to certain temporal trajectories based on prevailing rates, it should not be unreasonable or surprising that it would have such acute real world consequences on the side of the capital structure. Glasner just says, in effect, that it “isn’t clear” to him. How is that a refutation or challenge though?
Mises only referred to the constraints of the gold standard not because it is gold that the only reason the boom cannot continue, but rather, gold served to expose the errors more quickly as compared to fiat. Fiat money doesn’t eliminate real world scarcity. When fiat systems come into the fore, what happens is that the central bank is faced with the real world scarcity constraint in a slightly different way. Instead of the unsustainable boom manifesting in pressure on gold outflow, it is manifested in an increasing need to inflate more and more to prevent the real world scarcity from making a final judgment which would entail monetary breakdown. Central banks since the 1910s have chosen to reveal the errors with abstaining from accelerating inflation, rather than pretending fiat money can eliminate scarcity, and accelerate inflation to prop up an increasingly distorted capital structure which of course would lead to monetary breakdown.
When Glasner sees a correlation between monetary tightening up and recession, he is not seeing evidence that contradicts the theory that real capital structure unsustainability is the ultimate wall which forces a central bank to choose deflation now, or hyperinflation later on. He is just seeing the central bank choosing the option of maintaining monetary control versus losing control.
But this strategy of accelerating inflation to stave off the corrections on the real side, cannot go on forever on the real side. That was Mises’ argument, which Glasner does not seem to understand. He believes ABCT is a monetary constraint theory, but it is in fact a real constraint theory. Glasner falsely states that ABCT does not show a fiat system that generates malinvestment is unsustainable. He believes Mises’ theory only applies to a money constrained government, i.e. a gold standard. But it is precisely a fiat system Mises referred to in his theory. Its not the quantity of credit expansion per se that is the problem, it’s the effect on interest rates which then affect the capital structure.
Glasner’s second criticism is even worse, for he really disrespects the importance of time that is crucial to understanding ABCT. He asserts that ABCT emphasizes that a correction would contain falling prices of capital goods, and then he asks OK, if that’s true, why don’t those falling prices lead to a rise in profitability in the real world? In other words, he’s asking, OK, if the prices of all that malinvested capital were manifest, why do recessions encompass falling profitability?
Glasner does not seem to recognize that falling demand does not instantly result in falling costs. Costs are a reflection of past expenditures, not current expenditures. If current aggregate spending falls, it’s not like depreciation costs instantly fall. Those costs remain. It takes time for these costs to fall. That is why we don’t see an instant rise in profitability.
But even if costs did instantly fall, it would still be the case that it would take time for investors to find out new deployments for those capital goods. Wasted investments means you can’t just instantly redeploy a hoola hoop making machine for some other use. The machine may have to be scrapped, and the parts reused. All this takes time. It should not be surprising that we see a fall in production and spending when this takes place.
Glasner needs to read William Hutt’s “The Theory of Idle Resources.” Most of the things he isn’t clear about are answered there.
25. March 2014 at 18:13
Ben B:
Wow, I am impressed by your Kung Fu.
26. March 2014 at 11:00
Kevin, Very interesting pattern, wish I had an explanation.