President Obama is not pretending that monetary policy doesn’t exist

Matt Yglesias has a new post entitled:

It’s Time for Politicians to Stop Pretending Monetary Policy Doesn’t Exist

He focuses on President Obama.  But I think this is wrong.  Obama isn’t pretending anything.  President Obama does not believe that monetary policy exists at the zero bound.  It’s reported that he said so privately to Christina Romer.  And he’s acted that way since day one.

The US has been at the zero bound since before he took office, and it is likely to be there for at least several more years.  So I’m not surprised Obama pays no attention.  I am a bit surprised that the liberal economists surrounding him have not been able to convince him otherwise, but we can only presume that monetary policy expertise within the Democratic Party establishment has declined sharply since the days of William Jennings Bryan and FDR.

Or maybe that’s letting Obama off too lightly.  FDR knew enough to listen to George Warren, whereas Obama didn’t know enough to listen to Christy Romer.

Yglesias also reports that Obama is going to pivot to a focus on long term economic issues.  That would be a big mistake.  Obama needs to focus on getting the US out of the recession that began in 2007.  A good place to start is by appointing someone like Romer to replace Bernanke, and then two other like-minded people to the other two positions likely to open soon.

Then he can start his supply-side reforms.

PS.  I just noticed that Ezra Klein and Evan Soltas think the White House is paying attention to my Summers bashing:

But they’re not unaware that Summers is a polarizing choice. So some of what’s happening right now, I think, is that they’re figuring out whether opposition to Summers is soft or hard. There are trial balloons going to the kind of people who will be asked to render verdicts on the choice and, in the cases where those people are skeptics of Summers, efforts to see if they can be talked down a bit.

This has had the side effect “” probably anticipated, and perhaps even welcome “” of mobilizing Summers’s critics. I don’t know if the blowback (see Noam Scheiber, Felix Salmon, Scott Sumner, Dave Dayen, Senator Jeff Merkley, etc) is more or less than the White House expected. But they’re getting to see it. And remember that they’re also getting positive feedback from fans of Summers, who are underrepresented in the econo-blogosphere, but very present in the ranks of economic and Wall Street heavyweights who’ve worked or fundraised at high levels in Democratic administrations.

The result is that the White House is getting to test the reaction to a Summers pick at a time when they can still choose Yellen, or even go back to the drawing board and look at Roger Ferguson or Donald Kohn or Alan Blinder or anyone else.

I don’t like those three names any more than Summers.  Some people argue that Summers is a fine macroeconomist.  That’s not the issue.  In the 21st century the most important qualification for Fed chairman is the ability to understand that monetary policy must continue to steer AD at the zero bound, and supreme confidence that the Fed will do whatever it takes to get the job done.  Nothing else is remotely as important.  Any fool can do a Taylor Rule when rates are positive.



21 Responses to “President Obama is not pretending that monetary policy doesn’t exist”

  1. Gravatar of Alexander Hudson Alexander Hudson
    25. July 2013 at 10:36

    When you say “those three” I assume you mean Ferguson, Kohn, and Blinder (i.e. the “back-to-the-drawing-board” candidates). Yellen has actually had very sensible things to say about monetary policy, particularly since being elevated to vice chair. I’ve been pleasantly surprised by her. The only other people at the Fed who say similarly sensible things are regional Fed presidents like Evans and Rosengren (and, to a lesser extent, Kocherlakota and Bullard when they’re not worrying about structural unemployment or headline inflation). And, to my knowledge, she’s the only one who has openly proposed implementing monetary policy so as to achieve a desired path for inflation and unemployment. Which is pleasantly Svenssonian.

    Basically, I don’t understand all these people who think Yellen and Summers are the same on policy. At least from their public pronouncements, they are VERY different, and in important and consequential ways.

  2. Gravatar of TravisV TravisV
    25. July 2013 at 10:41

    Great post and I agree wholeheartedly.

    It’s hard for me to understand why Yglesias doesn’t view a Summers nomination as very very risky for unemployed people. I sure do.

  3. Gravatar of Joe Joe
    25. July 2013 at 10:56

    Some more ammo against Summers:

  4. Gravatar of marcus nunes marcus nunes
    25. July 2013 at 11:14

    To Summers QE is a placebo. More fiscal stimulus required:

  5. Gravatar of Michael Michael
    25. July 2013 at 11:18

    We can only hope that Obama is floating Summers to make Yellen’s confirmation easier.

    Yellen in the Fed minutes from 2007 (According to this article):

    May: “Much of the first-quarter weakness, of course, was due to housing, and I really don’t see that sector starting to turn around at this point,” she said.

    June: “In terms of risks to the outlook for growth, I still feel the presence of a 600-pound gorilla in the room, and that is the housing sector. The risk for further significant deterioration in the housing market, with house prices falling and mortgage delinquencies rising further, causes me appreciable angst.”


    “The housing sector obviously remains a serious concern. We seem to be repeatedly surprised with the depth and duration of the deterioration in these markets; and the financial fallout from developments in the subprime markets, which I now perceive to be spreading beyond that sector, is a source of appreciable angst.”

    “We’ve developed a credit crunch. If liquidity isn’t quickly restored in these markets, we are looking at a credit crunch””signs of it are everywhere…. Every day we hear about companies that are trying to finance prime quality jumbo mortgages and cannot get the financing to do that and are tightening standards.”


    “A big worry is that a significant drop in house prices might occur in the context of job losses, and this could lead to a vicious spiral of foreclosures, further weakness in housing markets, and further reductions in consumer spending… At this point I am concerned that the potential effects of the developing credit crunch could be substantial.”


    “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real.”

    She seems to have been more perceptive on this than her colleagues at the Fed.

  6. Gravatar of marcus nunes marcus nunes
    25. July 2013 at 11:25

    And in 2010, while the NEC Director Summers grossly failed to advise Obama on the imperative of getting the right people to quickly fill the Board vacancies. A HUGE mistake that only someone who doesn´t belive in the effectiveness of MP at the ZLB could make.

  7. Gravatar of TravisV TravisV
    25. July 2013 at 11:35

    Great find from David Henderson:

    “Krugman: The Average Family is Materially Much Better Off”

  8. Gravatar of TravisV TravisV
    25. July 2013 at 11:49

    Dear Commenters,

    If Larry Summers is nominated chairman of the Fed, what do you predict the market reaction will be?

  9. Gravatar of jknarr jknarr
    25. July 2013 at 12:14

    The insider crowd on Wall Street and DC love Summers, and so I infer that he is tight money/slow NGDP. Yellen is presumably more dovish — higher NGDP.

    Higher NGDP typically means higher yields and lower P/Es. Summers would be great for the speculative higher-present-value trade; so long USD and long equities (and long food stamps). Short USD and long commodities for Yellen.

    PS — Scott, Obama’s policy track record suggests that he is all about centralizing and expanding Federal power. I imagine that he’d prefer greater central government fiscal power — which he can influence and control, reward and punish — than easier monetary policy, which is by nature decentralized.

  10. Gravatar of Mark Mark
    25. July 2013 at 12:57

    Let’s just get Sumner on that list.

  11. Gravatar of Negation of Ideology Negation of Ideology
    25. July 2013 at 13:15

    Three board openings, three great appointments – Romer, Woodford and Sumner. If any of them refuse the appointment, go with Charles Evans.

    Yellen is fine, keep her where she is. But we need to signal a regime change at the Fed, to NGDPLT.

  12. Gravatar of TravisV TravisV
    25. July 2013 at 13:44

    Matt O’Brien:

    “Larry Summers Should Absolutely Not Be the Next Fed Chair”

  13. Gravatar of ssumner ssumner
    25. July 2013 at 13:52

    Alexander, Yes, I much prefer Yellen. Romer would be still better.

  14. Gravatar of AlanInAZ AlanInAZ
    25. July 2013 at 14:29


    One commenter to the “Krugman find” was astute enough to include a link to another Krugman piece, which I think is more relevant in today’s economy.

  15. Gravatar of maynardGkeynes maynardGkeynes
    25. July 2013 at 14:31

    Even my Metrobus driver hates Larry. Interesting ride today…

  16. Gravatar of Mike Sax Mike Sax
    25. July 2013 at 14:37

    You don’t like Blinder? I mean I do think that Romer is probably optimum. Then there’s Yellen. But if it’s a choice between Blinder and Summers you don’t think he’d be a head and shoulders above?

    Summers has lots of baggage and there are lots of reasons people don’t like him. However, the most compelling knock is that hed actually turn out to be more hawkish than Bernanke as he loves hobnobbing with the Wall St. bond guys.

    “Summers worked in the Clinton administration as a protege of Treasury Secretary Bob Rubin, and helped lead the effort to deregulate Wall Street. Rubin, a long time Goldman Sachs trader and executive, moved to Citigroup after his time in the Clinton administration. Rubin has been a leading advocate of the bond-holding community, which favors a strong dollar, low inflation and a loose labor market, otherwise known as high joblessness. Rubin has been a critic of Bernanke’s efforts to stimulate the economy, arguing that it could weaken the dollar and drive inflation, both of which would drive down bond prices. (Even this week, Rubin was making phone calls urging that Detroit’s bondholders be fully repaid, one source familiar with his lobbying said.)”

    I don’t know if he’s as bad as this makes him sound-that he’d be a hard money creature of the bondholders. However, while it may not be true it’s at least not wildly implausible.

    Whatever Blinder would be like I don’t think there’s any chance he’s ‘hard money.’

    He also has probably has little interest in buffeting the Fed’s regulatory role as per Dodd-Frank either.

  17. Gravatar of TravisV TravisV
    25. July 2013 at 15:17


    That is a good post. Thanks for sharing.

  18. Gravatar of Cthorm Cthorm
    25. July 2013 at 15:46

    Yellen is the least-bad choice named so far. But that is faint praise. There are very few good choices for Fed chair amongst central banks. Svensson, Fischer, and Carney (obviously not available) come to mind.

    Scott –
    My top criteria for Fed chairman is different. The next Fed chairman should want to eliminate the importance of his/her position. A system that puts this much power in the hands of a few individuals is a bad system.

  19. Gravatar of Ricardo Ricardo
    25. July 2013 at 17:38

    @TravisV: re market reaction if Summers Fed chair. I somewhat agree with jknarr. The “markets” love him (long equities, short fixed-income)

    This may sound dumb given their relative looser/tighter MP views, but I would not be surprised if the markets perception of Summers vs. Yellen boils down to something like this: “Yellen will be just a continuation of Bernanke’s last five years (slow growth)” vs “Summers will bring back the go-go 1990s. Yay!”

    If you want a pro-market expectations shift, Summers is the guy.

    (I feel the need for flagellation now.)

  20. Gravatar of TravisV TravisV
    25. July 2013 at 20:19


    Could be. We’ll see. I think you’re expressing the “uninformed armchair pundit” view of Summers. But the market is not an uninformed armchair pundit.

  21. Gravatar of TravisV TravisV
    25. July 2013 at 20:21

    Mike Sax,

    Good find on Bob Rubin’s shenanigans.

Leave a Reply