The Lucas Roundtable

I wasn’t invited to participate, but since I have a blog I’ll put in my 2 cents worth anyway.  In my view both sides of the debate are wrong.  I disagree with pundits like DeLong, Krugman and Skidelsky, who have used this crisis to argue that mainstream macroeconomics is fundamentally flawed.  Of course there are a few things I’d like to tweak, NGDP targeting rather than inflation targeting, for instance, but the basic building blocks of modern macro are sound.  These include the need for explicit nominal targets for monetary policy, an assumption of efficient markets, and skepticism about using fiscal stimulus as a countercyclical tool.  But what this crisis did clearly demonstrate is that most mainstream economists, indeed nearly all of them, do not know how to apply these tools to a real world crisis.

Here are ten ideas from modern macro that were either mostly ignored, or almost universally ignored during the recent crisis.  The first, third, and fourth are taken verbatim from Mishkin’s textbook summary of the “lessons” we have learned from modern macroeconomics:

1.  It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates.  (Mishkin, p. 606)

I think it’s fair to say that almost all economists, regardless of their ideological persuasion, agreed that monetary policy was “easy” or “accommodative” during late 2008.  Not all did so because of low interest rates, but this was the most common piece of evidence that economists cited.

2.  Because velocity can be erratic, the monetary aggregates are not a reliable indicator of the stance of monetary policy.

Friedman and Schwartz showed that money was extremely tight during the early 1930s, despite the fact that the monetary base rose sharply.  And the broader monetary aggregates were discredited as policy indicators during the 1980s.  It is not surprising that during a financial crisis there would be an increased demand for FDIC-insured deposits.  And yet despite the fact that it is generally understood that neither interest rates nor the money supply are reliable policy indicators, almost all economists did rely on one or both in reaching a tragically misguided consensus that the stance of monetary policy was expansionary in 2008.  So what does modern macro say are more reliable indicators?

3.  Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.  (Mishkin p. 606)


During the crucial period from July to November 2008 almost all other policy indicators were signaling loud and clear that money was far too tight.  Most importantly, the so-called TIPS spread, which is the gap between the yields on conventional and inflation indexed bonds, fell sharply.  By September 15th, just before the fateful meeting where the Fed decided not to ease monetary policy, this spread had fallen to only 1.23% over 5 years, far below the Fed’s implicit inflation target.  Even worse, the reason the Fed cited for inaction was that the risk of recession and high inflation were roughly balanced.  So even though the Fed’s dual mandate means that in practice they focus on both inflation and real growth, and even though real growth was obviously slowing sharply, the Fed ignored market warnings of dramatically lower inflation and based its action on the assumption that the real risk was high inflation.

There were plenty of other indicators that the Fed also ignored during late 2008.  Real interest rates rose sharply between July and November, stock prices crashed, as did commodity prices.  The dollar soared in value against the euro.  Indeed during this period it is difficult to find a single asset price that wasn’t telling the Fed that policy was far too contractionary for the needs of the economy.

4.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.  (Mishkin p. 606)

Because I have been teaching this idea from the most popular money book on the market, I was stunned when the crisis hit to discover that very few economists actually believed what Mishkin wrote.  Over and over again we heard that because monetary policy was no longer effective, we needed to resort to fiscal stimulus.  John Cochrane effectively summarized my bewilderment:

Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry.

And in my case it wasn’t just fiscal policy, the profession ignored much of what we know about a whole range of issues.  Indeed when I debated John Cochrane recently he seemed to accept the widespread assumption that monetary policy was easy last fall, despite all the key indicators showing exactly the opposite.

5.   The decision to double reserve requirements in 1936-37 delayed the recovery from the Great Depression.  This shows that during a depression the Fed should never institute a policy that has the effect of increasing the demand for reserves.

All economists who study monetary economics are exposed to this famous example from Friedman and Schwartz’s Monetary History.  And yet for some inexplicable reason when the Fed started a policy of paying banks to hold on to excess reserves last October 6th, there was hardly a murmur of protest from academic economists.  A few economists such as Robert Hall, James Hamilton and Earl Thompson did discuss the potential contractionary impact of the plan, and Hall and Woodward even called the Fed’s explanation “a confession of contractionary intent.”  That is, the Fed began paying interest on reserves in an attempt to prevent the fed funds rate from falling below their target of 2%.  In fact, the Fed still pays interest on bank reserves at a rate higher than they can earn on 3 month T-bills, which insures that any quantitative easing will have little impact on aggregate demand.  Not surprisingly, the program has led banks to hoard almost all of the money that the Fed has injected into the economy over the past year.

6.  Monetary policy should “target the forecast.”

Lars Svensson is the economist most associated with this eminently practical suggestion.  The basic idea is that since both nominal interest rates and the money supply are not reliable policy indicators, and since monetary policy affects the broader economy with a lag, the Fed should always set policy such that their forecast of the goal variable is equal to their target for the goal variable.  Bernanke has expressed similar views for the Fed’s longer term forecasts.  Earlier I mentioned that TIPS spreads signaled money was too tight in mid-September.  Not all economists favor targeting market forecasts.  But surely no one could disagree with Svensson’s view that policy should never be set at a level where the policymakers themselves expected it to fail? Unfortunately, that is in fact exactly what the Fed has done since late September last year.  The expected growth in prices and output, or nominal GDP, is far below any reasonable estimate of the Fed’s implicit policy target or targets.  Even though we don’t know precisely what the Fed is aiming for, once Bernanke called for fiscal stimulus there can be little doubt that he expected aggregate demand to fall far short of the Fed’s goals.  And of course he was right.  But then why didn’t the Fed adopt a more expansionary policy stance in late 2008?

7.  Markets are efficient, and thus asset prices incorporate the optimal forecast of economic variables.

Some economist will argue that the Fed dared not adopt a more aggressively expansionary policy stance (as if their current policy was actually expansionary) because of the fear of an “inflationary time bomb” due to “long and variable policy lags.”  This aspect of monetarism was discredited long ago, as it is entirely inconsistent with efficient markets.  Indeed the few modern monetarists who do still adhere to this view state quite explicitly that they don’t believe that the implied inflation forecast in the bond market is right.  Even though the indexed bond market is now signaling low inflation, they insist that the real danger is high inflation.  What puzzles me is the fact that so many non-monetarists have seemed to have at least implicitly accepted this discredited view, and are willing to give the Fed a pass for not targeting the forecast, not adopting a policy that they expected would succeed.

8.  The economy will be more stable if the Fed engages in “level targeting” rather than a “memory-less” policy of targeting the rate of inflation.

Almost every time there is a major collapse in aggregate demand, it is associated with a sharp change in the expected trajectory of prices and nominal GDP going several years forward.  This occurred in late 1920, late 1929, late 1937, late 1981, and late 2008.  In 1920 and 1981 the contraction was at least partly intentional, an attempt to slow inflation.  In 1929, 1937, and 2008, however, there was a major loss of monetary policy credibility.  Investors suddenly lost trust in the Fed’s ability to maintain adequate nominal spending growth going forward.  And in each case the markets were correct.

Modern macro theory (developed by Michael Woodford and others) emphasizes that the single most important factor influencing today’s aggregate demand is the expected future path of demand.  Prices and/or nominal spending will not fall sharply if the Fed has a credible policy to target the future path of prices or nominal spending.  Thus if the Fed targets a price level path that rises 2% per year, and the actual price level falls 1% (3% below target) then the following year they would target much higher than 2% inflation in order to start catching up to the trend.  But if the market understands this then velocity will not fall sharply, as each decline in prices increases expected inflation and reduces real interest rates.  Of course (as President Bush found out when he issued a warning to Iraq only after they had invaded Kuwait), this policy is only effective if credible and explicit.  Current Fed policy is neither.  The markets correctly understand that although prices and nominal spending have fallen far below the Fed’s implicit target over the past 12 months, the Fed is quite content to let them fall even further below over the next 12 months.  Almost no one expects 2% inflation in the next few years.  We will never resume the previous trend line for prices and NGDP; instead we will eventually get on a new and lower trend line.  Adjustments of this sort are always extremely painful.

9.  We cannot rely on Keynesian economics to provide reliable fiscal multipliers.

Many commentators have discussed problems such as crowding out and Ricardian equivalence.  But few economists have mentioned the most troublesome issue at all–monetary policy counterfactuals.  There is no scientific way of estimating a fiscal multiplier because there is no scientific way of establishing the monetary policy that would be adopted with and without fiscal stimulus.  One reason why fiscal stimulus was almost completely eclipsed by monetary policy in the so-called new Keynesian period (1982-2007) was because if you are using monetary policy to target inflation, then the expected fiscal multiplier should always be precisely zero.  For instance, suppose the Fed always adjusts policy to keep expected inflation at 2%.  In that case if fiscal expansion were expected to boost AD and inflation, the Fed would neutralize its impact through tighter money.

Some Keynesians like Paul Krugman have dismissed this problem, arguing that it implausible that Bernanke would offset the expansionary impact of fiscal stimulus in the current environment.  Krugman then argues that fiscal stimulus has saved us from another Depression.  But is this view really as reasonable as Krugman makes it seem?  Logically Krugman is correct if and only if at least one of the following two assertions is true:

1.  Monetary policy is ineffective at the zero bound.

2.  In the absence of fiscal stimulus Ben Bernanke would have preferred to allow another Great Depression, rather than aggressively pursue some of the unconventional monetary policies that he had earlier recommended to the Japanese.

I find both assumptions highly improbable.  Because I believe fiscal stimulus is relatively ineffective, and because I am confident that Bernanke would have pursued a much more expansionary policy in the absence of fiscal stimulus, I think it likely that the fiscal stimulus actually retarded the recovery.  However I’d be the first to admit that there is no way of knowing how all these policy counterfactuals would have played out.  In any case, we have no reliable way of estimating fiscal multipliers

10.  The real problem isn’t real, it’s nominal.

Above all else, the current crisis represents a failure of imagination of the economics profession.  If there is one thing we have learned from studying other periods of history, and other countries, it is that up close a deflationary economic crisis never looks like it was caused by tight money.  It always seems to be something else.  And this is not surprising, after all, no sensible central banker would every intentionally create an economic crisis.  In both the US in the 1930s, and Japan in the late 1990s, local observers saw the problem as financial, not monetary.  Only with the perspective of time (Friedman and Schwartz) or distance (Bernanke looking at the situation in Japan) did it become obvious that if nominal GDP and prices were falling, then money must be too tight relative to the demand for money.

The biggest failure of modern macro in this crisis wasn’t the abstract models; they provided all the tools we needed.  Indeed one could argue that even David Hume could have understood why the Fed’s reserve injections failed:

“If the coin be locked up in chests, it is the same thing with regard to prices, as if it were annihilated.” David Hume “” Of Money

And let’s not forget that Irving Fisher warned us that if prices starting falling during a debt crisis we needed to reflate with an explicit price level target.  Instead, it was a failure to look beyond the headlines, a failure to think about what our models were telling us about monetary policy.  We should have known from Friedman and Schwartz not to confuse a problem (falling nominal spending) with the symptoms of that problem (stock market crash, failing banks, etc.)

Unfortunately, the current Fed chairman drew the wrong conclusions from his study of the Depression.  Bernanke saw the credit channel as key, and thus assumed that recovery could not occur until the banks were rescued.  In fact, this precisely reversed causality.  Every policy Bernanke tried was also tried during the Herbert Hoover administration—sharp cuts in interest rates, a massive increase in the monetary base, and (in 1932) a bank rescue program.  And all failed miserably.  Only when FDR came in to office and promised a much higher price level and aggressively began devaluing the dollar, did we get a recovery.   Indeed in his first 4 months in office wholesale prices rose 14% and industrial production rose 57%.  And all of this occurred when much of the US banking system was shutdown.  So much for the view that a financial crisis is a “real shock” that cannot be papered over with higher nominal spending.

In fact, our current recession is roughly what any elite macroeconomist would have expected if told that because of a tight money policy NGDP was going to suddenly start falling at nearly a 5% annual rate in an economy with no banking crisis at all.  The banking crisis may have made things a bit worse, but there is no credible evidence for that assumption.

Modern macro theory provides lots of what Lars Svensson called “foolproof” escape strategies for a liquidity trap.  We have always known how to boost nominal aggregates if we got desperate enough, but unfortunately we relied on the same policy tools that had proved ineffective in the early 1930s, and more recently in Japan.  Despite all our arrogant claims that we knew much more than the Americans of the 1930s, or the Japanese of the 1990s, we made the same mistakes.  We also assumed policy was expansionary when it was not.  And what makes it especially inexcusable is that we really do know more that economists did in the 1930s.   We don’t need better theoretical tools; we need economists with better judgment about how to apply those tools to real world problems.  Economists who don’t blandly assume that money is easy when rates are low and the base is rising fast.  Economists who aren’t so blinded by news stories about a collapsing financial system that they are unable to look beyond the headlines to the deeper policy failures.



76 Responses to “The Lucas Roundtable”

  1. Gravatar of JimP JimP
    9. August 2009 at 12:58

    But there must be something more – there just must. It is really stunning to me – as it has been for months – that this horror goes on and on and yet your ideas don’t seem to get any traction.

    I think it is this moral dimension. There really are people (like – say Jim Grant for example)who do believe that economics is a morality play. We (Americans) invaded Iraq – or we are too fat – or we eat twinkies – or we borrowed too much – and so we are just getting what we deserve. The FT makes a living with this line. It must be that many many people think like that. The credit cycle view is really a morality view. That is why the fans of Austrian theories often sound as if they are pleased – we (Americans) borrowed to much and now we must get crushed and so we are getting crushed. Be happy.

    I find it hard to believe that this is what Bernanke believes – but he just must. What else can explain it? Surely he must know that there is another view around. I mean – he must have heard of Hall or Hetzel. But he never addresses or explains his deflationary choices – so he must in some secret place believe that 5 years of grinding deflation and high unemployment (another Japan)is the best medicine available for our economic illness of having been previously too optimistic.

    In a way of course I am kidding. But again – where is the optimism and the joy of the early Roosevelt. We sure could use it.

  2. Gravatar of ssumner ssumner
    9. August 2009 at 13:43

    Jim, I just think human thought is too complicated to be summarized in any simple (binary) way. Bernanke may face:

    1. An internal macro model that is somewhat flawed (the focus of this post.)

    2. Political realities that the Fed as a whole is very conservative.

    3. Reluctance to admit mistakes and do something that is clearly backtracking (like negative interest on reserves.)

    4. A puritan streak that printing money is too easy a way out.

    5. And lots of other biases all mixed together.

    He’s applying one strain of his academic work (the credit view) and ignoring another strain (the view that the zero rate bound doesn’t prevent a more expansionary monetary policy from being effective.)

    But again, it can’t just be Bernanke, as lots of others feel the same way. Don’t give up hope. In February who would have expected us to get into the NYT with a fairly long and favorable article. I’m using all the discussion surrounding the Economist’s Lucas roundtable to try to get my ideas to a bigger audience.

    Even if it’s too late to prevent the recession, it’s not too late to get these ideas out there so that the Fed doesn’t tighten prematurely. The inflation worriers are very loud right now, and we need to counteract that.

  3. Gravatar of JimP JimP
    9. August 2009 at 14:00

    All true. And the inflation hawks are sharpening up their claws. I do think the 7 fat and 7 lean years cyclical view of economics is very deep. Many people simply do not believe sustained prosperity is possible. Optimism is a lovely thing to be around. We need more of it. That is why I like your views. They are not passive.

  4. Gravatar of Rafael Rafael
    9. August 2009 at 14:47

    We had a recession here in Brazil (everybody says we´re already out of recession), but as the currency ( Brazilian Real) depreciated sharply about 50%, it should have prevented the industrial production index from falling more than 12% m/m in December (and back to 2005 levels). I can´t understand that.
    Seems that the problem wasn´t nominal only.

  5. Gravatar of ssumner ssumner
    9. August 2009 at 16:30

    Thanks Jim.

    Rafael, I agree that open economies may not be able to avoid recession, even with a stable monetary policy. But I would add that currency depreciation alone doesn’t mean you avoided a nominal shock. I don’t have NGDP numbers, but the data in The Economist suggests that inflation has slowed from 6.1% last year to to 4.8% this year, and obviously real growth has slowed much more sharply. So we can infer that NGDP growth slowed very sharply. Having said that, I would never deny that a smaller open economy might have trouble avoiding recession when the world economy is in a deep slump. That’s one thing that makes Australia’s performance so amazing. I’m afraid I don’t know enough about Brazil to offer a more informed opinion. I did notice however that, in terms of GDP, Brazil’s recession is milder than the US/Europe/Japan

    My argument is most aimed at central banks that have a significant impact on world aggregate demand—the Fed and the ECB.

  6. Gravatar of JeffreyY JeffreyY
    9. August 2009 at 17:11

    “There is no scientific way of estimating a fiscal multiplier because there is no scientific way of establishing the monetary policy that would be adopted with and without fiscal stimulus.”

    I don’t know how to turn this into a scientific estimate, but it certainly seems reasonable to think that monetary policy alone would have been no more expansionary than the (inadequate) monetary+fiscal policy we got. Further, given that a more expansionary monetary policy would have required tapping deeper into unconventional techniques, I think the inflation hawks would have been able to prevent the Fed alone from doing even as much as monetary+fiscal policy did. So, I think the focus on fiscal policy was a decent response to the fact that everyone had forgotten #s 3, 7, and 8. Nonetheless, you’ve convinced me that a pure monetary response would have been better, had it been possible.

    Great post overall!

  7. Gravatar of ssumner ssumner
    9. August 2009 at 17:52

    Jeffrey, First let me say that I think you have a very reasonable reply, and most people would say your view is more plausible than mine. But let me try to indicate where I am coming from here:

    1. I think fiscal stimulus was actually much weaker than most economists perceive it. Not necessarily as weak as Lucas, Barro, and Cochrane think, but pretty weak.

    2. I think the actual monetary stimulus was far weaker than almost any other economist in the world thinks (with a few exceptions like Earl Thompson, Robert Hetzel, and some of the economists who contribute here.)

    3. I think unconventional monetary stimulus (especially a credible promise to hit a nominal aggregate target) can be extraordinarily stimulative, much more than most economists realize.

    4. I think without any fiscal stimulus the Fed would have been forced to do something more dramatic. In that case they might well have discovered that its impact was much greater than they expected (or that common sense suggests) just as the impact of current policy was much less stimulative than most people would have expected from doubling the monetary base.

    5. I know that’s a lot to assume, but I really think the highly counterintuitive nature of monetary policy means that an effective monetary policy might well have done much more than an ineffective one combined with fiscal stimulus of doubtful efficacy.

    It’s not clear how many people will buy this argument, and I wouldn’t blame anyone for being skeptical, but that is where I am coming from on this issue.

    In any case I think you see why I view the multiplier estimates as being tricky, even if you don’t push the logic as far as I do.

  8. Gravatar of Jon Jon
    9. August 2009 at 19:47

    “4. A puritan streak that printing money is too easy a way out.”

    Or simply concern about the one-way ratchet of inflation expectations. There was enough concern about inflation in 2007/2008 that the Fed risked all credibility on a 2% target.

    Forget a moment about NGDP targeting; that isn’t how the rest of the world thinks. Losing control of inflation expectations is a very serious matter in the context of conventional monetary policy.

  9. Gravatar of David David
    9. August 2009 at 21:06

    thanks for the great post. I’m glad others such as Mankiw and Barro are saying similar things about the inefficacy of fiscal stimulus. And yet, here in Australia, it’s taken for granted – by the economically illiterate media, and most economists – that our government’s fiscal stimulus has prevented a recession. The IMF even issued a statement last week saying the govt was responsible for saving us all.

    Amazingly, the fiscal stimulus here has amounted to the mailing out of checks – most of which were saved or spent on poker machines – and subsidies for car manufacturers (the Labor party is supported by unions). It doesn’t take a genius to see the flaw in this thinking, but an anachronistic, bloody-minded Keynesian ideology greatly appeals to governments keen to be seen to be doing something, and this will remain very hard to shake.

  10. Gravatar of Itamar Itamar
    9. August 2009 at 23:49

    Hello Scott.
    Thanks for another fascinating post. I am a grad economic student from a “small open economy” and I wanted to know what are the applications of “targeting the forecast” stance in such a small economy? what are the monetary problems that can reduce the effect of this stance in such an economy?

  11. Gravatar of tobsen tobsen
    10. August 2009 at 01:38


    I agree with you that Svennson´s way may be the way to get out of the crisis. Building up a price-level target (with a memory) is a quite good idea and supporting the higher price level with a currency decration may also work. But, as Svennson pointed out, it´s only a way for small open countries like Sweden. Even if money expansion is always a kind of beggary thy neighbour policy, if this is tried by large economies, It could lead other countries into a liquidity trap or forcing other countries to act the same way. (see Svensson´s paper, “The magic of the exchange rate…”). The depreciation of the currency with a crawling peg should support the credibility of the price-level-target, but I think a good communication by the Central-Banks could be enough.
    I also agree with you that Bernanke´s (the FED´s) way is a little bit counter-productive, easy money with positive interest rates on reserves won´t increase broad money aggregates. The FED focusses on pushing down the premia of assets, that policy could work if we are not facing deflation. But But if the Wicksellian natural rate (real rate) is negative, which means, we need a negative rate to close the output gap, the only way is increasing inflation expectations. So we are back to Svensson.
    I think, Vincent Reinhart was right when he said the FED´s measures are “a big experiment”.

    A last way is presented by Buiter, “the wonderful world of negative interes rates”, what do you think about this idea?


  12. Gravatar of Tim Worstall Tim Worstall
    10. August 2009 at 01:42

    You mean this Skidelsky?

    Mainstream economics subscribes to the theory that markets “clear” continuously. The theory’s big idea is that if wages and prices are completely flexible, resources will be fully employed, so that any shock to the system will result in instantaneous adjustment of wages and prices to the new situation.

    Does anyone outside of the Noble Lord’s fantasies think that markets clear “instantaneously”?

  13. Gravatar of Bill  Woolsey Bill Woolsey
    10. August 2009 at 03:15


    Is level targeting desirable if the target is the growth path of the CPI and there is an adverse aggrgate supply shock?

    I think one of the reasons nominal GDP targeting is desirable is that it better handles the aggregate supply shock issue in the context of level targeting.

    By the way, total final sales may be pretty much the same thing as nominal income, but I think it immediately gives a better impression of the goal of the policy. The goal of the policy is to impact nominal expenditures. Yes, that does imply matching changes in the sum of nominal incomes–wages, interest, rents and profits. And then there is this strange notion that because real output is included in nominal GDP, it cannot be targeted–only the inflation part can be targeted. Obviously, the purpose of nominal GDP targetting is to let market forces handle the composition between real output and inflation.

    I read the roundtable.

    Some problems with mainstream macro:

    1. Monetary policy is the same thing as open market operations with T-Bills.

    2. “The” interest rate, is sufficient for macroecnomic theory.

    3. Financial disruptions and their impact on aggregate supply vs. aggregate demand.

  14. Gravatar of Bill  Woolsey Bill Woolsey
    10. August 2009 at 03:30


    If real output was at potential output now, and we were looking for the single interest rate that would keep it there, then I suppose higher expected inflation lowering that real interest rate to negative levels might be the only approach.

    However, real output is way below potential inocome and nominal income has dropped. It is about 5% below its long term growth path.

    Higher expected growth of nominal income (returning it to its growth path) can be a mixture of expectations of inflation and faster output growth. The higher inflation lowers expected real short rates, and the higher real growth raises the natural interest rate.

    So, the goal isn’t really higher inflationary expectations, it is higher nominal income growth. And, the more the growth in output and the less the inflation, the better.

    Second, it is a mistake to think of one interest rate under current conditions. While low risk, short term nominal rates are very near zero, longer term, higher risk nominal rates are well above zero. The central bank can purchase longer term and higher risk assets and directly lower their nominal rates.

  15. Gravatar of JKH JKH
    10. August 2009 at 03:47

    I guess the Fed has been using their balance sheet to rescue the banking system through credit pump priming (which goes to your causality point), whereas you think they should have been using it to create more monetary stimulus – preferably through more rapid rate reductions last fall, but given that they didn’t do that, more extensively now (e.g. charging interest on reserves).

    Your point on the monetary/fiscal counterfactual problem is intriguing.

  16. Gravatar of Lorenzo (from downunder) Lorenzo (from downunder)
    10. August 2009 at 04:13

    Off topic, but I still struggle understanding some of the basic aspects of monetary economics. Looking into the archaeology of early economic history makes me wonder whether there are good reasons for my puzzlement.

    Archaeologists and economic anthropologists do not seem to quite find what standard economy stories suggest they should. I have a post on that here
    There seems to be some opportunities for productive cross-disciplinary collaboration,

  17. Gravatar of ssumner ssumner
    10. August 2009 at 04:34

    Jon, You said:

    “Forget a moment about NGDP targeting; that isn’t how the rest of the world thinks.”

    Don’t be so sure. The Taylor rule puts exactly equal weight on price level and output deviations from trend. It is not precisely a NGDP rule, but it is far closer to NGDP than price level only. The Taylor rule is the most often cited estimate of how the Fed actually tries to behave.

    You make a good point about the summer of 2008, when there were some (excessive) concerns about inflation. But it does not explain what the Fed did in early October, and the profession’s amazing acquiescence.

    David, And the greatest irony is that the world’s most respected hard core Keynesian, Paul Krugman, just said in his column that the US tax cuts had had no effect. He says only government output produces a stimulative effect. So Australia did the type of fiscal stimulus that Krugman says doesn’t work.

    One good thing though–mailing out checks is less wasteful than building bridges to nowhere. How big is Australia’s deficit as a share of GDP?

    Itamar, Assuming you have a floating exchange rate, you should still be able to target NGDP, and this should reduce the severity of the business cycle. But if a severe recession is unavoidable because of the trade shock, then targeting nominal wage rates might be slightly better than NGDP. But it is hard to target nominal wages.

    Another idea is to temporarily reduce the payroll tax on labor during periods of high unemployment. Singapore does that, and someone told me France does as well.

    If you have a fixed exchange rate, try the payroll tax cut or even a coordinated wage cut.

    tobsen, You said

    “A last way is presented by Buiter, “the wonderful world of negative interes rates”, what do you think about this idea?”

    Ironically, I think I got there first. I published the idea in January, long before I saw him mentioned it. My proposal applied only to bank reserves, as it is not practical to pay interest on cash. I have many posts here discussing the idea. If you scrool back to sometime around April or May you will see a long post “Reply to Mankiw” which has the most complete discussion.

    You are right that it is hard for a big country to depreciate its currency against other currencies, but they can depreciate against goods and services. And Svensson’s “target the forecast” idea was applied very effectively by FDR in the US during 1933. Indeed Svensson often cites the US in 1933 as a successful example of his idea. And it actually help the rest of the world, as a big US growth spurt sucked in imports.

    Tim, That was an unbelievably bad essay. Skidelsky seems to be unaware of any changes in right wing macro since 1975. And he also argued that the fact that the crisis was not predicted shows the bankruptcy of the EMH. Huh? I was thinking of a post on it, but assumed everyone else would have already noticed the problems.

    Bill, You said;

    “Is level targeting desirable if the target is the growth path of the CPI and there is an adverse aggregate supply shock?

    I think one of the reasons nominal GDP targeting is desirable is that it better handles the aggregate supply shock issue in the context of level targeting.”

    No, level targeting of the CPI is not appropriate. But level targeting of the core CPI would be OK, as long as it was estimated correctly, which it isn’t. I agree about NGDP.

    You said;

    “By the way, total final sales may be pretty much the same thing as nominal income, but I think it immediately gives a better impression of the goal of the policy.”

    I have one question here. What if the price of imported oil surged. And suppose demand is pretty inelastic so that expenditure on imported oil surged. Under an expenditure target would you have to reduce nominal output in the US? That was the reason I originally gravitated to a production measure, I was trying to stabilize nominal output. (And hence aggregate wage payments if nominal wage rates are sticky) Am I thinking about this the wrong way?

    And I agree that there are some of the problems with mainstream macro that you pointed out. But I tried to show that we did have enough good ideas to deal with the crisis in my list of 10, we just didn’t use them. But obviously the standard model does need some tweaking.

    Thanks JKH, That’s about right. My only caution is that I tell people that it is really tricky to spell out what a more effective policy might have looked like. In the late summer of 2008 it might have meant more aggressive rate cuts, as you say, but if they were successful in maintaining a credible 5% NGDP expected growth path, then later in the fall they might have actually had slightly higher rates than they do now. It all depends on how well things went. Low interest rates can reflect easing, or they can reflect a loss of policy credibility.

  18. Gravatar of ssumner ssumner
    10. August 2009 at 04:40

    Lorenzo, I just read the post, but I am wondering what specifically in the historical record that you think is a puzzle, or doesn’t fit with modern views of money.

  19. Gravatar of Rafael Rafael
    10. August 2009 at 05:27

    Having said that, I would never deny that a smaller open economy might have trouble avoiding recession when the world economy is in a deep slump. That’s one thing that makes Australia’s performance so amazing.

    You are right, but I would like to see the brazilian economy having the australian performance. The consensus view is that we had a recession because exports plunged and we had a severe credit crunch. I doubt this view a little, despite the fact that Argentina is in deep recessesion (but they don´t admit this, the official data are false) and they are one of our major trade partners (of course the same apply to the US).

    However, the Brazilian Central Bank refused to lower interest rates in October, the cuts started only in January, after the great contraction in industrial production. They simply ignored all the signals of recession before January, although when the crisis hit hard, the brazilian currency depreciated sharply, which could trigger fears of inflation.

  20. Gravatar of Joe Calhoun Joe Calhoun
    10. August 2009 at 06:32

    Scott, I think I’m about to commit economic heresy or something, but reading this blog and your views about monetary policy is having a dramatic effect on my thinking about how the economy works. I’m not sure what in this post made me think of this, but here goes. If we adopt a level targeting regime (NGDP or nominal income as Bill suggests) would inflation then become more a fiscal phenomenon than a monetary one? In other words, fiscal policy would then be the driver of money demand at the margin and so would be the primary driver of changes in inflation rates? To paraphrase Friedman and complete the heresy, would inflation, in a level targeting regime, always and everywhere be a fiscal phenomenon?

  21. Gravatar of JeffreyY JeffreyY
    10. August 2009 at 07:27

    I think you’re coming from a reasonable place, but, of your reasons,

    “4. … In that case they might well have discovered that its impact was much greater than they expected …”

    indicates the constraint on Fed policy that I think I’m weighting heavier than you. From their actions, it seems the Fed is deathly afraid of anything happening they don’t expect. I’ve been attributing that to not wanting to give the inflation hawks more fodder, but it could also just be “that the Fed as a whole is very conservative.” Without fiscal stimulus, things might have gotten bad enough that they’d have to act, but as soon as events surprised them, I think they’d have pulled back, just like the Bank of Japan did every time deflation threatened to end. Further, I think they’d constrain themselves to make absolutely sure events didn’t surprise them.

    It’s certainly possible that, as soon as they started trying a truly expansionary monetary policy, events would have gotten away from them and fixed the economy. And you certainly have more expertise to predict that than I do to deny it. But I’d still be really nervous to bet on it.

  22. Gravatar of StatsGuy StatsGuy
    10. August 2009 at 08:18

    Hmm, I’m having trouble finding anything to nitpick.

    If I could add items to your list, it would be these:

    — The impact of asset pricing on the macroeconomy is simply not well understood. Economists seem content to leave this to business school finance experts, which is a mistake. Specifically, what’s the relationship of asset prices to aggregate demand (why is the Dow Jones a leading indicator, and how is it related to consumer confidence – which is another leading indicator)? The impact of wealth (and expected net wealth, instead of merely income) on consumption stabilization.

    Many media reports have the story that people used their houses as ATMs. That, expecting house values to keep increasing, they sustained income by incurring debt against assets that were expected to increase in value. But which didn’t. Are these stories all simply wrong?

    — The relationship of asset pricing to money supply. We tend to assume something like one-way causation (money supply ==> asset prices).

    But the financial crisis was perverse. Assets were bought with leverage, and if asset prices go down beneath a certain threshhold – which happened after 12 months of recession – then financial institutions become “solvency-challenged” and start to hoard reserves to cover loan losses. This reduces the money supply, and depresses asset prices. Which, because of capital asset ratios, _forces_ more deleveraging to cover losses. This is not simply incentive driven; it’s somewhat mechanical, because of the accounting framework.

    — Accounting in general. Perhaps this is too primitive for high-powered theorists, but I get the sense most macroeconomists (with certain exceptions like Bill W, who explains details very well) don’t get accounting. If they got accounting, they might have understood a little bit about how capital asset ratios (e.g. massive leverage, minimum levels of ‘assets – liabilities’) and Mark to Market accounting can interact in a very pro-cyclical way during a financial shock.

    — Psychology. Behavioral economics is gaining ground, particularly in a laboratory/micro setting, but has yet to make the translation to macro. That’s not to say there aren’t macroeconomists who believe psychology matters, but they tend to denigrate it as “animal spirits”.

    To cite Mark Thoma’s comment from the debate:

    “We need to take a close look at how the sociology of our profession led to an outcome where people were made to feel embarrassed for even asking certain types of questions. People will always be passionate in defense of their life’s work, so it’s not the rhetoric itself that is of concern, the problem comes when factors such as ideology or control of journals and other outlets for the dissemination of research stand in the way of promising alternative lines of inquiry.”

  23. Gravatar of Bill  Woolsey Bill Woolsey
    10. August 2009 at 08:26


    It is total sales of final _domestic_ output. Nominal spending on imports is subtracted and nominal exports are added, just like with GDP.

    There would be no significant difference in the effect of a change in the price of imported oil using either measure. There would be a shift in the composition of nominal expenditure, lower real incomes because of an averse change in the terms of trade, and probably, a more extensive adverse supply shock also causing inflation and reduced production.

    The only difference between nominal GDP and total final sales is inventory investment.

    Not counting unplanned inventory investment is the point. Total spending wasn’t too low. It was just right because we are going to say that the firms themselves purchased the output that they couldn’t sell to anyone else. Or, conversely, total spending wasn’t too high. Sure, people bought more than was being produced, but the shortage was covered out of existing inventories. The negative spending by the firms on inventory investment offsets the excessive spending of everyone else…

    Remember, expectations are being targeted. If total final sales actually turn out to be too high, then there will be unplanned inventory disinvestment. If total final sales are too low, then there will be unplanned inventory investment. But those are mistakes that should be avoided.

    Of course, planned inventory investment is also left out. That is more problematic. If we know that firms are going to be trying to work off excess inventory a year from now, having total spending by final users extra high at that time would be better, I guess. If the altertnative is less production and employment. But I think, what would be even better would be for firms to get rid of those excess inventories by lowering prices.

    Further, if firms figure out how to get along with less inventory permanently, isn’t that just the sort of productivity improvement that should show up as lower prices?

    There is another measure called total domestic purchases, which includes imports and not exports. You must be confusing that with total final sales. I think that if import prices rise, then this would imply less spending on domestic output unless exports rise an equivalent amount.

    Notice that you said that you settled on a measure of _output._ Doesn’t that just sound like _real_ output? Of course, you mean, nominal output. But isn’t that output times prices? What part of that does the Fed control? Prices? But, of course, what it really impacts is nominal expenditure. Your worry was that the Fed should be trying to target nominal expenditure on domestic goods and services. And that is what final sales of final goods and services does. Spending buy domestic and foreign firms, households and governments on goods produced in the U.S. (But not, spending by firms on their own products, where intentionally or due to sales to someone else being more or less than expected.)

  24. Gravatar of calieconomist calieconomist
    10. August 2009 at 13:04


    In looking at the amount of excess reserves at the FRED webite, it seems that excess reserves started spiking in September, when the financial crisis took hold. Why did excess reserves begin spiking before the Fed started paying interest rates on reserves on Octoboer 6th? Was this just expectations?

    Because it seems that you are arguing that paying interest on reserves was the major cause of this increase in excess reserves. I agree that it was a blunder to start paying interest rates on reserves, but how can we tell that this was the causal mechanism, and not simply precautionary holdings of excess reserves due to a financial crisis? You seem to be the person best qualified to answer this question. Also, weren’t there already significant holdings of excess reserves in the US during the early 1930s, when the Fed was not paying interest of reserves, but there was a financial crisis?

    Basically, even with the Fed’s blunder of paying interest on reserves, couldn’t the story be:

    Crisis-> Fear -> higher holdings of excess reserves, with the payment of interest on reserves a secondary story?

    You know more about this than me, but it seems that there should have been other episodes in history when there were significant holdings of excess reserves, without the central bank paying interest on reserves.

    Here are the numbers on excess reserve holdings in billions

    2008-01-01 1.640
    2008-02-01 1.721
    2008-03-01 2.973
    2008-04-01 1.879
    2008-05-01 1.949
    2008-06-01 2.267
    2008-07-01 1.917
    2008-08-01 1.972
    2008-09-01 60.054
    2008-10-01 267.904
    2008-11-01 559.039
    2008-12-01 767.398
    2009-01-01 798.233
    2009-02-01 643.486
    2009-03-01 724.632
    2009-04-01 824.378
    2009-05-01 844.100
    2009-06-01 751.378

  25. Gravatar of Rob Rob
    10. August 2009 at 20:48

    I still think the EMH is 180 degrees off. I just put my life’s savings into the growing sugar bubble. I guess the EMH gives me a 50/50 chance of making money…

    But I believe in bubbles…

  26. Gravatar of tobsen tobsen
    11. August 2009 at 00:47

    Scott, you said:

    “You are right that it is hard for a big country to depreciate its currency against other currencies, but they can depreciate against goods and services.”

    Well, how does this work in a fiat money regime? I don´t understand the mechanism how you can depreciate a currency against goods. Manna from heaven?
    Maybe there is anyone who can explain this to me. Thanks!!

    Bill, thank you for your comment. I will think about it.

  27. Gravatar of ssumner ssumner
    11. August 2009 at 04:46

    Rafael, From what you say it sounds like the Brazilian central bank was too backward looking in its policy, and responded too slowly to the crisis. But I am not knowledgeable enough to say any more.

    Joe, Under NGDP targeting, monetary policy determines the rate of NGDP growth (which is the sum of inflation and real growth. Other policies can then only affect inflation by affecting real GDP growth. Since demand side fiscal policy has no long run impact on real GDP, it also has no long run effect on inflation. To the extent that fiscal policy does affect real growth in the long run (i.e. supply side effects) it might have a slight impact on inflation. But money demand shocks don’t have any impact on inflation under NGDP targeting.


    When rates are zero it’s much easier to prevent inflation overshooting that undershooting. I think even Bernanke emphasized that the central bank should err on the side of too much inflation when rates are low. If inflation expectations started rising too high in the TIPS markets, they could have raised rates before those expectations started impacting wage rates.

    In addition, the problem you described can be greatly reduced with an explicit NGDP or price level target. But they never did this.

    To summarize, you might well be right, but if you are then the Fed behaved very foolishly. Even for a highly conservative central bank that is bad reasoning. Doubly so because a very conservative central bank should be horrified by the fiscal deficits that we now have.

    Statsguy, I agree that macroeconomists should spend a lot more time thinking about the relationship between asset prices and the macroeconomy. But my list was focuses on things were were doing right, but simply forget to apply in this crisis. That’s why I didn’t discuss behavioral economics. Even at the theoretical level I don’t know of any behavioral econ models that would help us understand this crisis. My point was that even the basic models (NGDP shocks causes RGDP to change in the short run) are really all we needed to understand what was going on.

    I read Mark Thoma’s comment too, but it didn’t resonate with me because (as you can tell) I am never embarrassed to disagree with the experts. My problem is finding experts who are willing to challenge me. I wish there were more of them.

    Bill, Thanks. Yes, for some reason I was confused about final sales, now I see that oil prices are irrelevant. At least I am reassured that there wouldn’t be much difference between the two, so I’d be fine with either. Since inventory changes 12 months forward are hard to predict, any forward-looking NGDP rule and nominal final sales rule would be almost identical.

    I am still not sure why nominal output is a bad target. It seems to me that business cycles are fluctuations in output more than fluctuations in sales. In the reductio ad absurdum case where final sales were stable and output had huge swings, you’d still have swings in unemployment.

    The Fed can control any nominal variable. So although the M*V framework naturally leads us to visualize the process in terms of sales. In practice they can control any nominal aggregate.


    I don’t fully understand all the details of ER policy. But my sense is that banks will not hold large amounts of ERs for any extended period of time unless the opportunity cost of doing so is near zero. In other words unless the rate of interest on ERs is not much lower than the rate on T-bills. So if the T-bill yields were about 5% and the interest rate on reserves was 0% banks would never want to hold much ERs, regardless of whether there was a banking crisis or not. The largest level of ER holding in the depression occurred around 1939-40, when yields on T-bills were zero, and there was no financial crisis. So I think interest rates are the key factor.

    I don’t know why banks held so much ERs last September, and I should study that issue more. But my sense is that the Fed made it’s decision in early October because they thought there were losing control of the interest rate target. They thought that without interest on ERs the free market interest rate would fall to zero, and at the time the Fed had a target of 2%. So the intent of the policy was to keep market interest rates higher.

    I’ve always said that the payment of interest on reserves might have contributed to the recession, but we don’t know for sure. Indeed we still don’t really know for sure how much impact the 1936-37 doubling of reserve requirements had. But we now think it was probably contractionary, and hence probably a mistake. That’s how I felt about the interest on reserve policy.

    One thing that I need to check is the fed funds rate in September. Another is whether there were any Fed administrative rules encouraging banks to hold ERS in September.

    Rob. If you believe sugar is a bubble, and if you believe the EMH is wrong, then you should sell sugar short right now. Is that what you are doing? It almost sounds like you are going long on sugar, which would make no sense. Anti-EMH types usually say it’s impossible to know how high the bubble will go, but we can be sure that the price will eventually return to non-bubble levels. If so then the best bet is to sell short until prices return to their normal level.

    tobsen, You target the future price level at a higher rate than today. For instance you might peg a CPI futures contract at a price 2% higher than the current CPI. Then the market will buy these contracts (automatically triggering parallel open market purchases)until they expect the future actual CPI to be 2% higher than today. Thus you get 2% expected inflation. It is like a gold standard, but replacing one commodity (gold) with a basket of all commodities.

  28. Gravatar of Joe Calhoun Joe Calhoun
    11. August 2009 at 05:33


    I was thinking more of supply side effects of fiscal policy. Maybe I’m missing something (I probably am), but if NGDP is growing at a constant rate, the ratio of inflation to real GDP growth would only be affected by changes in things like tax policy. So if the government enacts policies that suppress real growth, inflation would have to be higher, right? Alternatively, if they enact pro growth policies, inflation would have to be lower. That’s all I meant.

  29. Gravatar of septizoniom2 septizoniom2
    11. August 2009 at 05:34

    still a faithful reader of your excellent posts.
    have you considered whether the chinese central bank policy and the fed policy, taken together, should be viewed as a synthetic mega central bank?

  30. Gravatar of Bill Woolsey Bill Woolsey
    11. August 2009 at 11:12


    Between Sept 12 and Sept 15, the four week T-bill fell from 1.35% to .28%. These are daily figures, I guess a Friday and a Monday. The weekly figures for reserve balances at the Fed on the 10th were $8 billion. They were at $47 billion by the 17th. They were at $144 billion by the 24th and $167 billion by the beginning of October. On the 17th the T-bill yield was .07%. There was a good bid of fluctuation, still it was mostly well under .5% for the rest of September.

    Of course, “reserve balances” aren’t all excess reserves, but they are reported weekly, while “excess reserves” are reported monthly.

    The target for the Federal Funds rate was 2% during September, but the actual rate fell from about 2% to 1.5% on Sept. 18th.

    The Fed announced the interest on reserve program on October 6th.

    Soon reserve balances were over $250 billion. During November, they went up to over $500 billion. The 4 week T-bills were down to less than .1%.

    I don’t think Scott is claiming that paying interest on reserves caused the problem. It is rather that it exacerbated the problem.

    I am not sure what the Fed thought it was doing, but here is how it could have worked. The Fed tried to fix broken credit markets. You know, people holding funds in money market mutual funds that invested in asset backed commercial paper that was backed by securitized loans. If it worked, then investors would have been willing to lend in those markets. They would have sold T-bills and moved out of FDIC insured deposits. (Holding money market funds that invested in asset backed commercial paper that funded securitized loans.) By selling T-bills, T-bill yields would rise. These effects would have reduced the demand for base money (and the demand for other FDIC insured money instruments.) The drop in the demand for money/increase in velocity would allow nominal GDP to recover.

    Rather than let short interest rates to drop all the way to zero, and have the Fed buy a bunch of random assets pushing down those nominal yields too, the Fed could save the jobs of all of those wall street investment bankers who were involved in securitized debt, and allowed those who owned safe assets to continue to earn a bit, and avoid recession all at once!

    Too bad it didn’t work.

    You know, the “smart money” that moved out of stocks and into cash before the crash… well, we want them to earn something on their T-bills, right?

    You know, I think the investment bankers on wall street, and the people who sold stocks at the peak give more campaign contributions a week than most reading this do in a lifetime.

    If Bernanke wants to continue at the Fed, what is he going to do? Grasp at straws? Or what? (OK, I’m cynical today.)

    Hey, it didn’t work, and it looks like he will be reappointed anyway.

  31. Gravatar of Current Current
    11. August 2009 at 11:23

    I can’t resist mentioning this. The Daily Mash on what quantitative easing is really for:

  32. Gravatar of Is Money an Emergent Phenomenon « The Emergent Fool Is Money an Emergent Phenomenon « The Emergent Fool
    11. August 2009 at 12:48

    […] are the result of contractionary monetary policy by the central bank (for example, this recent post and this […]

  33. Gravatar of Rob Rob
    11. August 2009 at 15:09

    RE sugar bubble: I don’t consider it a bubble yet, but the pre-conditions for a bubble: action creating action. The point is there is more likely to be price exaggeration on the upside.

  34. Gravatar of rob rob
    11. August 2009 at 18:39

    i believe in the Wiley Coyote Market Hypothesis (WCMH). the market can continue to run on thin air until it dares look down.

    another way to think about it is that given a supply shock, the market has no idea what the price level should be. regression only works if you assume linearity, which i dont. the market may discount information, but how does it discount uncertaintity? as in poker, there are times when you will pay to see your oppenent’s hand. sugar speculators who have a built in profit at this level will happily buy more until the other side of the market shows its hand. how high must the market go before so called demand destruction sets in? we will keep paying to find out. no one wants to leave a fortune on the table. when commodity prices spike, they usually turn on a dime at the top. that is the point at which hands have been shown, there is less uncertainty and Wiley finally looks down.

    in summary, i have no idea what im talking about but enjoy speculating and rationalizing why. really, i just read as much as possible and go with my gut.

  35. Gravatar of rob rob
    11. August 2009 at 19:07

    everything i said sounds less far fetched if you think of price discovery as a negotiation.

  36. Gravatar of rob rob
    11. August 2009 at 19:24

    yeah ok, you can say the market discounts uncertaintity in the options market, but that is only a first orde discounting of uncertaintity. you cant ever really discount uncertaintity, by definition. that is why hacks can right one note books like the black swann.

  37. Gravatar of rob rob
    11. August 2009 at 19:38

    last post for the night, i promise. back to the poker analogy. the last bet in the sugar market was a huge raise, on an already giant pot. are they bluffing?

  38. Gravatar of Jon Jon
    11. August 2009 at 21:14


    Of course, “reserve balances” aren’t all excess reserves, but they are reported weekly, while “excess reserves” are reported monthly.

    They are available biweekly in the H.3 reports.

    The Fed tried to fix broken credit markets. You know, people holding funds in money market mutual funds that invested in asset backed commercial paper that was backed by securitized loans.

    The Fed was rescuing the European banking system via the swaps and domestic banks via TAF–although Domestic bank paper spreads were much smaller than libor and the problem was largely ‘European’ not American.

    Credit spreads on CP other than bank paper barely budged after a very brief initial panic. There was no general credit crunch. There was a very sudden distrust of bank’s balance sheets and a corresponding reluctance to lend.

  39. Gravatar of Greg Ransom Greg Ransom
    11. August 2009 at 22:25

    “JimP” is a masive liar. He’s invented his bogus “Austrian” morality play by pulling it out of his hat. JimP’s lies have nothing to do with Austrian theory, and his remarks read like AstroTurf — lies spread for political purposes within the profession and within the public debate.

  40. Gravatar of ssumner ssumner
    12. August 2009 at 05:51

    Joe, That is correct. I might add that since I don’t believe in price inflation, that would not concern me. Bad supply side policies would not impact wage inflation, which is what I care about.

  41. Gravatar of ssumner ssumner
    12. August 2009 at 06:33

    septizoniom2, I haven’t thought of that. But I do think that the Chinese stimulus may have helped bail out the Fed. I’m not sure whether monetary or fiscal stimulus has been more important, but China seems to be recovering rapidly. That seems to me to be the most important factor in improving expectations in our equity markets since March. If the Chinese had not done that, our economy might be in even worse shape. Of course it is hard to know how the Fed would have reacted if things hadn’t started improving, so all these counterfactuals are tricky.

    Bill, I agree with much of what you say, but a few points:

    1. Even with the interest on reserves, didn’t rates on T-bills pretty much fall to zero anyway? Maybe that’s what you meant by “it didn’t work.”

    2. When I think of the wealthy as a class, it seems to me that most of them have a lot of stocks and corporate bonds. So even if some of them have some T-bills, on balance they’d be better of with a highly expansionary stimulus that boosted all those asset values, even if their T-bill yields fell a bit. Again, I’m not sure this is inconsistent with what you said, as you pointed out that the Fed’s strategy didn’t work. But it makes me even more sure that “mistakes were made” rather than trying to find out who could have benefited from such a bad policy.

    The data was helpful. It suggests that ERs only rose sharply in mid-September, just weeks before their decision to put interest on reserves. (BTW, the decision was actually reached on October 3rd.) So I think the decision clearly was a reaction to their observation that higher ERs would cause them to lose control of the fed funds rate. My only puzzle is why the ffr didn’t immediately fall to zero in mid-September. Perhaps banks wanted that ER cushion in the post-Lehman turmoil. But the Fed correctly realized that banks wouldn’t hold those excess reserves for long at a zero rate, when they could lend them out at 2%.

    Current, Thanks, this is my favorite line:

    “We need something tough and durable with a moisture resistant coating, like the Euro. Although it has to be said, many of our senior executives do still prefer to rub themselves with an Asian currency.”

    I’ve argued that we must encourage American bankers to do more than just sit on their money. It’s good to know that in Britain the velocity of base money is speeding up. I suppose that paper is similar to our “The Onion” newspaper.

    Rob, So there is no sugar bubble now, but you expect one? Why? Why don’t you expect a crash in sugar prices, which would be equally irrational?

    rob#2, rob#3, rob#4, rob#5, Take two sedatives and call me in the morning.

    Jon, Thanks for the reserve info. I might add that the huge swings Bill noticed were probably in the ER category.

    The European information you provide is very interesting. I admit to not knowing much about this issue.

    I had the impression that the entire CP market froze up. Is that wrong? And roughly what proportion of the market is “CP other than bank paper?”

    Greg, JimP may be right or wrong, but it’s silly to argue that he is lying when so many people clearly have that perception. As you no doubt noticed the internet is full of people claiming that this recession is the price we must pay for borrowing and spending too much. And lots of those people call themselves Austrians. I understand that there are sophisticated Austrian theories out there, such as the work of Hayek and others, but it’s not hard to see how people get this impression.

  42. Gravatar of Current Current
    12. August 2009 at 08:19

    “Greg, JimP may be right or wrong, but it’s silly to argue that he is lying when so many people clearly have that perception. As you no doubt noticed the internet is full of people claiming that this recession is the price we must pay for borrowing and spending too much. And lots of those people call themselves Austrians. I understand that there are sophisticated Austrian theories out there, such as the work of Hayek and others, but it’s not hard to see how people get this impression.”

    I think a major problem is not theory, it’s that many Austrian Economists, Commentators etc tend to be rather grumpy. The internet presence of that whole area exudes grumpiness.

    Only British Libertarians are grumpier, see …

  43. Gravatar of Bill Woolsey Bill Woolsey
    12. August 2009 at 08:39

    Did you see this on the St. Louis Fed website?

    It is related to the arguments you were making here.

  44. Gravatar of Bill Woolsey Bill Woolsey
    12. August 2009 at 08:43


    I think there was a credit crunch. Instead of Wall Street _investment_ bankers being able to borrow at the same interest rate as the U.S. Treasury (with Citibank being an honorary member of the Investment banker club) they suddenly had to pay more than piddly little community banks in the U.S.

    Of course, with Citbank being 15% of the commercial banking industry, that is significant.

  45. Gravatar of Rob Rob
    12. August 2009 at 13:10

    “Rob, So there is no sugar bubble now, but you expect one? Why? Why don’t you expect a crash in sugar prices, which would be equally irrational?”

    1. I believe markets are more likely to move irrationally in the direction of the current price momentum.
    2. The EMH suggests the market would discount the news of crop failures instantly. I disagree and think it will take several months. The fact the rate of change in price increases has been increasing in recent days suggests to me that the market thesis is for much higher prices.
    3. All of the sugar ETF’s created over the past few years makes it more likely investors will go long than short, because that is the way investors have tended to use ETFs unless they are explicitly “short ETFs”.
    4. The markets may not anticipate inflation now, but the specter is there. I believe the specter matters.

    But I could be wrong. I usually am.

  46. Gravatar of Current Current
    12. August 2009 at 14:39

    Here is the problem….

    Rob: “I believe markets are more likely to move irrationally in the direction of the current price momentum.”

    If that is true then making money should be easy, bet over a longer term against momentum. You should be able to make yourself a billionaire by ~2015. When you do Scott and I will agree you’ve won the point.

    I agree with you that the market will take month to discount crop failures if they occur. That is quite a separate point to the EMH though which concerns itself with common knowledge. (Here is my main peeve with the EMH, what exactly is common knowledge).

  47. Gravatar of rob rob
    12. August 2009 at 15:18

    Current: I say more likely not likely. Generally, I do not believe momentum strategies work. According to studies I’ve read, commodity markets are more likely to reverse on small moves but more likely to continue on big ones. Where to draw the line on small and big I dont know, but surely the current move is big.

    The 4 points I cite go together. I rarely ever play momentum, but in this situation all the stars seem aligned. There has been a crop failure; the market has been moving up the past couple years; the news of crop failure has moved the market much higher (so it isnt a “sell the news” situation); the specter of inflation is in the air if not in the market; sugar has a history of super spikes; sugar ETFs have proliferated recently (for whatever reason.) I believe institutional investors will jump on the bandwagon for all those reasons. Bandwagon is the key word.

    So no, Im not likely to get rich soon playing the momentum method, because I dont see conditions like these often enough.

    Also, I just think it’s a good bet risk/reward wise. It wouldnt surprise me much if the market went straight down from here.

  48. Gravatar of Jon Jon
    12. August 2009 at 19:53


    Call it a definitional dispute then. I think investment bankers faced premiums because their solvency was in doubt. I don’t call that a credit crunch, I call that an efficient market.

    Credit was withdrawn from particular institutions not generally.

  49. Gravatar of Frederic Frederic
    13. August 2009 at 00:13

    “My only puzzle is why the ffr didn’t immediately fall to zero in mid-September.”


    this was indeed quite a puzzle for me back in September and October. Moreover, later on, an even more puzzling puzzle was why the Effective Fed Fund Rate (EFFR) was stuck around 25bps whereas the Fed had started paying 100bps on ER.
    I think in both cases it partly has to do with the fact that GSEs, supranational institutions…that participate in the fed funds market are not subject to reserve requirements and do not earn interest on excess reserves. They are suppliers of cash, but demand is limited so that they have to accept a very low rate (which will always be better than the 0% they earn).
    Theoretically, banks could have borrowed at, say, 0.25% and then park the fund at the Fed and earn 1%. This arbitrage should have bid up the EFFR to around 1%, but it didn’t, and the gap between the FFR and the EFFR lasted quite a while in October/November.
    One reason might have been that banks’ balance sheet constraints limited their ability to arbitrage. Bernanke also said that it might have been due to the time it took for the banks to adjust to the new system.
    It may also have been because banks were concerned that such arbitrage was not in the spirit of the various liquidity arrangements and that exploiting the anomalous behavior of the funds rate would have invited review by the regulators.

  50. Gravatar of ssumner ssumner
    13. August 2009 at 06:15

    Current, Yes, many people on the internet are grumpy—including me.

    Bill, I presume you mean that they agree with my view that output is currently far below potential.

    Rob, You said,

    “1. I believe markets are more likely to move irrationally in the direction of the current price momentum.”

    I believe in the EMH, but if I didn’t I would make exactly the opposite bet you are making. If I thought I saw a bubble, I’d sell the asset short. Since I do believe in EMH, I have no views either way as to where sugar is going. I might add that even opponents of the EMH concede one point; markets incorporate new information immediately. I really don’t think there is any empirical evidence to the contrary.

    Current, See my reply to Rob above. I strongly disagree on the new information issue.

    Frederic, Those are good observations. They may have all played a role. I especially like your last point, which I had not heard before.

  51. Gravatar of Current Current
    13. August 2009 at 07:27

    Scott: “many people on the internet are grumpy””including me.”

    Not comparatively, you’re not even in the running 😉

    Scott: “See my reply to Rob above. I strongly disagree on the new information issue.”

    I wrote: “I agree with you that the market will take month to discount crop failures if they occur. That is quite a separate point to the EMH though which concerns itself with common knowledge. (Here is my main peeve with the EMH, what exactly is common knowledge).”

    I think this depends on exactly what Rob means.

    What I took him to mean is “farmers are having crop failures and this isn’t yet common knowledge”. In this case I think it may take months for a farmer to report his failures to someone else, for others to collate and notice a pattern and for someone to report on it. But, on reflection I don’t think this is what Rob means. He means he has read about crop failures in a newspaper. In this case I agree with you, likely the information is already “in” the market price.

    But, I still have a problem with this idea of common knowledge. I don’t think it really describes the nature of knowledge correctly. There aren’t simply “publically available sources”. There is a constant and complex flow with no agent knowing exactly the same things. It’s more like Jeffrey Friedmans “bussling, blooming confusion of facts” (I can’t remember his exact words).

  52. Gravatar of rob rob
    13. August 2009 at 15:15

    My problem with the idea that the market discounts information immediately is that the key information is only revealed as a result of price movement. In the sugar market currently it is not the supply numbers that matter (they are transparent), it is the shape of the demand curve. We will only discover the shape of the demand curve through a betting game between buyers and sellers, and this betting game will not end overnight. It is just now underway.

  53. Gravatar of rob rob
    13. August 2009 at 15:56

    i.e., assuming the market can discount a sudden change in supply is to assume the market can discount the sound of one hand clapping.

  54. Gravatar of Current Current
    13. August 2009 at 16:05


    Read the article “The Uses of Knowledge in Society” by Hayek

    It’s only short.

  55. Gravatar of ssumner ssumner
    14. August 2009 at 04:14

    Current; You said;

    “But, I still have a problem with this idea of common knowledge. I don’t think it really describes the nature of knowledge correctly. There aren’t simply “publically available sources”. There is a constant and complex flow with no agent knowing exactly the same things. It’s more like Jeffrey Friedmans “bussling, blooming confusion of facts” (I can’t remember his exact words).”

    I agree, at the same time I think the market interpretation of this muddle is the best one we have, not perfect, but the optimal forecast.

    Rob, You said;

    “My problem with the idea that the market discounts information immediately is that the key information is only revealed as a result of price movement. In the sugar market currently it is not the supply numbers that matter (they are transparent), it is the shape of the demand curve. We will only discover the shape of the demand curve through a betting game between buyers and sellers, and this betting game will not end overnight. It is just now underway.”

    The last part of your argument does not conflict with the idea that markets discount information immediately. Obviously if markets lack information, then there is nothing to discount.

  56. Gravatar of Current Current
    14. August 2009 at 06:04

    Scott: “I agree, at the same time I think the market interpretation of this muddle is the best one we have, not perfect, but the optimal forecast.”

    I think you are generally right, but it’s still problematic.

    Leland Yeager said that “money doesn’t exchange in a market of it’s own”. That is, it exchanges in markets that are “for” other things.

    A similar complication applies to information. So, I don’t think we can say “the market interpretation of this muddle”. Because the market doesn’t see the whole muddle. Individual different parts of the market see parts of the muddle and consequently influence the price.

    So, I agree with the conclusion but not with the logic behind it. I don’t really think there is “common knowledge” in the sense that it means.

  57. Gravatar of Rob Rob
    14. August 2009 at 10:29

    “The last part of your argument does not conflict with the idea that markets discount information immediately. Obviously if markets lack information, then there is nothing to discount.”

    This is literally obvious, however it seems that most people take the view that news in the past should not affect the price a few days or weeks later at all. My view is that the supply information, now a week old, is still fully undigested, in that the market doesn’t yet know where that supply number meets the demand curve. So if prices spike (or dive) in two weeks, I believe Fama would be reluctant to acknowledge that a major catalyst was the supply numbers announced three weeks prior.

  58. Gravatar of Current Current
    14. August 2009 at 11:31


    Here is an interesting point about what “news” is in the EMH. I understand that originally the theory dealt with finance. That is the business of investing in stocks, derivative, currencies etc.

    In that situation the management of the company would make a decisions and the market’s opinion of that decision would be marked into the price. If the market is wrong that would be considered “new news”.

    It seems to me that the same should be applied to demand in a commodity market. The market’s estimate of demand is what is in the price now. As we see how accurate that estimate is new news will emerge.

  59. Gravatar of Rob Rob
    14. August 2009 at 13:01


    I see your point, and perhaps I am trying too hard to label something “not news” when it is.

    My question now is: does a price change itself qualify as “news”? Per EMH, it cannot, because a random walk must be memory-less (a Markov chain). The market isn’t supposed to react on Wed to what the market did on Tues, or at 1:05 based upon what it did at 1:03, but not many traders are going to believe this.

    To me, the price movement after a big news event is the main information I am after. It shows what other people are thinking.

    You say: “The market’s estimate of demand is what is in the price now.”

    I’d say the market’s actual demand is what is in the price now. This demand = consumer demand + net speculative demand. The price is a concrete result, not an estimate. But is it an equilibrium?

    I believe that price discovery occurs through an iterative process. That may not sound revolutionary, but I do believe it is EMH heresy. A buyer might purchase some sugar contracts at $21, wait and see how the market responds, then buy more at $23. Is it irrational to pay $2 more for something when you had every opportunity to buy more for less? No, not if the feedback from the price movement is telling you that demand has not slackened much between $21 and $23 and therefore might not slacken between $23 and $24. The contract is WORTH more at $23 than it was at $21, because new demand-side information exists. It exists because the price has proven itself to hold at a higher level. This iterative process might result in a staircase of higher and higher, or lower and lower prices over time, even though nothing seems to be changing in the supply/demand fundamentals. In fact nothing fundamental has changed, but new information has come to light as a result of price changes.

    Or is this not EMH heresy? Maybe I am wrong.

  60. Gravatar of Current Current
    14. August 2009 at 15:23


    On reflection I think you are right, in this case of a commodity market.

    The issue here is that sugar has what Austrian’s call a “subjective use value” that isn’t tied to it’s “objective use value”. Some people do things with sugar, like eating it or making rum from it. They don’t do such things with shares in Ford.

    That said EMH may take care of this, I don’t know that it does though.

  61. Gravatar of Rob Rob
    15. August 2009 at 12:31


    The more I think about it, the more I think I am merely describing the EMH. (Though I would like to know if someone disagrees with my above description about how price discovery works.)

    I was mainly focused on whether or not my take describes something that would not be a Markov chain, but I think I am describing a Markov chain, in that after the fact the time-price series would still appear to be a random walk. I think I am conflating how a single investor might view the market vs. how the overall market behaves.

    Still, I believe there are predictive windows of price behavior which make rare appearances. Based on historical data, the sugar market looks ready to super-spike. On the other hand, there aren’t too many data points (As is usually the problem.)

  62. Gravatar of Current Current
    15. August 2009 at 12:44

    I’m afraid I don’t know much about the EMH and I don’t know how to answer your questions.

  63. Gravatar of ssumner ssumner
    16. August 2009 at 23:51

    Rob and Current, I think the best way to respond is with a couple examples from the Depression, where the market seemed to respond with somewhat of a lag. In July 1933 the third biggest three day drop in stock market history took place after FDR’s high wage policy was announced. Why not all of the drop in one day? The newspapers said that the further drop was caused by anti-business statements of the man put in charge of FDR’s program. So perhaps the scale of the program became more apparent.

    Another example occurred in 1932 when Herbert Hoover foolishly tried to burnish his reputation during the campaign by stating that he saved the dollar when in was near devaluation in early 1932. The problem was that at the time the government had denied that the dollar was in any danger. At first Hoover’s speech was barely noticed, but over the next few days that point started getting talked about, even overseas, and the dollar started to come under pressure. Stocks fell sharply.

    Both cases are complex, but I think both may get at the delayed reaction issue you guys are discussing. The slow reaction could be considered to be in response to a better appreciation of information that had come out a few days earlier. I suppose there could be a semantic debate over whether that is new information, in my view those cases may seem to violate the letter of the EMH, but are still broadly within the spirit of the idea.

    Does this seem at all like what you were referring to Rob?

  64. Gravatar of rob rob
    17. August 2009 at 19:50

    Scott, those cases could be examples off the same phenomenon, except what im suggesting is that the market sometimes reacts to itself so to speak. Last summer with a sense of danger in the air, after the dow dropped 400 pts several times i reacted, went short and braced for the big one. i took the 400 pt daily drops as confirmation that the sentiment of pessimism was taking hold and might snowball. just as i believe the market in sugar may snowball now based on the price action. the point regarding incomplete information is thas, say a speculator believes, based on breaking news about the monsoon season, that the sugar price must move up. lets even go as far to say that this speculator had earlier info than the general public about the crop conditions. he might think the odds are good the market will move up, but then again he doesnt know for sure what others know and whether this should be a buy the rumour sell the news situation. so he buys a little in the morning, then watches the price move up all day. he buys even more after the price has moved up because the price action proved their was continued demand in the market.

    More along your area of expertise: isnt it true that when the fed eases or hikes rate they tend to be serially correllated? if so, why? isnt it because they arent sure what the effects of say, a single hike will be, and theyd like to wait for more market feedback before moving further? i posit speculators do the exact same thing. they dont usually put their full position on all at once.

  65. Gravatar of rob rob
    17. August 2009 at 19:59

    I dont beleive what im saying necessarilly contradicts your hypothesis the market dropped due to a failure in monetary policy. i dont know what 7 indicators you were looking at; to me the 400 pt drops were a sign something was going wrong, even if i didnt know what. like a tremor before an earthquake. surely seismic tremors dont prove that plate techtonics arent efficient.

  66. Gravatar of ssumner ssumner
    19. August 2009 at 02:43

    Rob, i don’t like the “feeds on itself” because as you mentioned I do think the drops reflected a loss of confidence in monetary policy.

    You said;

    “More along your area of expertise: isnt it true that when the fed eases or hikes rate they tend to be serially correllated? if so, why? isnt it because they arent sure what the effects of say, a single hike will be, and theyd like to wait for more market feedback before moving further? i posit speculators do the exact same thing. they dont usually put their full position on all at once.”

    This is a very good question, and I wish I knew the answer. I am suspicious of these serially correlated Fed moves, it suggests to me that they may often be behind the curve. And in retrospect it often looks like they were. By that I mean in retrospect it often looks liked they should have eased even more agressively early in a recession (to make it softer) and tightened more agressively early in a boom (to prevent a bubble. Instead the spread their easing and tightening over a multiyear period. I don’t know enough about this to be certain, but I am suspicious.

  67. Gravatar of Jon Jon
    2. September 2009 at 06:05

    Scott writes:

    By that I mean in retrospect it often looks liked they should have eased even more agressively early in a recession (to make it softer) and tightened more agressively early in a boom (to prevent a bubble. Instead the spread their easing and tightening over a multiyear period.

    Except what matters is acting contrary to policy expectations. I think it is plausible for the ‘neutral’ rate to drift over time. Therefore the Fed policy must drift. Problem again is the loss money versus tight money. Which is which? Its hard to know.

  68. Gravatar of ssumner ssumner
    2. September 2009 at 15:22

    Jon, You are right that the natural rate tends to drift. I tend to judge whether money is too easy or tight based on NGDP movements. And on that basis I think money is often too tight at the onset of recession.

  69. Gravatar of mb mb
    4. September 2009 at 12:00

    I’ve found your blog only recently and have found your posts insightful. A few points you might wish to consider:

    1) When nominal GDP targeting was the “hot” topic in the literature, circa 1990, Milton Friedman was a guest at a Fed conference hosted by the SF Fed. Bob Perry, then the President of the SF Fed, used the luncheon to announce his support for the idea, with a target of 6% seemingly like a reasonable goal. As soon as he had the opportunity, Friedman asked, “If you have 7% inflation and minus 1% real growth, what does the central bank do?” Because the Fed is a political institution that always will be pressured to do something about the real economy — unless it is insulated against those pressures — uncertainty/confusion about monetary policy will be increased if the public doesn’t know whether output or inflation is receiving more weight in its decisions. And, because the Fed only can affect nominal magnitudes in the long run, avoiding the type of confusion described above makes an objective for inflation a better single goal for the central bank.

    2) The reason that money no longer is a reliable indicator is that the Fed constructs wholly unreliable monetary data. It has failed to address the issue of “sweeps” and their effect on M1 and, much more seriously, it never has addressed the issue of weighting the different components of aggregate money differently. That the Fed understands the issue is revealed by is switch to a Fisher-Ideal index for Industrial Production a number of years ago. That the Fed would continue to construct monetary data so out of step with modern practice is a disgrace. These data do construct cover, however, for increased use of discretion by the Chairman and reduced accountability if and when policy goes wrong.

    3) The funds rate is not a policy instrument but an intermediate target, an important distinction that has gotten lost in the last 15 years. Bank reserves are the exogenous variable that the Fed is able to control. By manipulating their level (or growth rate), the Fed can influence a path for money or the funds rate, two choices (among others) for its intermediate target variable. But the Fed controls only the supply of reserves whereas the banking system represents the (derived) demand for reserves. Unless that demand curve is completely stable, the Fed does not “control” the funds rate. Moreover, because the demand for reserves is likely to shift as the demand for loans moves over the course of the business cycle, it is just as likely that the Fed is chasing the funds rate as it is that the Fed is moving the funds rate with its own actions.

  70. Gravatar of ssumner ssumner
    9. September 2009 at 01:12

    mb, I am really surprised by Friedman’s attitude. If he had said that to me, here is how I would have responded. Let’s suppose the Fed adopted a 4% rule. And let’s also suppose for the sake of argument that the monetarists are right—that under stable money growth velocity would be more stable. (And by the way I think this monetarist view is generally correct.) In fact, let’s assume M2 velocity is completely stable, and M2 grows at a steady 4% rate. In that case the policy would essentially be identical to a 4% NGDP rule. NGDP would grow at exactly 4% every year. Now we know Friedman actually supported a 4% M2 rule. And we know he claimed velocity would be much more stable under such a rule. But the quotation you provide suggests that Friedman thinks it would be bad if NGDP grew at a steady rate. In other words, if his monetarist rule was adopted, he thinks it would be a bad thing if velocity was stable. I find that attitude from a monetarist to be surprising. I really don’t understand it at all.

    2. I agree we need more accountability. I would like to see the Fed establish an explicit price level or NGDP target.

    3. That’s a good point. A lot of economists (including me) refer the the fed funds rate as an “instrument” of policy, but it is actually an indicator, and a very poor one.

  71. Gravatar of Van Van
    10. September 2009 at 11:11

    scott, can u elaborate a bit more on your understanding of the interplay btw the fed funds rate and positive rate paid on reserves? i have seen on the various Fed bank research sites the explanation that both are used to establish policy. what effect does IOR (interest on reserves) have on fed funds, or vice versa? is it the spread that indicates policy leaning? i am unclear

  72. Gravatar of ssumner ssumner
    11. September 2009 at 04:11

    van, It keeps a floor on the market fed funds rate. Thus if the banks can earn .25% interest on reserves, they would be reluctant to lend them to other banks at a lower rate. The Fed established the policy last October so that when they flooded the banking system with reserves, they were able to hold interest rates up at 2%, or whatever target they set. The higher the rate on reserves, the tighter the policy, other things equal.

  73. Gravatar of Van Van
    11. September 2009 at 08:03

    scott thank u very much for that.i guess we will not see those reserves drain out of the Fed until forced. either by a neg IOR as the Rykesbank is doing, or until the Fed’s asset side shrinks, and reserves are drained. Because even now, with FF and IOR effectively the same level, its less risky to keep money in the Fed than to lend to another bank. it looks like in the week to come, the Fed’s balance sheet will rise ~100bb on settlement of MBS transactions. Meaning effective FF will come down further, and reserves will yet again increase. What reverses these processes, and these levels (rhetorical)?

  74. Gravatar of ssumner ssumner
    14. September 2009 at 07:09

    Van, It is all up to the Fed. They have enough oprions with OMOs and interest on reserves (positive or negative) to accomplish whatever they wish. They lack the determination to act.

  75. Gravatar of van van
    16. September 2009 at 00:57

    scott, does that question their independence or lack of independence from the political process? after reading more on interest on reserves, seems like much of the ballooning is associated with Treasury borrowing to “re-liquidate” certain sectors. by definition, they have lost their independence if such is the case

  76. Gravatar of ssumner ssumner
    16. September 2009 at 04:29

    Van, The Fed wanted to do those liquidation efforts, it wasn’t political pressure. So I think they still have a fair bit of independence. I think they have enough to do what is necessary to hit their inflation targets. My problem is that their inflation target (implicitly) has been too low.

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