Then and now

Mark Sadowski sent me this post from Jim Hamilton (in 2008):

Some of my colleagues still talk of the possibility of a liquidity trap, in which the central bank supposedly has no power even to cause inflation. Their theory is that interest rates fall so low that when the Fed buys more T-bills, it has no effect on interest rates, and the cash the Fed creates with those T-bill purchases just sits idle in banks.

To which I say, pshaw! If the U.S. were ever to arrive at such a situation, here’s what I’d recommend. First, have the Federal Reserve buy up the entire outstanding debt of the U.S. Treasury, which it can do easily enough by just creating new dollars to pay for the Treasury securities. No need to worry about those burdens on future taxpayers now! Then buy up all the commercial paper anybody cares to issue. Bye-bye credit crunch! In fact, you might as well buy up all the equities on the Tokyo Stock Exchange. Fix that nasty trade deficit while we’re at it! Print an arbitrarily large quantity of money with which you’re allowed to buy whatever you like at fixed nominal prices, and the sky’s the limit on what you might set out to do.

Of course, the reason I don’t advocate such policies is that they would cause a wee bit of inflation. It’s ridiculous to think that people would continue to sell these claims against real assets at a fixed exchange rate against dollar bills when we’re flooding the market with a tsunami of newly created dollars. But if inflation is what you want, put me in charge of the Federal Reserve and believe me, I can give you some inflation.

And here is Jim Hamilton in 2012:

Johns Hopkins University Professor Larry Ball, Princeton Professor Paul Krugman, U.C. Berkeley Professor Brad DeLong, University of Oregon Professor Tim Duy and Texas State University Professor David Beckworth are among those recently arguing that Fed Chairman Ben Bernanke is neglecting his own earlier academic insights into what the central bank should be doing in a situation such as the United States presently finds itself. Here’s what I think they’re overlooking.

These academic critics would like to see the Fed announce more aggressive targets in the form of either higher rates of inflation or faster growth of nominal GDP. I will get to the issue of these targets in a moment, but first would like to discuss the mechanical details of what, exactly, the Fed is supposed to do in the way of concrete actions in order to ensure that any such announced target is achieved.

.  .  .

By drawing a line at keeping inflation above 2%, I think the Fed can use its limited available mechanical tools in a credible way to achieve an appropriate goal.

Perhaps there is a clear way to communicate an alternative, more ambitious goal, such as keeping nominal GDP growth above 5%, or temporarily focusing on getting unemployment down to 7%. If articulated narrowly and with some caution, these might allow the Fed to do more while still preserving confidence in what I have described as the logistics of managing potentially volatile short-term government debt.

But unlike many of my fellow academics, I worry about those logistics and am convinced that it is a mistake to ask too much from monetary policy.

In fairness to Hamilton, those posts are not in direct contradiction.  But surely there is much less optimism about the ease with which the Fed can boost AD.  The tone has changed.

Here’s Frederic Mishkin’s 9th edition:

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.

2.  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.

3.  Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.

And here’s the 10th edition, which just came out:

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.

2.  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.

3.  Monetary policy can be effective in reviving a weak economy even if short term rates are already near zero.

Suddenly monetary policy is no longer “highly effective.”  It’s easy to ridicule and mock the Japanese for being unable to stimulate the economy with fiat money, for their ridiculous claim that they “forgot” how to debase a fiat currency.  But mainstream American economists don’t seem quite so ready to disparage one of their own.  It’s like the Olympics.  When an Asian swimmer does very well they must be doing drugs, when “one of ours” wins 18 gold medals he’s a hero.

Here’s Ben Bernanke in 2003:

The imperfect reliability of money growth as an indicator of monetary policy is unfortunate, because we don’t really have anything satisfactory to replace it.  As emphasized by Friedman . . . nominal interest rates are not good indicators of the stance of policy . . .  The real short-term interest rate . . . is also imperfect . . .  Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation.

If we average NGDP growth and inflation since mid-2008, we get the lowest increase since the early 1930s.  That means Bernanke thinks monetary policy over the past 4 years has been the most contractionary since the Hoover administration.  But that was then.  How does he characterize this ultra-tight money today?

At present, with the unemployment rate elevated and the inflation outlook subdued, the committee judges that sustaining a highly accommodative stance for monetary policy is consistent with promoting both objectives” of the Fed for stable prices and maximum employment, Bernanke said Wednesday in prepared testimony to the House Financial Services Committee in Washington.

Highly accommodative?  Oh really?  On what basis?  Let me guess, on the basis of low interest rates and a growing monetary base.  You know, those unreliable indicators.

Of course those are all center-right economists.  Suppose we picked on Paul Krugman or Brad DeLong.  Then we’d dig up quotations from early 2009 insisting we needed fiscal stimulus because the Fed was out of ammunition, and from 2012 demanding that the Fed do more because a sluggish economy could put the barbarians back in power in November.

I may be right or I may be wrong.  But I’ve been 100% consistent from day one.

Oh, and put Hamilton in charge of the Fed right now—and let’s see him create some inflation.



19 Responses to “Then and now”

  1. Gravatar of dwb dwb
    9. August 2012 at 05:37

    excellent post.

    Hamilton, and Evan Soltas are who i am voting for.

  2. Gravatar of Matthew Belcher Matthew Belcher
    9. August 2012 at 05:51

    I’ve been thinking about the Fed’s statements some more and it seems like the problem isn’t that they don’t think they can create enough inflation. Obviously they realize they can just keep buying whatever the Treasury puts out and this will create inflation. Instead they have a calibration problem. They know they can create inflation but they aren’t sure how much they will get for a given amount of bond purchasing. They want inflation around 2%, they know the market expects 1.2%, but they are worried that if they bond $1.1T in bonds they’ll end up with 4% inflation.

    Of course this just means they should use inflation futures targeting but I don’t think everyone on the Fed is sold on prediction markets yet.

  3. Gravatar of Morgan Warstler Morgan Warstler
    9. August 2012 at 06:12

    If you want inflation created by the Fed, vote Romney.

    That’s the best chance MM has of getting a more aggressive stance.

    The question, isn’t whether or not I’m right. I am.

    The question is not if you think this is appropriate. It doesn’t matter.

    The question is since what you think about its appropriateness, doesn’t matter… and you know it is true….

    WHY is kee-ryst would you write this whole blog post and not say,

    “The Federal Govt. ought to force the Fed to ease by making Fiscal cuts.”

    It isn’t logical, it isn’t intellectually honest. If you are able to grasp the cynical argument, and you are willing to admit it is plausible/possible/likely, and you don’t form policy based on it…

    What are you doing? How serious are you?

    The path is there, follow it.

  4. Gravatar of Anthony Burns Anthony Burns
    9. August 2012 at 06:40

    This post made me wish once again that we could hear what Friedman would have to say right now.

    We all ready now what he thought he told us when he discussed the Japanese situation. But, in addition to being a brilliant economist, he was also a devote partisan, so it would have been fascinating to see how he spun this.

    It is one of the great tragedies of our times that his brilliant mind was fighting for the wrong side. If he had been a Democrat, we’d probably already have NGDP targeting.


    Keep up the good work. Eventually the entire world will use NGDP targeting, and the world will be a more prosperous place because. When that happens you’ll be remembered as an important voice for what will than seem like an obvious idea.

  5. Gravatar of Bonnie Bonnie
    9. August 2012 at 06:59

    “I may be right or I may be wrong. But I’ve been 100% consistent from day one.”

    The trouble is, so has Bernanke at least from 2008 onward or maybe even earlier than that. Many of the popular economics thinkers have been perplexed regarding the situation because Bernanke hasn’t followed a set of behaviors that we would expect; like not running tight money through a financial crisis and doing things to make it tighter as he changes the underlying priorities of the Fed and the policy framework. It seems to be a rather insane approach to policy when we finally realize what he’s been doing, and perhaps some people aren’t willing to admit what has happened for whatever reason.

    What is interesting here is that the poking around the edges of intellectual dishonesty appears more like giving Bernanke a pass rather than defending the particulars of his policy. I have found no big name champions of the policy, people who bring it out into the light, point by point and defend it, outside of Bernanke and I wonder why. Not even Bernanke has done that other than some BS about inflation and credibility, all surface appearances that can be and have been obliterated in the blogoshphere.

    What I’d like to know from these people is Bernanke running a defensible monetary framework or isn’t he? Surely getting to the point of being ineffective, if even remotely true, in itself is a failure of policy. Identifying how we got here is a big part of solving the problem, at least in my point of view and Bernanke apologists just do not want to talk about it. It would be nice if we could get an honest discussion about what is taking place from these people, but I am not holding my breath.

  6. Gravatar of AD AD
    9. August 2012 at 07:17

    Hey, at least Mishkin changed a word to justify releasing a new edition.

  7. Gravatar of Brad DeLong Brad DeLong
    9. August 2012 at 08:27

    A little less sneering, and a little more work would be nice…

  8. Gravatar of ssumner ssumner
    9. August 2012 at 08:40

    Work? That’s all I do.

  9. Gravatar of Steve Steve
    9. August 2012 at 09:01

    Is that an impersonator pretending to be Brad DeLong, or Brad DeLong pretending to be an impersonator?

  10. Gravatar of RJ RJ
    9. August 2012 at 09:30

    Either way, a little less defensive snark, and a little more work would be nice.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    9. August 2012 at 15:23

    Maybe Professor DeLong should do a little more work on his reading comprehension;

    Nobody can figure out what Mitt Romney is talking about here. He seems to be referring to some aggregate assessment of “productivity” across the four major sectors–private, non-profit, state and local government, and federal government. But nobody can figure out what he is talking about.

    Does he really think that we should outsource the army to Blackwater? Or the NIH to Merck? Or the Marine Corps to Marriott? Or the Social Security Administration to Bain Capital?

    Certainly our experience with for-profit hospitals and for-profit universities does not support the hypothesis that productivity inevitably goes up when we shift things over to the private sector.

    Where is this coming from?

    From a guy who doesn’t think that ‘profits eat up overhead’, I’d guess.

  12. Gravatar of Saturos Saturos
    9. August 2012 at 19:12

    “To which I say, pshaw!” is one of my favourite lines of all time. Very Wodehousian.

    And yes, I want to see all the critics on this blog acknowledge that consistency is worth something, especially from someone to whom people are actually paying attention.

  13. Gravatar of Jim Glass Jim Glass
    9. August 2012 at 21:12

    That DeLong comment — coming as it does from the singularity in inner depths of a black hole to criticize a kettle — is priceless!

  14. Gravatar of Major_Freedom Major_Freedom
    9. August 2012 at 22:00


    “I may be right or I may be wrong. But I’ve been 100% consistent from day one.”


    n. An advocate of a particular ideology, especially an official exponent of that ideology.


    I’m not saying it is wrong to be an ideologue, I’m just saying that’s the definition of an ideologue.

  15. Gravatar of Saturos Saturos
    10. August 2012 at 07:28

    Good to see Brad DeLong has conceded the fight in terms of substantial arguments. We are all market monetarists now (or will be, soon enough).

  16. Gravatar of Bill Ellis Bill Ellis
    10. August 2012 at 12:33

    Here is what Delong was getting at.

    I never realized how much Big time Economist are like children…

  17. Gravatar of Bill Ellis Bill Ellis
    10. August 2012 at 12:36

    Saturos…seems like Delong has been and M&M all along…in terms of substantial arguments.

  18. Gravatar of Peter K. Peter K.
    10. August 2012 at 12:53

    From my point of view DeLong and Krugman have been arguing for more expansionary fiscal, banking and monetary policy all along.

    Krugman was skeptical that more monetary policy would have much effect but said it was worth a try given that Republicans are blocking all fiscal stimulus.

    Personally I would rather have the government invest in infrastructure rather than give money to financial institutions which caused this mess in the first place.

  19. Gravatar of Kevin Kevin
    10. August 2012 at 17:41

    Will somebody point me to where Friedman emphasized not focusing on the short term interest rate as a measure of inflation? Or really anywhere that lays out the argument. Thanks.

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