"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister

"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."

- Daenerys Targaryen

"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker

Saturday, November 05, 2011

How Ben Bernanke Could Solve Our Problems by Yglesias
Felix Salmon and Joe Weisenthal have recently launched attacks against the idea that an NGDP level target would be credible or effective that I think are worth a response.
In response to Salmon, I think that if you think about it step by step that the idea that the Fed Chairman can create a self-fulfilling prophesy just by talking is less crazy than it sounds. Consider a scenario in which Bernanke says “I want NGDP to grow faster than 5 percent but slower than 10 percent until it catches up with the pre-crash trend and I’m prepared to do crazy stuff to make it happen.” How do sophisticated investors and large firms react to this announcement? Maybe some people find it non-credible. Maybe most do. But nobody is going to lower their growth and inflation forecasts in response. Some people will raise them. And higher expected inflation and real growth will drive higher actual expected inflation and real growth. As long as Bernanke responds to that by saying “NGDP growth has accelerated exactly as I planned, now I continue to want NGDP to grow faster than 5 percent but slower than 10 percent until it catches up with the pre-crash trend” then the second time around some of the skeptics will become converts and the convergence will continue. The announcement doesn’t need to persuade everyone, or even most people, it just needs to push expectations in the right direction.
Weisenthal, operationally, says cheap loans can’t resolve the debt overhang: “People don’t want (and can’t utilize) cheaper loans: What people need is more income to pay off this debt.” Right now, I have a mortgage. The interest rate on it is pretty low. But it’s not 1 percent. If the Fed wanted to offer me a loan at a one percent interest rate that would be sufficient in scale to pay off my existing mortgage, that would reduce by debt burden just as easily as a higher income would. Thus far the Fed’s policies have been oriented toward giving free money to banks in hopes that this will circulate down to the little bit, and the circulation has been blocked by a lot of other issues. But a determined central banker can get around this. Direct provision of super-cheap credit would work fine.

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