William D. Cohan, a columnist for Bloomberg View, is the author of “Money and Power: How Goldman Sachs Came to Rule the World” and “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street.”Baker rightly calls Cohan's op-ed bizarre.
AND JON HILSENRATH OF THE WALL STREET JOURNAL GETS ONE WRONG... by DeLong
Gauging the Guidance That Models Give the Fed by John Hilsenrath
The financial gaps in the models worry Nathan Sheets, a Citigroup economist who was Mr. Bernanke's top international adviser at the Fed from 2007 to 2011. Mr. Sheets points to 1994 as an example of why. Back then, small increases in short-term interest rates by the Fed led to a surge in long-term interest rates. The models didn't foresee the financial chaos that would ensue, including the collapse of investment bank Kidder Peabody & Co., the bankruptcy of Orange County, Calif., and the Mexican peso financial crisis…Because Citigroup has such a great track record. Sheets is arguing the same thing Cohan is.
DeLong writes:
Mr. Sheets's warning certainly warrants attention if you are a hedge fund or an investment bank thinking of replicating Kidder Peabody's or Orange County's portfolio--but you should have already known not to do that.
But should Mr. Sheets's warnings have led the Federal Reserve to do something different than it has done? In retrospect the Federal Reserve certainly wishes that it had given more guidance at the start of 1994 as to the likely shape of its interest-rate tightening cycle and that it had at the start of 1994 incorporated the endogenous duration of MBS into its models in the way that it had incorporated them by the end of 1994. However, if the employment and output recovery evolves going forward as the recovery of the 1990s evolved in 1994 and thereafter, the Federal Reserve will be not dismayed but ecstatic.The fixed-income lobby? The 1990s ended with a stock bubble however. And we had the East Asian financial crisis in 1997.
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