I suspect this is a major direction realistic policy-oriented macroeconomics is going to go in — that if you want central banks to be responsible for stabilization policy, it’s not enough for them to set the short-term risk-free rate, they need to also control interest rate spreads and the composition of lending, implying. a much more comprehensive set of controls on credit markets.
"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, January 05, 2013
Construction Numbers May Not be What They Seem by Dean Baker
The state of macroeconomics: it all went wrong in 1958 by John Quiggen
Third, Friedman used his critique of fine-tuning that macro policy should be confined to a rules-based monetary policy, with no role for fiscal policy. Although Friedman’s own prescription (a rule controlling the rate of growth of the money supply) was unsuccessful and quickly abandoned, these ideas were the basis of the policy regime, based on the use of interest rates as an instrument to meet inflation targets, that prevailed from the 1980s to the financial crisis, and to which central banks plan to return as soon as the crisis is over.
The real decline was in the 1970s and 1980s, as Friedman’s already overstated critique of Keynesianism was pushed to the limits of credibility and beyond. The big ideas of the period: Ricardian equivalence, Rational Expectations, Policy Ineffectiveness, Microfoundations, Real Business Cycle theory and the (strong-form) Efficient Markets Hypothesis were based on plausible (to economists, anyway) arguments. They didn’t have much empirical support but, given that Keynesian models weren’t working well either, this wasn’t enough to stop them taking over the debate.
The main response was New Keynesianism which showed that with plausible tweaks to the standard micro assumptions, some Keynesian results were still valid, at least in the short run. New Keynesianism gave a rationale for the countercyclical monetary policies pursued by central banks in the inflation targeting era, whereas the classical view implied that a purely passive policy, such as Friedman’s money supply growth rule, was superior. Broadly speaking the pre-crisis consensus consisted of New Keynesians accepting the classical position in the long run, and most of Friedman’s views on short-term macro issues, and abandoning advocacy of fiscal policy, while the New Classicals acquiesced in moderately active short-term monetary policy
How you evaluate this consensus depends on your view of the period from 1990 to the crisis. Noah Smith, quoting Simon Wren-Lewis says
Implicit in this view is the idea that the Great Moderation was a policy success and that the subsequent Great Recession was the result of unrelated failures in financial market regulation. My view is that the two can’t be separated. In the absence of tight financial repression, asset price bubbles are regularly and predictably associated with low and stable inflation. Central banks considered and rejected the idea of using interest-rate policies to burst bubbles, and the policy framework of the Great Moderation was inconsistent with financial repression, so the same policies that gave us the moderation caused the recession.To sum up, work done in macroeconomics since the discovery of the Phillips curve has offered an improved understanding of a wide range of issues. On the other hand, it has produced and sustained the dominance, in central banks and in much of the economics profession, of an empirically unsupportable position that is resolutely opposed to fiscal stimulus, or to any large-scale countercyclical policy. It has also diverted most of the intellectual energy of academic macroeconomists into a largely fruitless search for microfoundations, at the expense of an improved understanding of the various co-ordination failures that are at the heart of the macroeconomic problem.
I don’t suggest throwing out everything that’s been done since 1958 and starting all over from there. But, in many ways, that would be a better choice than continuing on the current path.
Friday, January 04, 2013
After the Japanese economy declined in the early 1990s and fell into deflation, the Bank of Japan dropped interest rates to nearly zero and embarked on a huge asset-purchase program (the pioneering “quantitative easing” program). The actions were on a much larger scale relative to G.D.P. than what the Fed has done.
Japan’s central bank, however, made the mistake of emphasizing that these purchases were only temporary and would be reversed at the first signs of the proverbial “green shoots” of recovery. Despite the bank’s large-scale asset purchases, the uncertainty that these statements created undermined confidence and the willingness to borrow. The bank’s words spoke louder than actions.
The highest priority in the economic revival plan of the newly elected prime minister, Shinzo Abe, is to strong-arm the Bank of Japan into acknowledging that it will do simply “whatever it takes” to reverse deflation there and allow a recovery to take root.
Mark J. Carney, the head of Canada’s central bank and soon to be the governor of the Bank of England, also seems to be embracing the “whatever it takes” theory of communications: tying monetary policy to a single measure of overall economic health (like nominal income) rather than multiple metrics (inflation, inflation expectations, unemployment numbers) that may be even easier to understand.
The Fed might well consider alternative economic indicators as it assesses whether its interventions are reducing uncertainty and promoting recovery. But the key, it seems, is to be forthcoming about its thinking with the American people. For now, the bank’s smart, calibrated open-mouth policy has been a step in the right direction.
The reality is that the current budget deficit largely reflects two things: exceptionally low government revenue and the continuing problems caused by the financial crisis and recession that followed the bursting of the housing bubble. Bringing tax revenue back to historical levels, as well as the growth in revenue and reductions in spending that will automatically follow an improving economy, will make a major difference.
There are issues that must be addressed regarding health care costs and Medicare, as well as the fact that there will be fewer workers for each retiree as the baby boomers retire. But those who see a Greek-type crisis here should ask themselves why the government can borrow at interest rates that remain extraordinarily low. The world’s trust in Uncle Sam’s ability to pay its debts has remained high.
What are not high are taxes, although a poll would no doubt show that many people think otherwise.
Federal taxes, relative to the size of the economy, are significantly lower than they were after Ronald Reagan cut them. During 2012 federal revenue amounted to around 17 percent of gross domestic product. At the Reagan low point, the figure was a full percentage point higher. In 2009, when the deficit was ballooning, the figure fell below 16 percent, something that had happened only once during the more than 60 years for which comparable data is available.
Back in 2000, federal revenue approached 21 percent of G.D.P. The assumption that such strong collections would continue played a major role in the forecasts of budget surpluses as far as the eye could see. In 2001, aides to President George W. Bush pointed to the figure as proof that Americans were overtaxed. It turned out that tax revenue figures were temporarily inflated in two ways by the bull market in technology stocks. Not only were there a lot of capital gains to be taxed, but soaring share prices also produced a lot of ordinary income for those employees and executives who could cash in stock options.
At the time, it was assumed that such options had no significant impact on tax revenue, because the income that went to the employee provided an offsetting tax deduction for the company that issued the options. That might have been true had the companies been paying taxes, but many of the most bubbly stocks were in companies that never had, and never would, pay a dollar in income taxes.
That revenue would have come down sharply after the technology stock bubble burst, even without the Bush tax cuts. But those tax cuts worsened the situation and are a major cause of the current deficits.
Over the longer term deficits are projected to be a problem, but this is because of the projected explosion in health care costs, not the aging of the population. If U.S. per person health care costs were comparable to those in any other wealthy country we would be looking at long-term budget surpluses, not deficits. This suggests that there is a conflict between the interests of the public at large and the health care providers (e.g. the drug, insurance and medical supply companies and high paid medical specialists), but not between generations.
Finally, it is important to note that the cuts that have been proposed for Social Security and Medicare, such as raising the normal retirement age or the age of eligibility for Medicare would primarily hit the young, not people currently receiving benefits from these programs. Polls have shown that seniors often support these programs because they want to ensure that their children and grandchildren get the same benefits that they enjoy, not out of a selfish impulse to protect what they have.
Thursday, January 03, 2013
What we learned, in other words, is that even with a Democratic President in the White House who's eager to cut spending on retirement programs they still don't get cut. That's how robust the welfare state is. Recall that the last time we had a Republican President in the White House what he did was make Medicare benefits significantly more generous. Recall also that Mitt Romney ran on a pledge to increase Medicare benefits for ten years and then offset that by cutting benefits for younger people in the future. That's how robust the welfare state is. Concern trolling about Democratic senators' willingness to blink on taxes is neat, but all we're seeing again and again is confirmation of Paul Pierson's thesis from Dismantling the Welfare State?, namely that dismantling the welfare state is incredibly difficult.
"In the 2008 campaign, Mr. Obama said that his top priority as president would be to “create bottom-up economic growth” and reduce inequality. He has governed as such."
This is at best debatable. President Obama bailed out the big Wall Street banks, allowing them to get trillions of dollars in loans at below market interest rates. This massive subsidy allowed many of the richest people in the country to preserve their wealth when market forces left to themselves almost certainly would have put most of the major banks out of business.
Obama has also refused to make a reduction in the value of the dollar a top goal in trade policy. A lower valued dollar would create millions of new manufacturing jobs by making U.S. goods more competitive in the world economy. This would provide a strong boost to labor demand and wages.Some Perspective on the Fiscal Cliff Deal by Jared Bernstein
Social Security: Principles, Facts, and Fixes by Bernstein
My Views on Spending Cuts and Entitlements by Bernstein
But They Will Always Smash It On The Floor by Duncan Black
But Republicans will inevitably see a balanced budget as an opportunity to give money to rich people (tax cuts and crony capitalism). The reward for liberals for this well done very important work? Tax cuts for rich people and unpaid for disastrous wars.
Liberals should spend their time in office figuring out how to implement a sticky liberal agenda, one which is hard to dislodge, not figuring out how to create a pot of money for Republicans to steal when it is their turn.As Baker points out, the tax cuts for rich people and unpaid disastrous wars didn't bust the budget, the housing bubble did that. We need a way to fix the shampoo economy.
*Reference to the new film "Django Unchained."
Wednesday, January 02, 2013
But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no.
It’s true that printing money isn’t at all inflationary under current conditions— that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public.
We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry.
Wedges driven in, by clockwork. It looks to me like Speaker Boehner is fed up with the Tea Party, and so he asked the Senate Republicans to come up with something the Senate Democrats would pass, in order to put the intractable House members on the spot. So one wedge is being driven into the Republican Party between the moderates (such as they are) and the wingnuts. The next debate becomes rhetorically very simple: debt ceiling vs. cuts to Social Security and Medicare. And those cuts can be blamed squarely and publicly on the House Republicans. So the second wedge will be driven between the Republican Party and the rest of the country. If the Dems can get back the House in 2014, we could finally start taxing the people who can afford it.If he means the cuts will be enacted, that's scary. If not, hopefully this wedge action happens and the Republicans lose the House.
The elderly: As recently as yesterday morning, it was taken for granted that one of the major provisions of an alternative to the fiscal cliff would be cuts in the federal retirement security programs that are the main long-term drivers of deficits. But ultimately Democrats cared more about avoiding spending cuts than securing tax revenues, and Republicans cared more about low taxes than cutting spending. Old people are the winners.Emphasis added. Yglesias recently blogged that he got a mortgage and this is Exhibit A of what happens when someone gets one.
The main long-term driver is Medicare and our broken health care system which is much more inefficient than any other advanced nation's system. The main short-term driver is the after-effects of the bursting of the housing bubble.
So, why am I feeling so despondent, and why do so many other progressives, like Noam Scheiber, feel the same? Because of the way Obama negotiated. He gave every indication of being more or less desperate to cut a deal before the year ended — even though going over the fiscal cliff was not at all a drop-dead moment, since we could have gone weeks or months without much real economic damage.
Now, given his evident antsiness to cut a deal in this case, how credible is his promise to hang tough over the debt ceiling, which is a much brighter red line? He may say that he absolutely, positively won’t negotiate over the ceiling — but nothing in his past behavior makes that believable.
Maybe this time will be different. Maybe the Treasury is secretly preparing to invoke the 14th amendment, or issue a trillion-dollar platinum coin, or direct that the whole budget gap be taken out of spending dear to Republicans. But I have to say that I now expect Obama to cave on the ceiling; and so, of course, do the Republicans, which means that the crisis is going to happen.
The only thing that might save this situation is the fact that Obama has to be aware just how much is now riding on his willingness to finally stand up for his side; if he doesn’t, nobody will ever trust him again, and he will go down in history as the wimp who threw it all away.
But even that may not be enough. I guess we’ll see.House and Senate Democrats have to say no to cuts in Social Security and raising the eligibility age of Medicare.
So, Krugman, Baker, Sheiber and Tim Duy believe Obama will cave. Commenters Cawley, Kervick etc. KNOW he will.
My guess is that they they will follow the usual clown show routine per Scheiber:
For Democrats, the optimistic take-away is that the two parties set up a mechanism for getting deals done, which is roughly as follows: First, the White House works out a compromise with Mitch McConnell, which passes the Senate with a bipartisan super-majority. This effectively isolates the House GOP and tells John Boehner the game is up. Boehner then lets his conservative members kvetch at length about McConnell’s treachery and the cosmic unfairness of it all. But eventually he brings up the compromise for a vote, and it passes with several dozen Republicans and a majority of Democrats.
Suffice it to say, the process is messy and full of anxious last-minute lurches in either direction. But it ultimately gets the job done. We could do worse than running the same playbook when we’re on the clock again in March.
Interestingly, the administration has a chance to make a real difference in this area while at the same time dealing with the Congressional threat noted above: do not negotiate with the Republicans on the debt ceiling.
It is unthinkable that the nation should, in weeks, be put through another crazy fiscal debate, this one with even higher stakes. It is even more unthinkable to allow a group of renegades to force national default in order to get a dollar of spending cuts for each dollar increase in the ceiling (and again, beyond sweeping calls for reducing caps of non-defense spending, something we’ve already pushed too far, they don’t have a plan here either).
The debt ceiling seems like an insurmountable problem, but I’m reminded of what the noted philosopher Donny Rumsfeld used to say in such cases: “if you can’t solve a problem, make it bigger.” This isn’t just a debt ceiling debate. It’s a chance to shut down a dynamic wherein Congress (i.e., Congressional Republicans) doesn’t solve economic problems, it creates them.
By over-riding them, blowing past them, ignoring them as irrelevant, and refusing to negotiate on the basis of the chief executive’s Constitutional responsibility to maintain the nation’s creditworthiness, the President can deal a fatal blow to these dangerous obstructionists. To do so would not only make a big positive difference to today’s politics and economy. It would be a precious gift to posterity.
Tuesday, January 01, 2013
"But by my back-of-the-envelope count, the deal the Obama administration has agreed to still leaves a net fiscal impetus of -1.75% of GDP to hit the U.S. economy in 2013. "
Commenter Sadowski at EV:
"If it's delayed for two months and then goes into effect that brings it to 0.67% of GDP. Add in 0.56% for the payroll tax increase and 0.1% for high income tax increase (it's actually less) and you get to a negative fiscal impulse of at most 1.33% of GDP. That's less than 46% of the 2.9% negative effect on GDP estimated by the CBO, not 60%, as estimated by DeLong."
As I write, the House hasn’t passed the bill yet, but if they do, as expected–with mostly D’s, btw–then we’re looking at some serious negative fiscal impulse coming…I’d guess around 1% of GDP (maybe less with no sequester).Dean Baker:
I think it's more of an open question.
Common musical elements of shoegazing consist of distortion, droning riffs and a "wall of sound" from noisy guitars. Typically, two distorted rhythm guitars are played together to give an amorphous quality to the sound. Although lead guitar riffs were often present, they were not the central focus of most shoegazing songs.
Vocals are typically subdued in volume and tone, but a strong sense of melody generally exists underneath the layers of guitars. However, lyrics are not emphasized and vocals are often treated as an additional instrument. While the genres that influenced shoegazing often used drum machines, shoegazing more often features live drumming.The Jesus and Mary Chain
The name was coined in a review in Sounds of a concert by the newly-formed Moose in which singer Russell Yates read lyrics taped to the floor throughout the gig. The term was picked up by the NME, who used it as a reference to the tendency of the bands' guitarists to stare at their feet—or their effects pedals; seemingly deep in concentration, while playing.
My Bloody Valentine
In January 1988 My Bloody Valentine played a gig with Biff Bang Pow!, a band that featured Creation Records owner Alan McGee as a member. The performance convinced McGee that they were the Irish equivalent to American band Hüsker Dü, and he approached the band after the show.Hüsker Dü
Hüsker Dü was particularly influenced by punk bands like D.O.A., Dead Kennedys, and The Fartz after having seen them play....
Through heavy touring they soon caught the attention of punk trailblazers like Black Flag and the Dead Kennedys' Jello Biafra, which helped introduce Hüsker Dü to new fans. Black Flag guitarist/songwriter Greg Ginn later signed the band to his label, SST Records....
Unlike other hardcore bands, Hüsker Dü did not disavow classic rock. "You know the whole deal with tearing down the old to make room for the new?", Hart posited. "Well, music isn't city planning."...
The band also set an example by being one of the first bands from the American indie scene to sign to a major record label, which helped establish college rock as "a viable commercial enterprise."
Kim Deal joined the Pixies in response to a classified ad placed by Black Francis seeking a female bassist who liked both Peter, Paul and Mary and Hüsker Dü.
Nirvana bassist Krist Novoselic has been quoted as saying Nirvana's musical style was "nothing new, Hüsker Dü did it before us."
In her recent podcast, she has a funny riff on watching the Exorcist the first time. She was struck by how dumb and immature the pre-possed 12-year old Regan was, and she should be masturbating at that age, if not with a crucifix. And that the devil's insults via Regan were hiliarious John Waters-level quality.
A Podcast That Has Old-School Smarts
Ms. Klausner, 34, delivers around 20 minutes of topical jokes, offhand theories, an occasional song. She might speak melodramatically about her cat, Jimmy Jazz, or describe one of her various Twitter feuds with marginal cultural figures.
Her assumption that her audience gets her references contributes to the show’s knowing, personal voice, which brings to mind Moss Hart’s description of the way actors talk among themselves: “gay, sardonic and very often sprinkled with a nice edge of malice.”
Ms. Klausner might be at her most irresistible when the speed of her monologue picks up, and she seems to be working out ideas out loud. As critics develop and refine opinions into reviews, their first impressions, which is often the most honest ones, can get lost or muted. That rarely happens in “How Was Your Week?” In fact, Ms. Klausner, who studied at the Upright Citizens Brigade, makes you think that criticism could learn something from improv.
Recently she talked about spitting on a man who slapped her near the Vatican, chatted about the Holocaust, analyzed “Rosemary’s Baby” and mocked Ricky Gervais. But all these riffs were anchored, believe it or not, by her confession that she now believes in the Devil.
Monday, December 31, 2012
Currency Wars Aren't Zero-Sum
In a demand-deficient environment, currency wars would help. Perhaps in the far off distant future a sane IMF and WTO would weigh in so nations wouldn't go overboard.
1) the US has a large output gap, high unemployment and low inflation
2) Japan is stuck in a deflationary rut
3) Europe also is treading water
4) China is sucking out demand of 1-3 by keeping its currency low.
1-3 have 4 options of adding demand to their economy.
- Take from creditors/savers and give to debtors via inflation.
- take from rich nationals and give to the government to spend via fiscal policy. Deficit spending would be taking for future generations.
- devalue/bring your currency to down to take from foreign exporters and give to national exporters. This would also hurt savers as their savings is devalued and can purchase less from foreign exporters. It is more politically feasible than merely taxing rich nationals in that the rich are a powerful political constituency
- there's the expectations channel which is more tricky. Investors move their money to riskier investments because of expectations of rising inflation and economic growth. See 1 above.
- Absalom: "The Japanese unemployment rate is apparently 4.1%. There may be little that can be done through monetary easing that would make much difference. My understanding is that one of the things holding the Japanese economy back is that the domestic economy is heavily regulated. De-regulating the domestic economy might be a way to bring some dynamism to the economy (but at the potential cost of increased unemployment)."
- Noah Smith: "Once again, Absalon and I are in complete agreement...Absalon, you hereby win "commenter of the month"..."
- Me: "I'm a complete amateur and find the discussion thought-provoking.
If the unemployment rate is so low, wouldn't talking down the Yen be inflationary as the export sector picks up and looks to hire more workers? Or would they just add more robots?"
Japan: If Shinzo Abe can bring Rooseveltian resolve to Japan and break the back of deflation, it'll be important not just for the world's #3 economy but as an example to the rest of the developed world. Noah Smith, who knows Japan much better than I do, says we shouldn't put our faith in Abe who's really just an ugly nationalist and not any kind of monetary policy wonk. I would say there's no contradiction there. The ugly nationalists running Japan in the 1930s were the first to ditch gold and beat the recession. Adolf Hitler ran a very intelligent and forward-thinking monetary policy regime. Sometimes it takes a national security hawk to beat the inflation hawks. That said, if the upshot is an invasion of Manchuria and a sneak attack on Hawaii we may end up missing the good old days of prolonged Japanese economic stagnation.Smith seems to have rewritten his blog post ("OK, maybe I'm wrong. I'm no expert in Japanese politics, just a guy who has been reading about the LDP for a long time. If Abe follows through on his radical monetary proposals, I'll gladly eat crow. But think of it this way. ") and has a second update:
Update 2: I think Reddit puts it very succinctly by saying: "Shinzo Abe isn't reading Scott Sumner, he just wants a return to Japanese mercantilism." That's exactly it. A mercantilist in monetarist's clothing.And then weirdly Smith seems to be agreeing with Yglesias in a new post "Should Japan Reflate?"
Now, I've gone on the record as a skeptic regarding the power of central banks to fine-tune the macroeconomy. In that post, I mentioned the idea of an inflation "snap-up", where expansionary monetary policy suddenly and unpredictably pushes inflation from very low to problematically high. Also, I've cast doubt on the idea that Shinzo Abe, the current hero of the Japanese "reflationist" camp, is really committed to following through on the radical changes he's proposed.
Still, I think that if Japanese politicians and policymakers were willing to try a big push for reflation, it would be a good idea.
ABSTRACT: POP MUSIC about Rihanna. Everything that the twenty-four-year-old R. & B. star Rihanna does comes with something extra: enormous numbers, awkward questions, unconfirmed stories, unclaimed responsibilities. Rihanna has sold more digital copies of her work than any other artist, including the Beatles. Her current No. 1 single, “Diamonds,” off her seventh album, “Unapologetic,” is her tenth. But all her accomplishments are sometimes overshadowed by her relationship with Chris Brown. Describes Brown’s assault on her, and its aftermath. It’s very hard to find a consistent Rihanna in any of her music. She has been, wisely, a carpetbagger from the beginning. Her voice isn’t particularly compelling; it conveys not emotion, but, rather, a position of powerful detachment. There’s so much Auto-Tune applied to her voice that it’s hard to say how she does or doesn’t sing. What she has done to remain a pop star is to choose very well-written songs.
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.
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.
Sunday, December 30, 2012
Economy of Nazi Germany
Economy of the Soviet Union
The New Deal
commenter at DeLong's blog writes
Bob isn't quite as crazy as Greenspan though. Greenspan would say, "It is unfortunate that we haven't had 10% inflation because the markets might stop expecting inflation, producing a sense of complacency, and could render them ill-prepared when it does happen."
Translation: "The markets are wrong." Perhaps he wants to use 'central planning' to force people out of bonds... oh, wait... that is what the debt ceiling default is for! The Republicans are central planners who wish to plan the end of the USA.It is ironic when libertarians say that the infallible market is wrong. It is quite often wrong as DeLong and Krugman point out, even if they take the market more seriously than glibertarians do.
Markets can be subject to panic (see 2008) and bubbles (pre-2008). As Yglesias writes in a thought-provoking post in the context of Shinzo Abe and the LPD's landslide election:
From time to time sheer economic desperation will give us a Junichiro Koizumi or a Franklin Roosevelent but Koizumi didn't last and FDR plunged the country back into recession in 1937 with contractionary policy. Foreign policy crisis is the main thing that drives a national establishment toward heterodoxy and growth. Nobody tried to finance either world war on a sound money basis, and in most respects Keynesian theory followed wartime practice rather than vice versa.
Questions for Joe Gagnon: What is Quantitative Easing, Does it Work, and Should We Do QE3? by Mike Konczal (June 14,2011)
MK: So did QE2 work? And if so, how can you tell?
JG: It did work. I think QE2 had two elements. One element was of moderate importance, one element was of minor importance. The moderate one is that QE2 convinced markets that the Federal Reserve would not allow deflation or a double dip recession to happen. This is good because it inspired confidence and kept inflation expectations from falling any further. That was the most important step, because it convinced financial markets that the United States wouldn't turn into Japan, which they were worried about. The element of minor importance was that it lowered long-term bond rates a little bit. It takes a lot of purchases to move these interest rates even a little bit, and QE2 wasn't big enough to move them dramatically. It's not nothing, but it is small in the scheme of things.
MK: So how do you know that QE has worked? What kind of studies are conducted, and how do they draw their conclusions?
JG: I have a paper that looked at two things. When the Fed made announcements on QE1, what happened to bond yields? Yields on the things the Fed was buying went way down, but yields on things the Fed wasn't buying also went down. All yields went down. So that was one piece of evidence. As for the other piece of evidence, we looked back thirty years and ran a regression of how the government's net supply of long-term bonds affects bond yields. We found when the government issues more long-term bonds, bond yields increase. When the government buys back long-term bonds, bond yields go down. QE, really, is like the Treasury buying back long-term bonds and issuing short-term bonds. There's a long history of this, including in non-crisis times. So for both pieces of evidence, when the government buys long-term bonds and issues short-term bills, it can push down the yield curve.
MK: So QE2 helped with the job growth of the past year?
JG: It definitely contributed by relieving businesses' fears of a double-dip recession and deflation. This helped with some growth in the economy. But really, not enough. The Fed has not been aggressive enough, it has been too timid.Can't find the article on inflation expectations at Konczal's blog so will have to look in my archives where I know I linked to it. Did find this nice quote of DeLong's on Jim Grant: