"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, February 02, 2013
CriticismsChartalism and Modern Monetary Theory has garnered wide criticism from a wide range of schools of economic thought. New Keynesian economist and Nobel laureate Paul Krugman has stated that the MMT view that deficits never matter as long as you have your own currency is "just not right".The main response by MMT economists to the abovementioned criticism is to point out that the positions taken by critics betray a misunderstanding of MMT. Although critics often represent MMT as supportive of the notion that "deficits don't matter", MMT authors have explicitly stated that that is not a tenet of MMT.Austrian school economist Robert P. Murphy states that "the MMT worldview doesn't live up to its promises" and that it seems to be "dead wrong". Daniel Kuehn has voiced his agreement with Murphy, stating "it's bad economics to confuse accounting identities with behavioral laws [...] economics is not accounting."Murphy's critique specifically employs a hypothetical example of Robinson Crusoe living in a world without a monetary system, and shows that it is in fact possible for Robinson Crusoe to save by forgoing income, thereby illustrating that despite what MMT economists argue, government deficits are not necessary for individuals to save. However, what Murphy terms saving in his example would traditionally be called investment - to introduce saving into the example would require more than one economic agent, a unit of account money and corresponding borrowing. MMT economists have pointed out that the central tenets of MMT theory only aim to describe the economy of a society with a monetary system, that employs a fiat currency and floating exchange rate.Murphy also criticises MMT on the basis that savings in the form of government bonds are not net assets for the private sector as a whole, since the bond will only be redeemed after the government "raises the necessary funds from the same group of Taxpayers in the future". In response to this, MMT authors point out that the repayment of bonds does not necessarily have to occur from taxes; a central bank attempting to hold an interest rate target must necessarily purchase government bonds. These purchases occur through the creation of currency, rather than taxation.New Keynesian Brad DeLong has suggested MMT is not a theory but rather a tautology. Still others have said MMT "ignores the lessons of history" and is "fatally flawed."Economist Eladio Febrero argues that modern money draws its value from its ability to cancel (private) bank debt, particularly as legal tender, rather than to pay government taxes. However, it is unclear how this is a critique, since banks rely entirely on the monetary services of the state and its chosen currency, via the central banking system.
1951: The Treasury Accord
2006 and Beyond: Financial Crisis and Response
During the early 2000s, low mortgage rates and expanded access to credit made homeownership possible for more people, increasing the demand for housing and driving up house prices. The housing boom got a boost from increased securitization of mortgages—a process in which mortgages were bundled together into securities that were traded in financial markets. Securitization of riskier mortgages expanded rapidly, including subprime mortgages made to borrowers with poor credit records. House prices faltered in early 2006 and then started a steep slide, along with home sales and construction. Falling house prices meant that some homeowners owed more on their mortgages than their homes were worth. Starting with subprime mortgages, more and more homeowners fell behind on their payments. Eventually, this spread to prime mortgages as well. The rising number of delinquencies on subprime mortgages was a wake-up call to lenders and investors that many residential mortgages were not nearly as safe as once believed. As the mortgage meltdown intensified, the magnitude of expected losses rose dramatically. Because millions of U.S. mortgages were repackaged as securities, losses spread across the globe. It became very difficult to determine the value of many loans and mortgage-related securities. In addition, the widespread use of complex and exotic financial instruments made it even harder to figure out the vulnerability of financial institutions to losses. Institutions became increasingly reluctant to lend to each other.
The situation reached a crisis point in 2007 when these fears about the financial health of other firms led to massive disruptions in the wholesale bank lending market. As a result, rates on short-term loans rose sharply relative to the overnight federal funds rate. In the fall of 2008, two large financial institutions failed: the investment bank Lehman Brothers and the savings and loan Washington Mutual. The extensive web of connections among major financial institutions meant that the failure of one could start a cascade of losses throughout the financial system, threatening many other institutions. Confidence in the financial sector collapsed and stock prices of financial institutions around the world plummeted. Banks were unable to sell most types of loans to investors because securitization markets had stopped working. As a result, banks and investors clamped down on many types of loans by tightening standards and demanding higher interest rates—a classic credit crunch. Tight credit weakened spending on big-ticket items financed by borrowing: houses, cars, and business investment. The hit to household wealth was another factor causing people to cut back on spending as they struggled to rebuild depleted savings. With demand weakening, businesses canceled expansion plans and laid off workers. The U.S. economy entered a recession, a period in which the level of economic activity was shrinking, in December 2007. The recession had been relatively mild until the fall of 2008 when financial panic intensified, causing job losses to soar.
As short-term markets froze, the Federal Reserve expanded its own collateralized lending to financial institutions to ensure that they had access to the critical funding needed for day-to-day operations. In March 2008, the Federal Reserve created two programs to provide short-term secured loans to primary dealers similar to discount-window loans provided to banks. Conditions in these markets improved considerably in 2009. The possible failure of the investment bank Bear Stearns early in 2008 carried the risk of a domino effect that would have severely disrupted financial markets. In order to contain the damage, the Federal Reserve provided non-recourse loans to the bank JP Morgan Chase to facilitate its purchase of certain Bear Stearns assets. Following the collapse of the investment bank Lehman Brothers, financial panic threatened to spread to several other key financial institutions, potentially leading to a cascade of failures and a meltdown of the global financial system. The Federal Reserve provided secured loans to the giant insurance company American International Group (AIG) because of its central role guaranteeing financial instruments.
In normal times, banks borrow from each other for terms ranging from overnight to several months. Starting in August 2007, banks became increasingly reluctant to make short-term loans to each other. In response, the Federal Reserve increased the availability of one- and three-month discount-window loans to banks through the creation of the Term Auction Facility. It also created swap lines with foreign central banks to increase the availability of dollar-denominated loans to banks in other countries. In the spring of 2009, the Federal Reserve, in conjunction with other federal regulatory agencies, conducted an exhaustive and unprecedented review of the financial condition of the 19 largest U.S. banks. This included a "stress test" that measured how well these banks could weather a bad economy over the next two years. Banks that didn't have enough of a capital cushion to protect them from loan losses under the most adverse economic scenario were required to raise new money from the private sector or accept federal government funds from the Troubled Asset Relief Program.
In response to the economic crisis, the Federal Reserve’s policy making body, the Federal Open Market Committee, slashed its target for the federal funds rate over the course of more than a year, bringing it nearly to zero by December 2008. This is the lowest level for federal funds in over 50 years and effectively is as low as this key rate can go. Cutting the federal funds rate helped lower the cost of borrowing for households and businesses on mortgages and other loans. To stimulate the economy and further lower borrowing costs, the Federal Reserve turned to unconventional policy tools. It purchased $300 billion in longer-term Treasury securities, which are used as benchmarks for a variety of longer-term interest rates, such as corporate bonds and fixed-rate mortgages. To support the housing market, the Federal Reserve authorized the purchase of $1.25 trillion in mortgage-backed securities guaranteed by agencies such as Freddie Mac and Fannie Mae and about $175 billion of mortgage agency longer-term debt. These Federal Reserve purchases have reduced mortgage interest rates, making home purchases more affordable.
Friday, February 01, 2013
[I]f investors are told by the Fed that the short-term rate is going to be close to zero in the future, then they will bid down the yield on the long-term bond. The forward guidance keeps the long-term rate low and tends to prevent it from rising. Effectively the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low.
The perverse effect comes when this ceiling is below what would be the equilibrium between borrowers and lenders who normally participate in that market. While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate.
This is much like the effect of a price ceiling in a rental market where landlords reduce the supply of rental housing. Here lenders supply less credit at the lower rate. The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy.Glasner:
When economists talk about a price ceiling what they usually mean is that there is some legal prohibition on transactions between willing parties at a price above a specified legal maximum price. If the prohibition is enforced, as are, for example, rent ceilings in New York City, some people trying to rent apartments will be unable to do so, even though they are willing to pay as much, or more, than others are paying for comparable apartments. The only rates that the Fed is targeting, directly or indirectly, are those on US Treasuries at various maturities. All other interest rates in the economy are what they are because, given the overall state of expectations, transactors are voluntarily agreeing to the terms reflected in those rates. For any given class of financial instruments, everyone willing to purchase or sell those instruments at the going rate is able to do so. For Professor Taylor to analogize this state of affairs to a price ceiling is not only novel, it is thoroughly post-modern.
Doctors cite a number of reasons our medical treatments cost more — the high price of malpractice insurance being a favorite, and genuine, culprit. But the main reason everything costs less in other countries is that other countries tend to have one big payer — usually the government — with the clout to bargain down prices. A single-payer system has, so far, proven politically unpalatable in this country. And even Medicare, which has the power of scale and uses it to drive down prices, wields its power sparingly, because doctors threaten to stop serving Medicare patients if the reimbursements fall too low. As hospitals merge into mightier megachains, they may be able to bargain down the payments to doctors and drug companies and device-makers, and create economies of scale by standardizing treatments. (The physician and New Yorker writer Atul Gawande proposed in a provocative August article that hospitals could drastically improve productivity by studying the example of restaurant chains like the Cheesecake Factory.) But that’s not what P4P is about.
Thursday, January 31, 2013
I guess my genealogy and key terms posts are all about macroeconomic demand management by the government via fiscal and monetary policies. The government is reacting to financial crises like the one in 2008 brought on by long-term secular trends in income and credit/debt creation/management.
downward nominal wage rigidity (DNWR)
Zero interest-rate policy (ZIRP)
nominal GDP level target
Opitmal Control Path
"extend and pretend"
Interest on Excess Reserves (IOER)
Open Market Operations (OMO)
Hot Potato Effect
Bloggily thinking out load here. Parts One and Two links.
I liked Ben Affleck's "Argo." It tells the story of how the Shah's torture regime in Iran backfired. It has a great cast with Alan Arkin, Kyle Chandler, Rory Cochrane, Bryan Cranston, Clea DuVall, John Goodman, and Scoot McNairy. Canada and international cooperation are celebrated too. Movies and film, if not Hollywood itself, help save the day.
"Silver Linings Playbook" was entertaining as well. It is always amusing when a crazy person is out-crazied by a crazier person.
How are the banks in Japan?In an equity financed model, banks would either turn into venture capitalists — lending high risk at the right price — or remain extremely cautious, opting not to lend at all if productive loans cannot be found.Which leaves us with three important conclusions:
- The banking industry as it stands represents “government lending” in everything but name.
- Even in its implicitly state-supported form the industry is struggling to find productive loans.
- It’s unsurprising the industry is unattractive to equity investors.Three other points to consider on the back of those:
- Any lending forced upon banks under government duress would likely be directed towards unproductive loans, thus the equivalent of uncollateralisedmoney-printing.
- If banking remains in the private sector it should be equity funded. But if there aren’t enough productive loans to be had, equity funding will simply encourage cashpiles to accumulate contracting money supply.
- In that scenario the government/monetary authority would have to compensate either with uncollateralised money-printing or debt-financed government spending and sterilisation through taxes, when needed.Final thought:Perhaps we’re all government employees already, we just don’t realise it?Second final thought:What is equity if not perpetual debt? And what is money if not national equity? Is there really any differentiation at this point?
At the end of 2009, more than 1,700 companies in the United States issue commercial paper. As of 2008 October 31, the U.S. Federal Reserve reported seasonally adjusted figures for the end of 2007: there was $1.7807 trillion (short-scale, or 1,780,700,000,000) in total outstanding commercial paper; $801.3 billion was "asset backed" and $979.4 billion was not; $162.7 billion of the latter was issued by non-financial corporations, and $816.7 billion was issued by financial corporations....
Commercial paper is a lower cost alternative to a line of credit with a bank. Once a business becomes established, and builds a high credit rating, it is often cheaper to draw on a commercial paper than on a bank line of credit. Nevertheless, many companies still maintain bank lines of credit as a "backup". Banks often charge fees for the amount of the line of the credit that does not have a balance. While these fees may seem like pure profit for banks, in some cases companies in serious trouble may not be able to repay the loan resulting in a loss for the banks.-------------------
Wednesday, January 30, 2013
But maybe not. Maybe we’ll see the light and enact a basic income scheme or negative income tax brackets. Maybe we’ll restore the dark, and engineer new ways of providing fraudulently loose credit. Either sort of change could bring “full employment” interest rates back above zero.
I’m less sure about the “someday end” thing. The collapse of the “full employment” interest rate below zero strikes me as a secular rather than cyclical development, although good policy or some great reset could change that. Regardless, if and when the Fed does want to raise interest rates, I think that it will not do so by returning to its old ways. A permanent institutional change has occurred, which renders past experience of the scale and composition of the monetary base unreliable.Secular Development:
The negative unnatural rate of interest
Tuesday, January 29, 2013
Currency Wars in the Era of Unconventional Monetary Policies by Menzie Chinn
From my genealogy*
interest rate on excess reserves (IOER)
On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances as well as required reserves. They began doing so three days later. Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009. In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.
The day before the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is." The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target, and again on November 5 for the same reason.
The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:
Estimated Budgetary Effects Year 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Millions of dollars 0 -192 -192 -202 -212 -221 -242 -253 -266 -293 -308 (Negative numbers represent expenditures; losses in revenue not included.)
0.25% simple interest on $800 billion is $2 billion, not $202 million as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-termcommercial paper and associated credit markets.
Beginning December 18, the Fed directly established interest rates paid on required reserve balances and excess balances instead of specifying them with a formula based on the target federal funds rate. On January 13, Ben Bernanke said, "In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors. However, as excess reserves decline, financial conditions normalize, and banks adapt to the new regime, we expect the interest rate paid on reserves to become an effective instrument for controlling the federal funds rate."
Also on January 13, Financial Week said Mr. Bernanke admitted that a huge increase in banks' excess reserves is stifling the Fed's monetary policy moves and its efforts to revive private sector lending. On January 7, 2009, the Federal Open Market Committee had decided that, "the size of the balance sheet and level of excess reserves would need to be reduced." On January 15, Chicago Fed president and Federal Open Market Committee member Charles Evans said, "once the economy recovers and financial conditions stabilize, the Fed will return to its traditional focus on the federal funds rate. It also will have to scale back the use of emergency lending programs and reduce the size of the balance sheet and level of excess reserves. Some of this scaling back will occur naturally as market conditions improve on account of how these programs have been designed. Still, financial market participants need to be prepared for the eventual dismantling of the facilities that have been put in place during the financial turmoil" At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion, and on February 10, 2010, they stood at $1.154 trillion. By August 2011, they had reached $1.6 trillion.open market operations (OMO)
Floor System (from Waldman)
Under the floor system, a central bank sets the monetary base to be much larger than would be consistent with its target interest rate given private-sector demand, but prevents the interbank interest rate from being bid down below its target by paying interest to reserve holders at the target rate. The target rate becomes the “floor”: it never pays to lend base money to third parties at a lower rate, since you’d make more by just holding reserves (converting currency into reserves as necessary). The US Federal Reserve is currently operating under something very close to a floor system. The scale of the monetary base is sufficiently large that the Federal Funds rate would be stuck near zero if the Fed were not paying interest on reserves. In fact, the effective Federal Funds rate is usually between 10 and 20 basis points. With a “perfect” floor, the rate would never fall below 25 bps. But because of institutional quirks (the Fed discriminates, it fails to pay interest to nonbank holders of reserves), the rate falls just a bit below the “floor”.------------------------------
If “the crisis ends” (whatever that means) and the Fed reverts to its traditional approach to targeting interest rates, Krugman will be right and I will be wrong, the monetary base will revert to something very different than short-term debt. However, I’m willing to bet that the floor system will be with us indefinitely. If so, base money and short-term government debt will continue to be near-perfect substitutes, even after interest rates rise.
* a work in progress
What If We Paid Off The Debt? The Secret Government Report by David Kestenbaum (Planet Money)
The Untold Story Of How Clinton's Budget Destroyed The American Economy by Joe Weisenthal
Jan. 2, 2013
Debt in a Time of Zero by Krugman
On The Folly of Inflation Targeting In A World Of Interest Bearing Money by Ashwin Parameswaran
The end of RoRo, or is it? by Izabella Kaminska
The liquidity trap heralds fundamental change by Frances Coppola
Platinomics by Greg Ip
On The Disruptiveness of the Platinum Coin by Tim Duy
There’s no such thing as base money anymore by Steve Randy Waldman
A Trap of My Own Making by Tim Duy
All Our Base Are Belong To Us (Wonkish) by Krugman
Floor Systems by Stephen Williamson
Do we ever rise from the floor? by Steve Randy Waldman
All Your Base Are Belong To Us, Continued (Still Wonkish) by Krugman
Yet more on the floor with Paul Krugman by Steve Randy Waldman
Money and Debt, Continued by Tim Duy
Do sofas refute monetarism? by Nick Rowe
Base money basics by Merijn Knibbe
Unifying The Fiscal And Monetary Functions: A Policy Proposal by Ashwin Parameswaran
More on Floor Systems by Stephen Williamson
Once you turn base money into short-term debt, can you go back? by Izabella Kaminska
Understanding the Permanent Floor—An Important Inconsistency in Neoclassical Monetary Economics by Scott Fullwiler
All Your Base Are Belong To Us: What Is the Question? by Krugman
All Your Dorks Are Belong to This by Cullen Roche
Krugman, Kaminska, and Waldman by Scott Sumner
Monetary Policy: From Managing the Monetary Base to Setting an Interest Rate Floor by Peter Dorman
Let’s Talk About Interest on Reserves by Josh Hendrickson
A confederacy of dorks by Steve Randy Waldman
THE PERMANENT FLOOR 2004 by Scott Fullwiler
Two extreme fiscal/monetary worlds by Nick Rowe
AND NICK ROWE IS THE LATEST ECONOMIST TO JOIN THE INARTICULATE DORKS... by Brad DeLong
The Coin is Dead! Long Live the Coin! by Michael Sankowski
Shinzo and the Helicopters (Somewhat Wonkish) by Krugman
Waldman Thinks Bernanke Will Go for (Flawed) Exit #1 by Robert Murphy
Safe Assets and Financial Crises by Carola Binder
*provisional. Times are not sorted. Updated from Jan. 19th posting.
Mark Thoma has shared a link to a new working paper by Gary Gorton and Guillermo Ordoñez called "The Supply and Demand for Safe Assets." The paper brings to mind a once-confidential document written by economists in the Clinton Administration called "Life After Debt" which was recently made public by the team at NPR's Planet Money. The report notes:And:
In the year 2000, the U.S. Treasury began actively buying back the public debt; we should all appreciate the tremendous achievement this represents for the Nation as a whole... We must realize however, that a sharp reduction in Federal debt and the possible accumulation of a Federal asset raises at least three important issues. First, investors looking for an asset free of credit risk can no longer count on an abundant supply of U.S. Treasury securities, and Treasury securities may no longer provide a reliable benchmark for other interest rates. Second, the Federal Reserve may have to change the mechanisms by which it conducts monetary policy. Third, continued surpluses after the public debt has been paid off will require the Federal. government to acquire assets; either directly or though the Social Security Trust Fund. This raises issues about what kinds of assets might be acquired, and the best way to manage this task.”
For a time, the AAA-rated top tranches of these manufactured assets were considered really safe, and it was like the "normal times" in the model when lenders trust that on average, collateral quality is good enough that they don't need to pay the extra cost to check on it. But then it became apparent that the average quality was much lower, and these assets became less effective collateral, and the financial crisis began. There are at least some claims that the Clinton surplus kicked off the rise in mortgage-backed securities issuance. (I included two graphs below, made using data from FRED, in case you want to evaluate the claims for yourself.) If you decide to read "The Supply and Demand for Safe Assets," please do also look at Krishnamurthy and Vissing-Jorgensen's empirical counterpart. Or, for something lighter, listen to Planet Money'sepisode "What If We Paid Off The Debt? The Secret Government Report."
I think I should add Binder's post and Gorton & Ordoñez's working paper to my paradigm shift geneology.
Monday, January 28, 2013
The Fed Is More Out of It Than You Thought It Was by Mike Konczal
Under "normal" conditions, one stabilizing element of the Fed is that people think they know how the Fed will respond to future contingencies. We all know that if core inflation gets up to 3 percent for a couple of quarters in a row, the Fed will respond with tighter money. That means nobody expects that to happen. And the expectation that it won't happen helps prevent it from happening. Everyone's plans are coordinated around a no-high-inflation scenario. And for a long time, that also operated on the downside. But the Fed didn't articulate in advance any clear ideas about the zero bound to reassure people. People knew Ben Bernanke had written some old papers about this. But he wasn't publicly speaking about strategies, and we can see in the transcripts that he wasn't privately trying to build consensus either. It was a failure of contingency planning that exacerbated the problems when the bad contingency arose.If downward nominal wage rigidity hadn't occurred to extent it did - which surprised Yellen and Krugman - we could have had deflation seeing as how the Fed as slow to react and communicate its intentions.
Sunday, January 27, 2013
Okay, that is not exactly what he said, but if Chrystia Freeland's account of Summers' comments at Davos is to be believed Summers is badly misinformed about the state of the U.S. economy in 1993, when he was one of the top advisers in the Clinton administration. According to Freeland Summers said:
"In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right."
This is not what the data say. Here's the story on real wages and productivity.
Source: Bureau of Labor Statistics.
There are some measurement issues that would reduce the gap somewhat, but anyone who could see these two as laying "on top of each other" needs some new glasses. The sharp divergence between productivity and wages began in the 1980s. It would be really scary if Larry Summers, Robert Rubin and the rest did not know this in 1993.
The other parts of Summers' story are also wrong. The trade deficit was less than 1.0 percent of GDP in 1993. By comparison it was almost 4.0 percent of GDP when Clinton left office in 2000. The interest rate on ten-year Treasury bonds was 6.6 percent in January of 1993. Coupled with an inflation rate of around 3.0-3.5 percent, this gave a real interest rate in the neighborhood of 3.1-3.6 percent. This is perhaps a bit higher than desirable, but actually not much different than what we saw through most of the Clinton years.
In short, Summers is describing a history that does not exist. He either has a very poor memory or is just making things up.