Age of Niallism: the turn towards deficits and away from Obamacare

Whiskey-Tango-Foxtrot Wall Street Journal Bang-Query-Bang-Query: Is This Some Strange Berkeley Acid Trip I Am on? Weblogging by DeLong

Republicans will probably lose the House.

The falling deficit has been a disaster for the GOP by Ezra Klein

Fed meeting

Ten Questions About Today's Federal Reserve Meeting by Ygelsias 

6. So what's Woodford's argument? Part one for Woodford is that giving the economy a monetary boost is all about expectations, not about bond-buying. He thinks you boost the economy by telling people to expect faster nominal growth in the future—saying the Fed will give us faster real growth or faster inflation, but will absolutely refuse to countenance a slow-growth low-inflation combination. In that framework, QE is unnecessary.

7. But even if it's unnecessary, is it doing any harm? Yes, Woodford's view is that taking the bonds off the market is dangerous. Government debt plays a crucial role as a "safe asset" in the broader financial and economic situation. Public policy ought to ensure that this government debt is around in ample supply.

8. Doesn't that also imply that the budget deficit should be higher? Woodford hasn't said this, but it does appear to follow from his logic. For that matter, the Fed's own statement that it will tolerate inflation in the 2-2.5 percent range as long as unemployment stays high also argues for a higher deficit. It's a clear signal from the Fed that if fiscal stimulus gave the economy a boost, monetary policy wouldn't calm it down again. Either way you look at it, the government should be collecting less in taxes and doing more opportunistic investment. But the Fed can't make that stuff happen.

emphasis on balancing the budget from Clinton through Bush and Obama

How Did Fiscal Policy Get Turned Upside Down? by Jared Bernstein

Emperor has no clothes

Wow what a week. This story in the New York Times by Jackie Calmes really struck me:

Economists See Deficit Emphasis as Impeding Recovery

When the emphasis has been the Deficit and government spending since 2010 thanks to Geithner, Obama, and the Tea Party. It's as if the boy yelled "The emporer has no clothes."

And DeLong on Moby Ben and Washington-Whale.

Powerful shit. About the hedge fund cranks (DeLong mentions in a comment that conservative economists like Marty Feldstein feel the same way.)

BERNANKE-HATERS AT THE SOHN CONFERENCE by DeLong

And Matthew Yglesias:

Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."

Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.

And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.

Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.

Time magazine lists Yglesias as one of 2013's best political Twitterers along with Franke-Ruta. Zero Hedge is listed for economics! WHY Zero Hedge??? Is Time trying to be seen as edgy? So Zero Hedge criticizes the banks, so what?

Twins No More by Krugman

Back in the Reagan years two unprecedented things began happening to the US economy. For the first time ever, we began running large peacetime budget deficits; and for the first time ever we began running large trade deficits. In a famous analysis, Martin Feldstein pronounced them “twin deficits”, linking the external deficit to the budget deficit, a proposition that made sense at the time: the budget deficit was helping to drive up interest rates, and high rates led to an overvalued dollar. 

It’s occurred to me recently that much discussion of deficits these days implicitly assumes that something similar applies in today’s world — that by running budget deficits we’re indebting ourselves, as a nation, to foreigners (especially China). So it’s worth pointing out that this isn’t remotely true.

Triffin dilemma?

The Deficit Was Not Ballooning Until the Economy Collapsed by Dean Baker

Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billion in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.  

While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate by Dean Baker

Obama gives up on demand by Yglesias

The Untold Story Of How Clinton's Budget Destroyed The American Economy by Joe Weisenthal

(via Yglesias)

Yes, We Can Do Stimulus Without Adding Debt. Here’s How. by Robert Shiller

Fun with Thomas Friedman by Dean Baker

Bernanke Offers Little Help On Budget Deficit by Dean Baker

In 1996, the Congressional Budget Office (CBO) projected a deficit of almost $250 billion (@ 2.6 percent of GDP) for the 2000 fiscal year. The country actually had a budget surplus of almost the same size in fiscal 2000, representing a shift from deficit to surplus in the year 2000 of more than 5 percentage points of GDP.

Congress did not approve any major tax increases in this 4-year period, nor were there any major unscheduled cuts to spending. Rather this shift from deficit to surplus of more than 5 percentage points of GDP ($750 billion in today's economy) was attributable almost entirely to better than expected economic performance.

In 1996 CBO projected that the unemployment rate would be 6.0 percent in 2000. Unemployment actually averaged just 4.0 percent. This was due to the fact that Alan Greenspan ignored the overwhelming consensus in the economics profession and allowed the unemployment rate to fall below the conventionally accepted levels of the NAIRU.

This decision, which was made over the objections of the Clinton appointees to the Fed, allowed millions of more people to get jobs than would have otherwise been the case. It also allowed strong wage growth for people at the middle and bottom of the wage distribution as their labor was then in demand. And it reduced the budget deficit. Because Bernanke offered little hope of more aggressive Fed actions to reduce unemployment, he is not offering any similar growth dividend on the budget deficit.

Bill Gross and David Stockman versus the Fed by Ezra Klein

"When the Federal Reserve gets out of the Treasury market on June 30th, the question becomes who will buy them at these yields, and I don’t know who would." Gross, incidentally, has put his money where his mouth is by making a big and very public play against Treasurys.

 I'd take the Fed even though Gross is a player. The Fed can print money without an ensuing wage-price inflation spiral and the US government can raise taxes very easily if it has to. There are a lot of profitable US businesses. It could even stick it to China which would hurt some politcally-connected US firms and yet benefit the national economy as a whole.

Added:

Stocks, Flows, and Pimco (Wonkish) by Krugman

... If you believe that it is obvious that rates will spike as soon as QE2 ends, you have to ask why investors aren’t moving out of US debt now in anticipation; you don’t have to believe in efficient markets to believe that totally obvious gains or losses will be anticipated.

I’d also add that if flows matter a lot -- if it’s hard to persuade investors to buy a suddenly increased quantity of newly issued Treasuries per month, as opposed to being willing to hold the total amount of Treasuries outstanding -- the big shift into budget deficits and the corresponding increase in Treasury issuance should have led to sharply rising interest rates.

And as you may recall, some people did predict just that -- and ended up not just with egg on their faces, but losing a lot of money for their investors.

So I don’t buy the notion that rates are low only because the Fed is doing QE2; if there were really a problem with the marketability of US debt, rates would be high regardless. And so I don’t expect rates to spike when QE2 ends unless there’s good economic news that gives us a reason to believe that the zero-rate policy on short-term rates will end sooner than expected.

My estimation of Bill Gross just took a hit.

Lands of Ice and Ire by Krugman

Iceland versus Ireland; heterodox versus orthodox.

What’s going on here? In a nutshell, Ireland has been orthodox and responsible -- guaranteeing all debts, engaging in savage austerity to try to pay for the cost of those guarantees, and, of course, staying on the euro. Iceland has been heterodox: capital controls, large devaluation, and a lot of debt restructuring -- notice that wonderful line from the IMF, above, about how "private sector bankruptcies have led to a marked decline in external debt". Bankrupting yourself to recovery! Seriously.

And guess what: heterodoxy is working a whole lot better than orthodoxy.

Dean Baker: Robert Samuelson Does the Big Lie, Big Time

Competent budget analysts know that the long-term budget problem is a health care cost problem. If U.S. per person health care costs were comparable to those in any other wealthy country, we would be looking at huge projected surpluses not deficits. Because health care costs are rising rapidly in the private sector, it means that the public sector programs that pay for these benefits (most important Medicare and Medicaid) also have rapidly rising costs.

If Medicare and Medicaid are lumped together with any other programs then the combination of Medicare, Medicaid, and the other program will be the cause of the deficit. For example, the categories of Medicare, Medicaid, and foreign aid explain the vast majority of the projected increase in the deficit over the next quarter century. Similarly, the combination of Medicare, Medicaid, and school lunch programs also explains the vast majority of the projected increase in the deficit over the next quarter century.

Robert Samuelson throws in Social Security as the third program so that he can tell readers:

"America's budget problem boils down to a simple question: How much will we let programs for the elderly displace other government functions."

Social Security does not in any honest way since it is fully financed over the period in question by the designated Social Security tax. But Samuelson does not feel bound by such details.

Of course there are easy ways to prevent health care costs from bankrupting the country, most obviously by taking advantage of the lower cost health care available in other countries. But, Samuelson never discusses such possibilities, focusing exclusively on cutting benefits on which the vast majority of retirees depend.

via Yglesias, Joe Klein on the Pain Caucus's focus on "fiscal resposibility":

here is, for example, Glenn Hubbard, who was featured on the New York Times op-ed page recently in defense of the deficit commission, describing the problem this way: "We have designed entitlements for a welfare state we cannot afford." This is the same Glenn Hubbard who served as George W. Bush’s chief economic adviser when Dick Cheney was saying that "Reagan proved deficits don’t matter." One imagines that if Hubbard was so concerned about deficits, he might have resigned in protest from an Administration dedicated to creating them. But, no, he’s here to speak truth to the powerless -- to the middle-class folks whose major asset, their home, was trashed by financial speculators, thereby wrecking their retirement plans and creating the consumer implosion we’re now suffering. Hubbard is telling them they now have to take yet another hit, on their old-age pensions and health insurance, for the greater good.

The Next Six Months are Crucial
(or Dylan Matthews Reduces Uncertainty*)

I see Dean Baker has a lengthy fisking of Thomas Friedman's column for today, but I'm not going to read it until I perform the exercise of doing it myself. Then I'll compare notes and see how I did.

Friedman takes the title of his column "Really Unusually Uncertain" from a description Bernanke recently made about the economy in testimony to Congress. The Fed Chairman described the atmosphere as "unusually uncertain" because the economy was giving off mixed signals. Economists are also divided on where the economy is heading, with many saying they don't know.

Right from the start, Friedman puts on his pundit hat and quotes PIMCO's** C.E.O Mohamed El-Erian to the effect that "Structural problems need structural solutions."  The Consenus seems to have latched on to the term "structural."*** Yesterday, the Minnesota Fed President asserted that the labor market had "structural" problems that would take time to sort out. Friedman opines:

There are no quick fixes. In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path -- changes that will require a level of political consensus and sacrifice that has been sorely lacking in most countries up to now.

"We" are all going to need to compromise and sacrifice. But what exactly are these "structural problems"?

The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines. Now our government owes more than ever and has more future obligations than ever -- like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) -- and less real growth to pay for it all.

Well Obama's health care reform should help with the deficit and government debt. Social Security isn't that bad off and the government's debt problems should ease with growth. Bill Clinton balanced the budget ten years ago, but he did it with "debt-fueled growth" - or rather with help from a stock market tech bubble and Alan Greenspan. Here Friedman raises an interesting issue. How do we get "sustained" growth rather than "debt-fueled" growth? Or more accurately, how do we get sustained debt-fueled growth, rather than bubblicious debt-fueled growth?

Structurally speaking, our political elites allowed the housing bubble to blow up and pop. And just to make sure the resulting financial crisis would be severe and sink us in recession, they allowed the shadow banking system to metastasize and outgrow Depression-era government regulations, some of which were scrapped anyway. At least Friedman, along with Rogoff and Reinhart, call for more fiscal**** stimulus in the face of weak employment levels:

America will probably need some added stimulus to kick start employment, but any stimulus right now must be in growth-enabling investments that will yield more than their costs, or they just increase debt. That means investments in skill building and infrastructure plus tax incentives for starting new businesses and export promotion. To get a stimulus through Congress it must be paired with spending cuts and/or tax increases timed for when the economy improves.

Government to the rescue! Golden straightjackets and invisible bond vigilantes be damned! (The world may be flat, but US Treasuries are still the safest investment.)

Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever. 

I'm not sure but here things may be much more ominous than Friedman lets on. There's no class conflict or "outsourcing" in Friedman's (flat) world, just much less controversial concepts like "retraining" and "entrepreneurial innovation," even if the jobs aren't there thanks to a lack of aggregate demand.  And why is there less demand? Because as Friedman acknowledges, older, less skilled jobs are getting destroyed. Without consumers getting paid, they can't have demand - without incurring debt - and the US economy can't grow. (Without rising house prices they can't get loans.) And finally, Friedman turns to Europe:

But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first "existential crisis." For the first time, he noted, the E.U. "saw the possibility of collapse." Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.

Greece couldn't devalue - as Argentina did - because they're on the euro, whereas the euro has been lower against the dollar which helped Germany's exports. Germany has basically exported its way to growth, something everyone can't do simultaneously, unless we find another planet to import our goods. Also Germany has better "automatic stabilizers" in times of recession and an innovative work-sharing program which reduced the fall in employment. So Germany - who didn't have a housing bubble even when England and Spain did - is doing better than the United States whose only social safety net is low interest rates/full employment and is suffering because of the fact.

------------------------
*My favorite recent blog subject title which was composed by Ezra Klein about his research assistant. Or perhaps Matthews wrote it himself?
** PIMCO's co-founder and co-chief investor Bill Gross was at Geithner's pow-wow on the housing market.
*** Is Structuralism back in vogue? I'd prefer post-structuralism.
**** Even though Friedman mentions Bernanke, he has no opinion on what the Fed can or should do. He's like the Mark Wahlberg character in the movie The Other Guys who has no idea what the Federal Reserve Bank is or does.

Epistemic Closure
(or The Wall Street Journal Op-Ed Page is loco)

Jonathan Chait blogs about supply-siders and their zombie economics(reprinted in its entirety):

Supply-Siders: 1990s Boom, Bush Recession Only A Flesh Wound!

Like the Black Knight in Monty Python, supply-siders fight on with a bluster utterly undiminished by two decades that have systematically cut the premises out from their philosophy one by one. First they insisted Bill Clinton's upper-income tax hike would destroy the incentive to get rich, create a recession and reduce tax revenues. Then they promised George W. Bush's supply-side tax cuts would deliver a decade of prosperity. Now they're warning that a return to Clinton-era top tax rates will destroy America's economic competitiveness. Here's Wall Street Journal op-ed columnist Daniel Henninger:

Extend the current tax rates for all and free everyone in an economy begging for the chance to be strong again. Yes, the U.S. economy will always be "strong," but it needs to be strong enough to take on all comers and win, which last time I looked was the real American way.

Advocates of keeping the Bush-era tax rates for the rich seem to write as if they have some kind of new plan. In fact, the Bush-era tax rates are currently in place. We're already "free." The question is whether to return to the slavery of the Clinton era tax regime.
I also like this bit about why raising taxes on the rich won't reduce the deficit:

The deficit is dangerous. But raising taxes to cut the deficit is a bailout for the spenders--until proven otherwise.

I think it's been proven:

DeLong passes on the info that Aussie John Quiggin's new book is scheduled for release on October 5th:

Krugman blogs about the return of the Mellonheads:

One of the truly amazing things, however, is the return of full, 1930s-type liquidationism -- the idea that a slump serves a useful purpose, and that stimulating the economy, even through monetary policy, is a mistake. And so we have Raghuram Rajan in today’s FT arguing that with 9.5 percent unemployment, long-term unemployment at record levels, and falling inflation, we need to ... raise interest rates

...

I’ve written about this before; but let me add a few numbers. Is it at all reasonable to attribute high unemployment now to the need to shift the economy out of housing and cars?

OK, I actually haven’t taken cars into account; someone with more time can do that. But let’s look at the role of job losses in construction versus other sectors, since December 2007. It looks like this:

If high unemployment were largely about shifting workers out of an overblown construction sector, wouldn’t you expect job losses to be concentrated in that sector? Wouldn’t you expect employment elsewhere to be, if anything, rising? In fact, however, the vast majority of job losses have occurred in parts of the economy with little direct connection to the housing bubble. Yes, as a percentage job losses have been much larger in construction; but nothing in Rajan’s argument explains why we shouldn’t be using policy in an attempt to prevent vast job losses in parts of the economy that aren’t overblown.

Rajan was the top economist at the IMF (surprise, surprise) but more surprisingly he was the lone dissenter at a famous going-away party in Jackson Hole, Wyoming, for Alan Greenspan in August 2005 after Bernanke had been nominated to replace him. He presented a highly critical paper to the guests - central bankers do that at parties - and according to John Cassidy's wonderful book How Markets Fail, "As a rule, central bankers don't rush stages or toss their chairs; if they did Rajan might have been in physical danger."

But Rajan turned out to be correct when he called out Greenspan and politicians' deregulation of the financial sector for putting the economy in a vulnerable position.

But Rajan is from India and the Brahmin there have a notoriously callous attitude towards the lower classes.

Henwood on Dodd-Frank.

The Volcker Rule by John Cassidy

Volcker’s skepticism about bankers and other financiers dates back to his days at the Fed, where he opposed the Reagan Administration’s efforts to deregulate the banking system. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act, which gave struggling thrift banks (also known as savings and loans) the right to make commercial loans. (Previously, they had been restricted to residential lending.) The legislation was intended to enable thrifts to earn higher profits, and it was strongly supported by Treasury Secretary Donald Regan, the former head of Merrill Lynch. Volcker repeatedly disagreed with Regan and with other members of the Administration. Referring to the S. & L.s, he told his staff, "Give ’em commercial lending power, and they’ll end up with all the bad loans."

This is precisely what happened, and Volcker regards the S. & L. crisis, which ended up costing taxpayers about a hundred and eighty billion dollars in today’s money, as a template for the financial catastrophe of 2007-08. Unlike many economists, who regard financial innovation as generally a good thing, he is suspicious of many things that today’s big financial institutions do, such as creating complex securities and building elaborate mathematical models. Last December, at a conference in England for banking executives, he said that the most important banking innovation of recent decades was the A.T.M.

...
"It does show leadership in the United States, which will help encourage actions abroad. Without the U.S. stepping up, you’d never get a coherent response." He pointed out that the language banning proprietary trading was strong and that even the much weaker language on hedge funds and private-equity funds still contained some safeguards that would force big banks to change how they do business. He also cited the crackdown on derivatives trading and a clause, which he had campaigned for, that creates a position for a second vice-chairman of the Fed, who will be explicitly responsible to Congress for financial regulation. "I think that might turn out to be one of the most important things in there," he said. "It focusses the responsibility on one person."

Anthony Dowd [Volker's chief of staff] added, "We both felt like we got kind of excluded at the very end. But, when you step back, there were fifty-four lobbying firms and three hundred million dollars spent against us. So we didn’t do too badly."

To summarize, the bursting of the housing bubble caused a loss of aggregate demand and turned many loans bad which caused firms like Bear Stearns, Lehman Brothers, A.I.G., etc. etc. to collapse. Which caused a chain reaction and panic - no one trusted anyone else's accounting until the "stress tests" - which further reduced aggregate demand in a vicious circle. And then the governments of the world stepped in.

The economy is growing again, yet there's risk of it slipping into a double dip recession. Many in the Pain Caucus - who don't like seeing all of this government action and deficit spending even during a recession - argue the economy needs no more help from the government or central banks and will continue to grow on its own.

Inflation Fears

Ken Rogoff is a professor at Harvard and dues-paying member of the Pain Caucus. Not surprisingly he has worked at the IMF. Brad DeLong debates him in the Financial Times where he writes "Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilise confidence in price stability." Maybe the bubbliciousness of the 2000s came in part from the profits made off of shipping jobs overseas?

Sewell Chan writes that the "Fed is in the Hot Seat," as Bernanke testifies before Congress today.

With unemployment high and inflation low, a question is being asked more often and more loudly: Can and should the Federal Reserve do more to get the economy moving?

...
So far, the debate within the Fed has occurred largely outside of public view, but it reflects how the economic picture has darkened from just a few months ago, when the prospects for a gradually improving economy and a robust stock market seemed more hopeful. Back then, the dominant talk was when to start tightening monetary policy and selling assets on the Fed’s balance sheet.

"Now there is a general recognition that that talk was premature," said Peter N. Ireland, a professor of economics at Boston College and a former economist at the Federal Reserve Bank of Richmond.

Why was that talk premature, as in why where they overly optimistic? That's what I would ask Bernanke after pointing out that the Fed missed the housing bubble which cost the economy trillions. Since the Fed has been consistently wrong, is it possible the Fed has a bias? (As Dean Baker points out, the IMF has been consistently wrong which suggests it's policy recommendations are politically motivated.)

Sewell Chan:

In addition, although core inflation, which excludes the highly volatile prices of food and energy, has been running at about half of the Fed’s target of nearly 2 percent, inflation expectations "have not come down nearly as much as one would expect, given how much slack there is in the economy," Ms. Dynan said.

The size of the Fed’s balance sheet, which has more than doubled since the financial crisis of 2008, and the large amount of bank reserves sitting at the Fed has made officials at the central bank nervous about the potential for rapid inflation once banks decide to start lending more vigorously again, she noted.

Where is Ms. Dynan's data on high inflation expectations? Link please? Again I don't understand where this fear of phantom inflation is coming from. With unemployment high, the economy in a liquidty trap, and aggregate demand weak, everyone should be afraid of deflation. Very afraid.

Federal Reserve Bank takes note of a change in conditions


Neil Irwin reports in the Washington Post:

Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak economic reports, the debt crisis in Europe and faltering financial markets have led them to conclude that the risks of the recovery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.

"If the economic situation changes, policy should react," James Bullard, president of the Federal Reserve Bank of St. Louis, said in an interview Wednesday. "You shouldn't sit on your hands. . . .  I think there's plenty more we could do if we had to."

Perhaps they also saw how the hearltess bastards in the Republican party blocked the extension of unemployment insurance and thereby 1) increased the hardship of many American families, 2) jeopardized a weak recovery 3) exacerbated the government's long-term debt problems. 

Kevin Drum reacts.

Yglesias comments.


Dean Baker patiently explains how the Washington Post is confused.

"When the Fed was buying $300 billion in Treasurys in mid-2009, part of its try-everything approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid concerns that the Fed was "monetizing the debt," or printing money to fund budget deficits. With deficit concerns having deepened in the past year, such fears could be even more pronounced now."

The markets don't tell anyone why they moved in a certain direction at a specific time. It is not clear what spike the article is referring to, but the cause of the spike is entirely the interpretation of the Post and should clearly be identified that way. The Post does not really know what caused interest rates to rise, it is presenting its speculation to readers as a fact that is then used to support the case for a more cautious monetary policy.