It is, I must say, remarkable that Plosser has managed to avoid learning that the housing bust since 2007 has been much larger than the mid-2000s housing boom, and that there is no overhang of overbuilt houses, rather the reverse:The story goes:
The fact that houses became so expensive is hardly unrelated to the fact that financial means were created which then allowed people to bid the prices up further.
I don’t really agree, (surprisingly) – the price bubble was policy-caused. In the early 00s, when I started covering the UK banking industry in serious depth, the main upward driver of house prices was simply the fact that (as base rate plummeted to the historically low level of 4%!) they were so, so damn affordable – remember that mortgage rates went from nearly 10% to about 5% on a simple, vanilla standard variable rate mortgage, basically halving the monthly payment. The product innovations were a response to, not a cause of, the housing boom (in Spain, where financial regulation was and is very strict, they still had a housing boom on 100% vanilla products).Is what Davies says related to the Global Savings Glut? After witnessing the 1997 East Asian financial crisis, the Chinese - who avoided the worst because of capital controls - decided they would never ever be put in a position to be forced to go to the IMF and so built up their reserves. This caused mortgage rates to drop.
"[W]hen [bubbles] are underway, [they] are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular."
From NY Fed President William Dudley: Financial Stability and Economic Growth. Dudley makes several interesting comments. I've long argued that the primary causes of the housing bubble were rapid innovation in the mortgage market combined with a lack of regulatory oversight.
Like “The Social Network,” which is about the creation of Facebook and yet so much more (it was also written by Mr. Sorkin) “Moneyball” is about a fundamental cultural shift and the rise of the information elite. Instead of going by instinct, Peter knows what he knows because he’s a disciple of Bill James, a once-marginal figure who, starting in 1977, began publishing an abstract that offered a new, rationalized way of looking at the game. In a nutshell, Mr. James looked at baseball statistics in a different light, less by breaking the numbers down in another way but by seeing that what appeared to be objective facts, like fielding statistics, were, as he wrote, “a record of opinions.” And these numbers didn’t just describe baseball; they gave the game its language, its “fiction and drama and poetry.”
Like a linguist Mr. James studied that language, looked at its form, context, meaning, and called his new approach sabermetrics. Among other things he could see value in underappreciated, often underpaid and ignored players whom conventional thinkers saw as destined for the minors. In the movie Peter preaches this new gospel to Billy, who embraces it with born-again fervor, partly because it clarifies the mystery of why he never became the player he was drafted to be: he had the tools, as the scouts like to say, but they just didn’t work in the majors. (In reality it was a former general manager of the A’s, Sandy Alderson, now with the Mets, who introduced Mr. Beane to Mr. James’s work.)Reminds me of progressives like Yglesias and Ezra Klein and their recourse to data and charts, especially during the health care debate. In macroeconomics, though freshwater economists lost their way by focusing too much on models and equations.
The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem -- the loss of manufacturing competitiveness -- they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.Yet this approach has been doomed to fail, and continues to do so. Consumers will not return quickly to buying houses, cars, and other big-ticket items in large numbers. They are exhausted and in debt, and in no mood to repeat the earlier disasters of over-borrowing.
To reprise a couple of points from yesterday’s post: 1) As a share of GDP, residential investment—that is, the building of new houses and work done on older ones—hit a peak of almost 60% above its long-term trend in the mid-00s. And, 2) between 2001 and 2006, residential investment accounted for 12% of GDP growth, twice its share of the economy. If “60%” and “twice” don’t sound like big numbers, then I don’t know what does.See where I'm confused is where inflated prices work into the equation of residential investment. Is the bubble reflected in the numbers? And when working with fractions and percentages it gets kind of tricky. My guess is that Yglesias doesn't want to admit there was a boom of any sort in the Bush years, but maybe that's not fair or true.
For the moment, Greek officials are adamant that neither a default nor a euro exit and devaluation is in the cards. One senior policy maker in Greece’s Finance Ministry, who declined to be identified because of the delicacy of the matter, even offered to send his questioner a case of 2005 Dom Perignon Champagne if Greece ever repudiated its debt.
But close followers of Greece’s budget dynamics point to the fact that, despite the country’s deficit woes, by next year Greece is likely to have achieved a primary budget surplus, meaning that after taking out the high levels of interest it pays on its debt, it will be running a surplus.
History shows that a country tends only to take such a drastic step as cutting ties with its international lenders when it has tightened its belt enough to achieve a budget surplus, and it is only payments to its bankers that is keeping it in the red.
Such was the case in most of the recent country defaults, including Argentina, Ecuador, Indonesia and Jamaica, economists at the I.M.F. found in a paper published last year that addressed when a country finds its interest is served by default.
“My view is that it is very much in Greece’s interest to default now, as there is no prospect that it can repay its debt,” said Desmond Lachman, a former I.M.F. economist at the American Enterprise Institute. “If it is inevitable that an insolvent Greece is going to have to restructure, it would be better for Greece to do it now.”
Interesting comments, like:The Oregon Office of Economic Analysis has ventured an update to Carmen Reinhart and Ken Rogoff’s ‘This Time it’s Different‘, the seminal work on financial crises of the past – and their related analysis on the aftermath of financial crises.
The OOEA* uses both updated and revised data and, mostly, confirm that while things have of course gotten worse, they’re still inside the historical norms. For example, equity price declines:Indeed, for most of the key measures used by Reinhart and Rogoff, the OOEA finds newer data only reconfirms the US is experiencing a “garden variety” of financial crisis, as the original works indicated.The summary of the new data comes out like this:
However… there’s one area in that list in which the current US appears to be significantly better than the crises past: unemployment.While it looks terrible in the context of past US recessions…
So far, at least, the US has done reasonably well in terms of unemployment, when compared to global precedents:
It probably won’t be much comfort to anyone in these economic times, but interesting, nonetheless.
In addition to governments messing with the definition of unemployment, US has less social support than other countries, so impact of unemployment is far greater. Limited time benefits being one example, and health insurance being tied to your job an even larger one, means losing your job can be catastrophic in a way that is inconceivable in Japan, Spain or Scandinavia. This will provide further amplification of the impact of recession on US consumers.
The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.
I wish the people making these decisions had to face what households struggling to find a job endure daily -- the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they'd finally get it and, more importantly, do what needs to be done.
But now there’s a new wrinkle. As Stan Collender says, it’s hard to see the GOP letter threatening Ben Bernanke if he does anything to help the economy as anything but an attempt to invert the political business cycle, pressuring the central bank to ensure a weak economy in the year before the election.
---------------------------Got to give the GOP points for innovation.
It was Romer’s first meeting with the President-elect in November 2008. According to Ron Suskind’s book “Confidence Men: Wall Street, Washington, and the Education of a President,”Obama had “a woman problem: too few of them in key jobs” and he was trying to bring in Christina Romer. And “It’s clear monetary policy has shot its wad” is what Obama said to her before even “hello.” Is that how you talk to a woman?She then quotes the following passage from Suskind:
It was a strange break from decorum for a man who had done so outstandingly well with women voters. The two had never met before, and this made the salty, sexual language hard to read. Later it would seem a foreshadowing of something that came to irk many of the West Wing’s women: the president didn’t have particularly strong “women skills.” The guy’s-guy persona, which the message team would use to show Obama’s down-to-earth side, failed to account for at least one thing: What if you didn’t play basketball or golf? Still, for the moment, the comment didn’t faze Romer. She was curious to hear what he thought.
“What do you mean?” she asked.
Obama extended his hand, now ready to greet her. “I guess we need to focus on fiscal policy,” he said.
I like Romer so this made me cringe. It's obviously unprofessional even if it is weirdly funny in a surreal way. But interesting that Obama already thought the Fed was "pushing on a string" back then. What sorts of conversations did he have with Bernanke?“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily, even with the historically low interest rates."
Now rates will finally be low enough to spur consumers into taking out 30 year loans to finance the construction of panic rooms
Stephen Colbert can’t be influenced by the agendas of politicians and public officials, but if you’re a popular rock group that doesn’t easily embrace television cameras he will gladly roll over for you. On Monday Comedy Central announced that it would expand “The Colbert Report” to an hourlong broadcast for the first time in that show’s history to present a special episode featuring Radiohead, the British rock quintet of “OK Computer” and “Kid A” fame, whose song “How to Disappear Completely” could sometimes be mistaken for their press strategy. (Perhaps in an effort to be more visible, the band will also appear on Saturday’s season premiere of “Saturday Night Live,” and will perform at Roseland Ballroom in Manhattan on Sept. 28 and 29.)
In a news release Comedy Central said that the one-hour “Colbert Report” special would be shown next Monday, Sept. 26, and would present the band in interviews and performances of their songs from their recent album, “The King of Limbs” (including an unreleased track called “The Daily Mail”), along with that program’s usual mix of topical comedy segments. Mr. Colbert, who isn’t afraid to flaunt his rock-music bona fides, has used his show to feature artists like the Decemberists, LCD Soundsystem and Jack White, who appeared in multiple “Colbert Report” segments over the summer. Mr. Colbert said in a statement, “I look forward to meeting the Radioheads and leveraging their anti-corporate indie cred to raise brand awareness for my sponsors.”
Former Federal Reserve Board Chairman Paul Volcker lectured readers on the dangers of inflation in a NYT column today. He warned that a little bit of inflation invariably grows to a lot of inflation, which then carries a huge cost to contain.
Actually this has not in general proven to be the case. The one time in the post-war period where inflation clearly became excessive in the United States was in the 70s. This was due to a number of extraordinary events, including large oil price increases associated with the formation of OPEC and the Iranian revolution, a huge wheat deal with the Soviet Union, and a mis-measurement of the rate of inflation that got directly translated directly into wages and other prices as a result of wide-spread indexing.
Even in this case, the cost of bringing inflation down with the 1981-82 recession was minor compared to the costs that the country is now enduring as a result of the current prolonged downturn. It is hard to see how any careful analysis of risks and costs would support Mr. Volcker's warnings on inflation.
It is worth noting that the financial sector might view the equation differently. Its assets are directly devalued by even modest rises in the rate of inflation. For this reason, the financial industry tends to be strongly opposed to inflation even at the cost of high unemployment.
It is indeed the audiences who are getting scary. The MSNBC crowd last Thursday applauded the state of Texasʼs record-breaking death-row executions. On Monday in Tampa at least one person cheered the prospect of (in a question posed to Ron Paul) an uninsured man in a coma being left to die. Monday’s audience also booed Perryʼs defense of public education for children of illegal immigrants, as well as Paulʼs skeptical remarks about American exceptionalism (“We’re under great threat because we occupy so many countries. We have 900 bases around the world.”). This kind of hooha heartlessness is recession road rage at its worst, and that this is the electorate these candidates are trying to court often seems to startle even them, though this is reflected less in the policies they endorse than in their faces, which can veer to and from their lecterns in disorientation and fog.
Each of the candidates did have something genuinely interesting to offer: Ron Paul is strongly antiwar. Perry would like to give the children of illegal immigrants the right to go to university. Bachmann seemed to have the goods on Perry (a genuine scandal involving the pharmaceutical company Merck, a former staffer who was a lobbyist for Merck, and Texasʼs executive mandate for a controversial vaccine made by Merck). Cain would like a simplified tax system with no loop holes and a rule that says no congressional bill can be longer than three pages. Huntsman has a more progressive though also flattened tax system (you can see him, with nervous dismay, counting his island days). He is also trying to keep science in the platform and religion out and would (like Perry) work to wind things down in Afghanistan. Gingrich is working on his wittiness, something of which heʼs always been proud (Bachmann brings her loud rough laugh to it all, so he may be flirting with her). Romney is tall. Romney also arranges his face warmly when others are speaking—unlike Perry who often looks concussed, though Perry’s beauty, a cross between Burt Reynolds and Hillary Swank, springs to life when the suggestion that he can be bought for only five thousand dollars comes up. He has a price, he seems to suggest, but itʼs much higher than that. And—as reports roll in—so it is.
Facing a similar crisis in 2008, then-Treasury Secretary Henry Paulson talked about the need for a bazooka, a weapon large enough to scare markets into submission. Europe doesn’t have one. Even Germany — which has a debt-to-GDP ratio of 83 percent — can’t credibly bail out Italy and Spain. Together they need to roll over 600 billion euros of debt before the end of next year. Who has that kind of money*
Today, $10 trillion of foreign exchange reserves are sitting around across the globe. That is the only pile of money large enough from which a bazooka could be fashioned. The International Monetary Fund could go to the leading holders of such reserves — China, Japan, Brazil, Saudi Arabia — and ask for a $750 billion line of credit. The IMF would then extend that credit to Italy and Spain but insist on closely monitoring economic reforms, granting funds only as restructuring occurs. That credit line would more than cover the borrowing costs of both countries for two years. The IMF terms would ensure that Italy and Spain remained under pressure to reform and set up conditions for growth.Would (will?) China be an enlightened, responsible stakeholder? I'd think human rights, democracy, and civil rights will be low on their list of priorities as well as environmental and labor regulations, such as they are. Still the Chinese Communist Party enacted a sizable fiscal stimulus after the financial crisis of 2008. This demonstrated they have much more wisdom and macroeconomic know-how than the American Republican Party.
What’s in it for the Chinese, who would have to devote at least half the funds and who have already politely demurred when approached by the Italians? China invests its foreign exchange reserves looking for liquidity, security and decent returns. It isn’t trying to save the world. Premier Wen Jiabao made slightly encouraging noises this week, hinting that he would increase bond purchases and asking in return for greater market access to Europe. That’s classic Chinese diplomacy: cautious, incremental and narrowly focused on its interests.
The time has come for China to adopt a broader concept of its interests and become a “responsible stakeholder” in the global system. The European crisis will quickly morph into a global one, possibly a second global recession. And a second recession would be worse because governments no longer have any monetary or fiscal tools. China would lose greatly in such a scenario because its consumers in Europe and America would stop spending.
Of course, China would have to get something in return for its generosity. This could be the spur to giving China a much larger say at the IMF. In fact, it might be necessary to make clear that Christine Lagarde would be the last non-Chinese head of the organization.In a world awash in debt, power shifts to creditors. After World War I, European nations were battered by debts, and Germany was battered by reparation payments. The only country that could provide credit was the United States. For America, providing desperately needed cash to Europe was its entry into the councils of power, a process that ultimately brought a powerful new player inside the global tent. Today’s crisis is China’s opportunity to become a "responsible stakeholder."
The E.C.B. can stop this crisis in a minute if they want to,” said Guntram B. Wolff, deputy director of Bruegel, a research organization in Brussels. The bank, he said, could simply overwhelm bond markets by buying huge quantities of debt from Greece, which is effectively insolvent, as well as other countries that have come under attack, like Italy. End of crisis.
Some economists have argued that the bank could buy more than $1 trillion in sovereign debt if it needed to.*
But such an action would provoke howls from Germany and countries like Finland,** where the bank is seen as having gone rogue because of its relatively modest purchases of debt from a list of countries that also includes Spain, Portugal and Ireland. In those beleaguered countries, meanwhile, the bank is regarded as insufficiently supportive.------------------------------
He sifts through all the slowdowns — defined as two successive quarters of growth not exceeding 1 per cent — recorded since 1950. There are 13 in total – and, as the charts above show, not all of them presaged a double-dip recession. Partly because, of the 13, only four occurred in a “young” expansionary period. That is, within eight quarters of a recession ending.
And of those four, only two resulted in a double-dip recession. One was 1959, in which a recession commenced three quarters after the the slowdown, and 1981, when a recession immediately followed a slowdown.Andreopoulos writes:
But what were the catalysts?
…both because of monetary tightening: It turns out that both these recessions were precipitated by monetary policy. The 1981 recession was – deliberately – induced by the Fed in order to squeeze inflation out of the system (the recession essentially marked the beginning of the ‘Volcker disinflation’). And even the 1960/61 recession is thought by economic historians to have been caused by “the drastic tightening of money that occurred in 1959/60".
Conclusion: double-dips have only occurred upon Fed tightening: Whenever in post-war US history expansions have died young, the catalyst has been monetary policy tightening. Put differently: double-dips have occurred only when induced by the Fed.A commenter writes:
RTRS GREEK GOVERNMENT TO BAN THE EXPORT OF TARAMASALATA AND TZATZIKIOn fiscal policy, Andreopoulos writes:
RTRS LAST DITCH ATTEMPT TO STAVE OFF DOUBLE DIP RECESSION
The outcome here is binary, with adoption of the president’s proposals bringing about 0.8% of GDP of net new stimulus; a rejection by Congress would mean expiration of these measures and bring about an automatic fiscal tightening of 1.2% of GDP. And of course the eurozone debt crisis – a fiscal problem – could yet prove a catalyst for a potentially vulnerable US economy.
America has two national budgets, one official, one unofficial. The official budget is public record and hotly debated: Money comes in as taxes and goes out as jet fighters, DEA agents, wheat subsidies and Medicare, plus pensions and bennies for that great untamed socialist menace called a unionized public-sector workforce that Republicans are always complaining about. According to popular legend, we're broke and in so much debt that 40 years from now our granddaughters will still be hooking on weekends to pay the medical bills of this year's retirees from the IRS, the SEC and the Department of Energy.
Why Isn't Wall Street in Jail?
Most Americans know about that budget. What they don't know is that there is another budget of roughly equal heft, traditionally maintained in complete secrecy. After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds. And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the "official" budget in size — a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.
Now, following an act of Congress that has forced the Fed to open its books from the bailout era, this unofficial budget is for the first time becoming at least partially a matter of public record. Staffers in the Senate and the House, whose queries about Fed spending have been rebuffed for nearly a century, are now poring over 21,000 transactions and discovering a host of outrages and lunacies in the "other" budget. It is as though someone sat down and made a list of every individual on earth who actually did not need emergency financial assistance from the United States government, and then handed them the keys to the public treasure. The Fed sent billions in bailout aid to banks in places like Mexico, Bahrain and Bavaria, billions more to a spate of Japanese car companies, more than $2 trillion in loans each to Citigroup and Morgan Stanley, and billions more to a string of lesser millionaires and billionaires with Cayman Islands addresses. "Our jaws are literally dropping as we're reading this," says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont. "Every one of these transactions is outrageous."
Wall Street's Big Win
But if you want to get a true sense of what the "shadow budget" is all about, all you have to do is look closely at the taxpayer money handed over to a single company that goes by a seemingly innocuous name: Waterfall TALF Opportunity. At first glance, Waterfall's haul doesn't seem all that huge — just nine loans totaling some $220 million, made through a Fed bailout program. That doesn't seem like a whole lot, considering that Goldman Sachs alone received roughly $800 billion in loans from the Fed. But upon closer inspection, Waterfall TALF Opportunity boasts a couple of interesting names among its chief investors: Christy Mack and Susan Karches.Now I get why the Fed is bailing out foreign banks - as it just did in Europe today and yesterday and just as Hank Pauslon did with TARP. It's forestalling a global panic and US financial institutions are intertwined with these banks. It's globalization. I get it, but it's still weird to think about and truly comprehend as David Brooks might say.
Banking crises are, after all, a theme running through much of modern economic history. Nobody should be able to call himself a macroeconomist unless he has a working knowledge of what went down in 1931, both in the United States and in Europe. And you don’t have to go back to the 1930s, either, as long as you’re willing to step outside the United States and core Europe. With the Scandinavian crises of the early 1990s, the Asian crises of the late 1990s, Argentina, and so on, there should have been ample reason to at least consider whether it might happen here
Nor are crises a case of something that can happen in practice, but not in theory. Diamond-Dybvig [1983] isn’t a perfect model of what we’ve just gone through, but it is a canonical model showing how bank runs can happen — and it's hardly obscure. Nobody should be looking at the stability of a financial system without thinking to himself, “Hmm. Is there a way this system could experience a Diamond-Dybvig-type crisis?”
It's true that Diamond-Dybvig tells us that deposit insurance ends the possibility of bad equilibria in which everyone tries to pull out of the banks, creating a self-fulfilling prophecy of financial collapse. And I’m afraid that the way many economists read the paper was as an essay in economic history, a description of what could go wrong in the bad old days. But this was a crude mistake. In fact, a proper reading of the D-D paper, far from making the profession comfortable about the stability of our system, should have raised major doubts.=
For the right question to ask after reading Diamond-Dybvig is, what constitutes a “bank” from the point of view of this model? And the answer is that it doesn’t have to be a big marble building with a row of tellers — that is, a depositor institution. As far as the model is concerned, a bank is any institution that borrows short-term and uses the funds to make longer-term, illiquid investments. And that, right there, should have led to the next question: what institutions do we have that fit this definition, but are not depository institutions, and are not covered by either deposit insurance or the regulations designed to limit the moral hazard that insurance creates?
If economists had followed that line of thought, they would have been led right to the risk posed by the rise of shadow banking. They would have seen that money-market funds and repos were functionally just like deposits, but without the safeguards. They would, in short, have realized that a 1931-type banking crisis was very much a real possibility in 21st-century America. But they didn’t.
Q.You were also on “Star Trek: The Next Generation.” Do you still get cornered by Trekkies?
A. Yeah a little bit, all these years later.
Q. What’s that like?
A. It’s… It’s… You know… That’s nice [laughs]. It’s like talking about a different person — I was such a kid when I did that show.
Q. You had a stint on “Battlestar Galactica,” too. Are you actively seeking obsessive fan bases?
A. No, no. The fear with those massive, rabid fan bases is that they can also turn on you quite quickly.
Q. This is your first Emmy nomination — are you going to go to the ceremony?
A. Nah. [laughs] Of course I’m going! What’s so great about these things and the awards season is it feels like one big long reunion. You run into everyone you’ve worked over the past two-and-a-half decades. It’s great.
Q. Are there any television creators that you particularly admire right now?
A. Alan Ball [“True Blood,” “Six Feet Under”] is definitely one; I would jump to work with him again. Ron Moore, from “Battlestar,” I think is really kind of a genius in the way he wove that story. I hear Tom Fontana [“Oz,” “Homicide: Life on the Street”] is coming back with a series and I’m so happy, because I’ve missed his voice on television. Vince Gilligan [“Breaking Bad”] I really admire. There are so many.
Q. What about other actors?
A. One is Melissa Leo and one is Mary McDonnell. Edie Falco is another one. They’re just extraordinary actors and they’ve always stood by their work. They work on amazing projects and they’ve never lost their integrity throughout their careers.
Q.What do you watch on TV?
A.I’ve been watching “Game of Thrones,” and I can’t wait for “Bored to Death” to come back, it’s one of my faves. I’m not a huge fan of reality television but I just found a show that I think is really important for America called “Downsized.” It’s just about a normal American family and their kids aren’t drunks, and they’re not all going out to nightclubs. It’s just about a family trying to get through this painful and awkward time we’re in. I couldn’t believe that something this honest was around when everyone’s eyes are pinned to “The Jersey Shore.”
Q.“Important” isn’t a word that is often applied to reality shows.
A. Yes, most of them are only important in that they help us realize how far we’ve fallen.
Every time I listen to Gov. Rick Perry of Texas and Representative Michele Bachmann of Minnesota talk about how climate change is some fraud perpetrated by scientists trying to gin up money for research, I’m always reminded of one of my favorite movie lines that Jack Nicholson delivers to his needy neighbor who knocks on his door in the film "As Good As It Gets." "Where do they teach you to talk like this?" asks Nicholson. "Sell crazy someplace else. We’re all stocked up here."
Thanks Mr. Perry and Mrs. Bachmann, but we really are all stocked up on crazy right now...(via Dean Baker)
The old Keynesian approach has a major presence in the blogosphere but much less influence in current academic macroeconomics. Whether Econ 101 sides with the Old Keynesians I am not sure (it depends who teaches the class), but Econ 2011 in many cases does not.=
There are enough AD-denialist arguments running around that the new and old Keynesian perspectives can forge an alliance on some major issues. But as the downturn continues, this intellectual alliance will grow increasingly fragile, mostly over the question of whether long-run or short-run models are relevant.I am sort of out of my depth, but it appears the "old Keynesians" constitutes the DeLong-Krugman-Thoma axis and the "new Keynesians" are Cowen and his ilk.
Not long ago I tweeted this:
Confused by the Right on macro, you’re a New Old Keynesian; confused by the Left, you’re an Old New Keynesian.I also see old Keynesians as believing that the IS-LM framework follows directly from the quantity theory of money, while new Keynesians are not committed to such a view and may even oppose it. I may write a post devoted to this topic.
I haven't carefully documented it, but from my memory the "old Keynesians" have proven to be more correct than the "new Keynesians" starting with the housing bubble and through Lehman, the government's response (via the Fed and fiscal stimulus) and the weak recovery.I have a suggestion for the commenter above, and in fact for most observers of the absurd stuff being written by the free market ideologues of the economics profession. Ignore the ideologues and take a look at the perspective of the economists who make their forecasts in the service of actually making money, i.el[sic], the economists of the asset management industry and of Wall Street. I assure you that for the most part they don't pay any attention to the rantings of guys like Barro, Cochrane, Mulligan and the rest of the University of Chicago gang. Hatzius of Goldman Sachs, Zandi of Moody's analytics, Harless of Atlantic Asset management analyze the economy from the perspective of what works, because they have to, it is not an intellectual hobby for them, they and their bosses are all trying to make money. And lo and behold what you will find is that their analysis has a lot more in common with Krugman, Delong, et.al., than it does the guys listed above. Why, because their stuff needs to work. As Barry Ritholtz points out all the time, successful investing requires fact-based analysis. How do I know? Because I am the retired Chief Investment Officer of a firm that ran and still runs well over $100 billion and I assure you there is no other way to be successful. I hope Barro has been trading on his beliefs, because it is certain that I now have some of his money safely locked away in my personal portfolio.
Fed officials will consider several options when the central bank’s policy-making committee meets for two days next week. The leading contender is a plan to shift the composition of the Fed’s $2.6 trillion investment portfolio, selling short-term Treasury securities and using the money to buy longer-term securities.via quasi-monetarist Scott Sumner, a National Review piece advocating that the Fed target nominal GDP.
If it works, the shift should modestly cut credit costs for businesses and consumers. Macroeconomic Advisers estimated that the Fed could raise gross domestic product by about 0.4 percentage points over two years, increasing jobs by about 350,000 over the same period.
An impact of that magnitude would be roughly the same as the Fed achieved through its recently-completed purchase of $600 billion in Treasury securities, popularly known as QE2.
Under the new plan, the Fed would be absorbing more risk for each dollar it invests; 10-year Treasury securities are riskier than one-year securities because the investor makes a longer commitment. By shifting its portfolio, the Fed would seek to drive investors into even riskier assets, reducing borrowing costs.
Charles Evans, president of the Federal Reserve Bank of Chicago, said in a speech in London last week that the central bank had an obligation to ratchet up its efforts. With an unemployment rate of 9 percent, he said, Fed officials should be "acting as if their hair was on fire."
But Richard Fisher, president of the Federal Reserve Bank of Dallas, said Monday that the Fed already had "filled the gas tanks of the economy," that he doubted its ability to do more, and that the responsibility now fell on the rest of the government.
Finally, a nominal-income target not only has economic advantages but is also politically feasible. Replacing the Fed’s dual mandate of promoting low inflation and full employment with an inflation target would be met with strong resistance by left-leaning politicians. However, a nominal-income target would implicitly respond to fluctuations in both prices and real output (and therefore unemployment) in the short run while maintaining a commitment to low and stable inflation over the long run.
Congress has the power to change the Federal Reserve’s mandate. It’s time for conservative politicians to be bold and serious about monetary policy and not simply use rhetoric to capitalize on a popular view of the conservative base. Republican presidential candidates would do well to seize the opportunity of the public’s dissatisfaction with the Federal Reserve and make it part of their campaigns to push for significant and meaningful reform of monetary policy. It is time that the Fed had an explicit target for policy, preferably one for nominal income.Talk of replacing the Fed's dual mandate makes me nervous. A call for Republican politicians to focus on the Fed makes me nervous. Granted, if the Fed had an explicit target it could be held accountable for not meeting that target and the target itself could be democratically debated.
I see that Ponnuru finally got his guru a guest spot on NRO. His arguments still suffer from the same flaw when he delivers them himself as when Ramesh repeats them: An increased demand for money balances is not a demand for a certain number of pieces of paper with presidents on them; it's a decision about how to allocate one's (limited) wealth. If this shift is economy-wide, then the economy *should* shrink temporarily, until there are enough positive-net-present-value investment opportunities that people choose again to deploy their cash reserves.and
Most irritating is the dishonesty of it. Hendrickson doesn't come out and say, "We should manipulate people into spending or investing now, against their better judgment, by scaring them with the threat of future inflation". Instead, he talks about a "deviation between actual and desired money balances" as though it's some sort of distubance in the Force that we need to correct. Monetarists like Hendrickson are manipulators just like Keynesians; the only difference is that they want to use monetary instead of fiscal policy.It sounds like the Treasury view and the view held by Treasury Secretary Andrew W. Mellon who supposedly advised Herbert Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."
So what should the Fed do? Assuming we have to have a Fed, it should increase the money supply mechanically, with zero discretion, to match long-term average growth rates determined in advance according to a set formula, regardless of short-term fluctuations.
This is what I heard from an Italian policymaker: "We gave up the old safety valves of inflation and devaluation in return for lower interest rates, but now we do not even have the low interest rates."and
How would deflation work for a small open economy?
For small open economies such as Latvia and Ireland, regaining competitiveness and growth through deflation might work. For a big country such as Italy, it is too painful to be credible.
Reporter: What is your answer to German people and economists who want the return of the DM?(via Krugman)
Trichet: You want answers?
Reporter: I think the Germans are entitled.
Trichet: You want answers? (SHOUTING)
Reporter: Germans want the truth! (SHOUTING)
Trichet: *You can’t handle the truth!* (SHOUTING)
[pauses]…
Trichet: Son, we live in a world that has prices, and those prices have to be guarded by men with bonds. Who’s gonna do it? You? You, Sylvia Wadhwa? I have a greater responsibility than you could possibly fathom. You weep for Lehman Brothers, and you curse Ben Bernanke. You have that luxury. You have the luxury of not knowing what I know. That Lehman’s collapse, while tragic, probably saved banks. And my existence, while grotesque and incomprehensible to you, saves banks. You don’t want the truth because deep down in places you don’t talk about at parties, you want me on that committee, you need me on that committee. We use words like rate, target, expectation. We use these words as the backbone of a life spent defending something. You use them as a profitline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the blanket of price stability that I provide, and then questions the manner in which I provide it. I would rather you just said congratulations and went on your way. Otherwise I suggest you pick up a Greek bond, and suffer a haircut. Either way, I don’t give a damn what you think you are entitled to!
If we are to avoid the mistakes of the past, it is important to have an accurate assessment of what those past mistakes were. The severity of the Recession of 1937-38 was not due to contractionary fiscal policy or higher reserve requirements. By contrast, the policy tightening associated with gold sterilisation was not modest – it did not simply reduce the growth of the monetary base by a few percentage points, it stopped its growth altogether. While the Federal Reserve is often blamed for its poor policy choices during the Great Depression, the Treasury Department was responsible for this particular policy error.
The recession of 1937-38 occurred long ago, but it does have policy lessons for today. It suggests that, in a weak recovery, a pre-emptive monetary strike against inflation (which was very low at the time, as it is today) is capable of producing a devastating recession.(via Mark Thoma)
A few years ago, Kenneth Rogoff and Carmen M. Reinhart wrote the definitive guide to the current economic downturn, a book called “This Time Is Different.” Rogoff and Reinhart studied data from eight centuries of financial crises. They found that banking-crisis recessions are worse than normal recessions. They last longer.When asked about Reinhardt and Rogoff's study at a press conference, Bernanke deadpanned that "policy makers stuck in a financial recession" haven't performed well in the past. They were too complacent or made mistakes in other words. In a recent speech, Chicago Fed President Charlie Evans said the same thing.
In these recessions, it took an average of six years for housing prices to stop their decline. Unemployment rates were high or rising for an average of five years. Government debt increased by an average of more than 86 percent.
The general lesson I take from this history is that policy makers stuck in a financial recession should probably think about the long term. You’re going to be stuck with a lousy economy anyway.
