How to Target Nominal GDP by Yglesias

The Fed Is Laying the Groundwork for Further Easing by Mark Thoma

The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around.

However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again.

In fact, the Fed is beginning to lay the groundwork for this. As the WSJ reports:

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

And Federal Reserve governor Dan Tarullo in his speech on Thursday:

I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009…

Finally, in a meeting with members of the Senate on Thursday, Ben Bernanke stressed the need for more action to help housing markets (though he didn’t mention it specifically, further purchases of mortgage backed securities would provide more help for to these markets).

It’s not a done deal yet. Recent inflation data, which appears to be elevated by temporary factors, has some members of the Fed wary of doing anything that might further increase the risk of inflation. In addition, fears of a double-dip could diminish and bring inflation expectations back up without Fed action. But it does appear the Fed is trying to move in this direction.

Price Pressures?... I don't see it. by Jared Bernstein

The New Libya’s First Mistake: Muammar Qaddafi should not have been killed, and his surviving son should be captured. by Hitchens

Lots of stuff on OWS being written and published.

Michael Hardt and Antonio Negri in Foreign Affairs:

The political face of the Occupy Wall Street protests comes into view when we situate it alongside the other "encampments" of the past year. Together, they form an emerging cycle of struggles. In many cases, the lines of influence are explicit. Occupy Wall Street takes inspiration from the encampments of central squares in Spain, which began on May 15 and followed the occupation of Cairo's Tahrir Square earlier last spring. To this succession of demonstrations, one should add a series of parallel events, such as the extended protests at the Wisconsin statehouse, the occupation of Syntagma Square in Athens, and the Israeli tent encampments for economic justice. The context of these various protests are very different, of course, and they are not simply iterations of what happened elsewhere. Rather each of these movements has managed to translate a few common elements into their own situation.

In Tahrir Square, the political nature of the encampment and the fact that the protesters could not be represented in any sense by the current regime was obvious. The demand that "Mubarak must go" proved powerful enough to encompass all other issues. In the subsequent encampments of Madrid's Puerta del Sol and Barcelona's Plaça Catalunya, the critique of political representation was more complex. The Spanish protests brought together a wide array of social and economic complaints -- regarding debt, housing, and education, among others -- but their "indignation," which the Spanish press early on identified as their defining affect, was clearly directed at a political system incapable of addressing these issues. Against the pretense of democracy offered by the current representational system, the protesters posed as one of their central slogans, "Democracia real ya," or "Real democracy now."

Keith Gessen

"Dornish law does not apply." Tyrion had been so ensnared in his own troubles that he'd never stopped to consider the succession. "My father will crown Tommen, count on that."

"He may indeed crown Tommen, here in King's Landing. Which is not to say that my brother may not crown Myrcella, down in Sunspear. Will your father make war on your niece on behalf of your nephew? Will your sister?" [Oberyn] gave a shrug. "Perhaps I should marry Queen Cersei after all, on the condition that she support her daughter over her son. Do you think she would?"

Never, Tyrion wanted to say, but the word caught in his throat.... "I don't know how my sister would choose, between Tommen and Myrcella," he admitted. "It makes no matter. My father will never give her that choice."

"Your father," said Prince Oberyn, "may not live forever."

Something about the way he said it made the hairs on the back of Tyrion's neck bristle. Suddenly he was mindful of Elia again, and all that Oberyn had said as they crossed the field of ash. He wants the head that spoke the words, not just the hand that swung the sword. "It is not wise to speak such treasons in the Red Keep, my prince. The little birds are listening."

"Let them. Is it treason to say a man is mortal? Valar morghulis was how they said it in Valyria of old. All men must die. And the Doom came and proved it true."

George R.R. Martin -- A Storm of Swords

Atlanta Fed President Lockhart and others are saying that the incoming economic data is better than expected and yet one keeps running across stories like "Warning by States as Tax Revenues Fail to Rebound".

what if we paid off the debt? secret government report

Expectations and the Economy by Dennis Lockhart (Atlanta Fed President)

(via Mark Thoma)

CNBS's Steve Liesman tweets "Boston Fed's Rosengren tells #Cnbc Fed should target 7% unemployment, 2.5-3% inflation."

(via David W4ssel, via DeLong twitterstorm.)

Rosengren is echoing Evans, who Liesman interviewed on CNBC. Maybe Rosengren is the mysterious second member favoring stronger action in this article.

Lockhart admits the Fed's forecasts have been way off (maybe they should take out some insurance given the economy's susceptiblity to shocks?). He says recent incoming data however is better than expected so a double-dip is unlikely. Hopefully the better-than-expected data doesn't forestall action.

He closes with:

So, in closing, I would offer the following thought with all appropriate tentativeness and caveats. If the European situation is stabilized and put on a believable resolution path, and if the supercommittee delivers a believable fiscal plan accepted by Congress, these two developments would go a long way toward clearing the air and energizing economic activity.

???

Maybe Lockhart is one of those sarcastic types with a weird sense of humor?

Mike Konczal:

Shorter Richard Fisher, using the phrase Chernyshevsky is reputed to have come up with: “the worse the better.”  The worse it gets for people, the better the opportunities for our ideology to be put into action.  I never thought I’d have to go digging into the immediate influences of Vladimir Ilyich Lenin to get a handle on how “independent” monetary policy works in the 21st century, but here we are.

(via DeLong twitterstorm)

Caleb Crain plugs Henwood's newsletter

Valar morghulis.

Qaddafi Is Dead, Libyan Officials Say

Targeting Nominal GDP Level

Yglesias links to Krugman who links to David Beckworth who links to Joe Weinsenthal's post "The Hottest Idea In Monetary Policy:"

Over the weekend, Goldman came out with a report calling on the Fed to embrace Nominal GDP targeting: In other words, set as a goal for the economy that nominal GDP that we saw back in 2007, and then produce enough inflation so that we got there.

Now Bernanke is out with a new speech about monetary policy in the post-Great Recession era, and though he doesn't say that much substantive, he does talk more about trying to more clearly express monetary policy goals.

According to PIMCO's Bill Gross, that's code for... targeting Nominal GDP.  Meanwhile, Chicago Fed President Charles Evans has been making similar comments, about weighting the Fed's mandate much more towards the full employment/growth end of the spectrum, even if it means high inflation.

All of which means you should really be reading the work of Bentley Economist Scott Sumner, who has been writing forever about the benefits of Nominal GDP targeting, and who is sure to be the hottest economist in the world, as this takes off.

Caveats

Krugman blogs

... As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.
...
I still believe that the chances of success will be a lot larger if we have expansionary fiscal policy too; but by all means let’s try whatever we can.

DeLong blogs

If you are--as we are right now--in a liquidity trap, with extremely interest-elastic money demand, then expansionary monetary policy that involved the Federal Reserve buying financial assets for cash:

1. will have next to no effect on the short-term safe nominal interest rate--it's already zero.
2. will decrease the long-term safe nominal interest rate to the extent that your open-market operations today change people's expectations of what your target for the short-term safe nominal interest rate in the future.
3. will decrease the long-term safe real interest rate to the extent that it decreases the short-term nominal interest rate and changes expectations today of what inflation will be in the future.
4. will decrease the long-term risky real interest rate to the extent that it decreases the long-term safe real interest rate and to the extent that the assets purchased for cash by the Federal Reserve free up the risk-bearing capacity of private investors and lead to a reduction in risk spreads.
5. will increase spending to the extent that it decreases the long-term risky real interest rate and to the extent that private spending responds positively to decreases in the long-term risky real interest rate.

Lots of steps here, some of which may well be weak.

...
To try to target nominal GDP using either only monetary policy or only fiscal policy seems hazardous. To coordinate--monetary and fiscal expansion, money printing-financed purchase of useful things--seems to be the winner.

Back on Monday I linked to a blog post by Yglesias on the film Ides of March and George Clooney's character Mike Morris. Now I've seen the movie - and liked it by the way - so I can comment.

Yglesias agrees with Dana Goldstein who blogged "There’s no reason, as the movie seems to suggest in its final scene, to feel that voting or working for him would be futile, or that either act lacks basic integrity."

I often agree with them, but in this instance I think Morris (and Clinton and Edwards) showed bad judgement because no matter the morality of the act of infidelity, it wouldn't play well with the public and hurt their cause. It demonstrated bad judgement. Interestingly candidate Morris has a sound bite about having our "heads in the sand" regarding oil and Iraq. That's the title of Yglesias's book. Maybe the screenwriter borrowed it or it was in the original play.

Anyway it was a thought-provoking movie with great acting and I highly recommend it.

2-day General Strike in Greece

Richard Fisher Wants To Make You Poor by Yglesias

Fisher's just echoing what MMTer Dan Kervick has been saying. Interestingly, he hasn't commented on the blog post.

broadcast of Marjane Satrapi's film Persepolis roils Tunisia before election

The episode began when a relatively small group of ultraconservative Islamists attacked the television station that had broadcast the 2007 film, about a Muslim girl growing up in post-revolutionary Iran, because of a scene in which she rails at God. He is depicted as she imagines him, violating an Islamic injunction against personifying him.

But it soon became clear that ultraconservatives were hardly the only ones offended. The broadcast has touched a nerve among a far broader section of Tunisia’s Muslims, even in the coastal regions where many pride themselves on their cosmopolitanism. “It is true we do not all fast, and we do not all pray,” said Saleh Mohamed Khoudi, 53, a director of technology at a private company. “But this is too much.”

Semiha Sehli, 33, who works in finance, said she wanted nothing to do with the Islamists and did not trust Ennahda. But even she was shocked when she saw the offending scene on Facebook. Sure, she acknowledged, all little children imagine a personified God. “You can imagine it, but you shouldn’t put it in a movie,” she said.

Manohla Dargis and A.O. Scott discuss Pauline Kael

Karl Smith Needs to Avoid the Siren Embrace of Latter-Day Physiocrats by DeLong

Mental health break.

I liked how blogger Andrew Sullivan would take a mental health break every other day way back when. I stopped reading him when he deleted his comment system.

12 new episodes of “Beavis and Butt-Head” will be shown on MTV starting Oct. 27.

...The reception is bound to be quieter than it was in the ’90s: back then the two became controversial figures, at the vanguard of televised crudeness, but they’ve since been far surpassed in the onscreen moron category. And the world that Beavis and Butt-Head have returned to, with its blogs and its Twitter feeds and its customer reviews, is bloated with dumb commentary.

But Beavis and Butt-Head’s comments are dumber and funnier, which has less to do with the message than with the perversely upbeat messengers. For everything in their world that “sucks” (wedding music, exercise, trees), they find something else “cool” (a sadistic bully, a gushing nosebleed, head lice). “It doesn’t get any better than this” is one of Butt-Head’s signature lines. Their topsy-turvy outlook, often very funny in itself, sets up the comedy of the video commentaries, in which Beavis and Butt-Head, who admire all sorts of stupid stuff, nonetheless find certain stupid stuff to be inauthentically stupid, and therefore beneath them.

Massachusetts Tries to Reign In Its Health Cost

The main issues with the long-term federal deficit are health care costs and a lack of economic growth. From the article:

BOSTON — On the Republican campaign trail, the health care debate has focused on the mandatory coverage that Mitt Romney signed into law as governor in 2006. But back in Massachusetts the conversation has moved on, and lawmakers are now confronting the problem that Mr. Romney left unaddressed: the state’s spiraling health care costs.

After three years of study, the state’s legislative leaders appear close to producing bills that would make Massachusetts the first state — again — to radically revamp the way doctors, hospitals and other health providers are paid.

Although important details remain to be negotiated, the legislative leaders and Gov. Deval Patrick, all Democrats, are working toward a plan that would encourage flat “global payments” to networks of providers for keeping patients well, replacing the fee-for-service system that creates incentives for excessive care by paying for each visit and procedure.
...
“We have shown the nation how to extend care to everybody,” Mr. Patrick said in an interview, “and we’ll be the place to crack the code on costs.”

Those who led the 2006 effort to expand coverage readily acknowledge that they deferred the more daunting task of cost control for another day. It was assumed then that the politics would pit doctors, hospitals, insurers, employers and consumers against one another, and obliterate the fragile coalition behind the groundbreaking coverage law.

Predictably, the plan did little to slow the growth of health costs that already were among the highest in the nation. A state report last year found that per capita health spending in Massachusetts was 15 percent above the national average. And from 2007 to 2009, private health insurance premiums rose between 5 and 10 percent annually, according to another state study.

Yet the plan, which generated fresh attacks on Mr. Romney in a recent New Hampshire debate and a blistering Internet ad by Gov. Rick Perry of Texas, has largely succeeded in providing nearly universal coverage. Only 2 percent of residents and a fraction of 1 percent of children in Massachusetts are uninsured. The law’s popularity has given state leaders added incentive to make it financially sustainable.

Have employers in Massachusetts dropped coverage for their employees?

NYTimes article on OWS and the 99 percent movement.

There may be no common manifesto or list of goals — something that has drawn criticism from both inside and outside the movement — but there is one common thread: anger. Some have looked for jobs for months; others have lost their homes to foreclosure. Angry, they all are.
...
In Chicago, where 175 protesters were arrested over the weekend for curfew violations, a crowd outside the Federal Reserve Bank marched to the beat of improvised drums. “Education is a part of it; housing is a part of it; jobs are a part of it,” said Maryem Alyhabib, 34, who left her three children with her mother to protest for an hour and a half on Monday for the first time.

Without the symbolic power of a Wall Street, many local activists have improvised by occupying parks, street corners, always someplace with a link to the power structure they denounce. The many arrests that have taken place across the country have linked protesters in spirit.

Charles Evans of the Chicago Fed is one of the good guys...

The Fed’s Dual Mandate Responsibilities: Maintaining Credibility during a Time of Immense Economic Challenges by Charles Evans

(via Calculated Risk)

The Case for Mike Morris by Yglesias

I'm seeing the movie this week, so I won't read this until then to avoid spoilers. The movie has some of my favorite actresses and actors: George Clooney, Paul Giamatti, Ryan Gosling, Philip Seymore Hoffman, Marisa Tomei, Evan Rachel Wood and Jeffrey Wright.

Dan Kervick, pushing MMT at Yglesias's blog:

Possibly. Or they might just yawn. Even the Austrians must be wondering by now whether their pet theories of awesome and evil Fed control over the price level by virtue of quantitative policy are all wet. After all, we have had two rounds of QE already, with little impact. But who knows? Maybe a third push on the string will unleash the great inflationary gusher.

http://en.wikipedia.org/wiki/Early_1980s_recession

I also believe without QE and QE2 unemployment would be 10 or 11 percent. Obama wouldn't even have a chance of being re-elected in that case.

Interview with the director of Drive, Nicolas Winding Refn

NWR:  ...And that basically started that whole fascination with Europop, because I essentially wanted this whole Eurovision sound."

Like the song contest?

NWR: "Yeah, it was a certain kind of pop that was made in the late '70s and early '80s in Europe, that would mostly come out of Germany and Italy and so forth, a little bit of the U.K. You know, pop-ish, electronic sounds that came out of the whole Kraftwerk electronic wave of the late '70s. So when I was making the movie — because I always try to figure out what kind of music a film would be that I make — I would use that music to give me inspiration. A bit like a fetish. It would give me images because I don't do drugs any more. The electronic score was something I knew I wanted to use, and I listened to a lot of Kraftwerk when I was developing the film, and while I was shooting it. And then in [post-production], we would find these songs, and then I would have Cliff Martinez emulate the sound of it."

It's funny you mention Eurovision, because the soundtrack is very international. There are musicians from Brazil and France and Canada and the United States and yet it fits very well within the setting of Los Angeles at night and the idea of being alone in your car. Was there some idea of Los Angeles that you were trying to illustrate?

NWR: "What's interesting about L.A. is that it basically feels like a city that never left the '80s. Everything about L.A. — the architecture and the feel of the city — it just feels so '80s in all it's aspects. The lighting, the kind of golden glow aura is very '80s appeal. And a lot of the stuff came out of ideas I had while listening to music. Like the white satin scorpion jacket came out of listening to Kiss's 'I Was Made For Loving You' like 1,000 times over and over again in a car."

Back on September 14th I linked to the following cool video provided by a commenter at Crooked Timber. It's from a 1979 Italian movie Zombie 2. Note the awesome Europop music.

Henwood tweets to Yglesias:

It being the Sino-German view doesn't make it wrong. Devaluation is a lazy way out. You can't devalue your way to prosperity.

Yglesias being all nationalistic is ironic, but what I would say to Henwood is look at Japan. They weren't lazy.

Also, what did Argentina do? What should Greece do? 

Jan Hatzius And Sven Jari Stehn Of Goldman Sachs Call For NGDP Level Targeting And Monetary Stimulus by Yglesias

“NGDP level targeting” can sound very technical. But in ordinary language terms, what it means under the present circumstances is that the Fed should say “we would welcome a spurt of unemployment-reducing catch-up growth even if it means needing to tolerate a bit of inflation.” You hear a lot about the need to create more “confidence,” which is generally interpreted as a psychological notion. Be nice to businessmen and make them feel good about themselves. What matters more is expectations, and in particular the coordination of expectations. A firm statement from the central bank that they’re undertaking actions designed to spur catch-up growth and that they’re willing to tolerate a modest increase in inflation to get there alters expectations in a positive way no matter how CEOs feel about Barack Obama.

DeLong on the proposal:

They hope such a policy could lower the unemployment rate by two full percentage points--from 8.5% to 6.5%--as of mid-2013.

The whole purpose of an independent central bank is so that it can do the right thing with respect to its dual mandate, and nominal GDP level targeting plus quantitative easing now looks to be the right thing to do.

In this post I wondered why Japan didn't experience a classic overinvestment slump and recovery normally seen in the years preceding WWII.

Via Joe Wiesenthal, Richard Koo, economist for Nomura writes:

Arguing need for longer-term fiscal consolidation is irresponsible
The insistence that fiscal consolidation is necessary in the longer term is like the doctor who, faced with a patient who has just been admitted to the intensive care ward, repeatedly questions the patient about his ability to afford the treatment. This is both lacking in decency and irresponsible.

If the patient loses heart after learning the cost of the treatment, he may end up spending even longer in the hospital, leading to a larger final bill. Completely ignoring the policy duration effect of fiscal policy and constantly insisting on longer-term fiscal consolidation was what prolonged Japan’s recession.

For instance, it was because Japan’s policymakers refused to give up the medium-term fiscal consolidation target of achieving a primary fiscal balance by 2011 that the government stumbled from fiscal stimulus to fiscal retrenchment and back again and, ultimately, was unable to meet its fiscal targets even once in the last 20 years.

That is why Japan’s recession lasted as long as it did and why the nation’s debt has risen to some 200% of GDP.

1. Paul Krugman is right 2. If you think Paul Krugman is wrong, refer to #1

As DeLong and others have said. Here Krugman points out that Bill Gross has written a letter of apology to PIMCO's investors over being wrong about the end of QE2 this summer. He said interest rates in the bond market would spike, but they didn't and he lost money. As Krugman pointed out at the time, all you needed was an understanding of the IS-LM model to judge that Gross was wrong. Gross is usually good and advocated relief in the mortgage market via Fannie and Freddie to provide stimulus. But Gross wasn't alone with mistaken bet. Ever since the American Recovery and Reinvestment Act was signed into law by Obama, the Very Serious People of Washington and the media have been obsessing over the bond vigilantes and deficit-reduction.

They have been proven wrong again.

Here's Krugman calling it in real time. I remember it very well because up to that point I had some respect for Gross's no-nonsense analytical abilities.

Here's the Wonkish explanation for Krugman's disagreement with Gross.

The Internets are wonderful. Here's a good blog post from Nov. 22 2009, discussing those who warned of a bubble in Treasuries.

Role reversal

Many people on Wall Street are now warning that there’s a huge bubble in government debt, that interest rates will spike any day now; it’s a warning that clearly has the Obama administration’s ear. A good sample is this piece from Morgan Stanley, according to which “Our US economics team expects bond yields to rise to 5.5% by the end of 2010 – an increase of 220bp that outstrips the 137bp increase in the fed funds rate expected over the same horizon.”

Btw: what? Almost everyone expects unemployment in late 2010 to remain close to 10%. Why, exactly, would the Fed funds rate rise sharply?

Anyway, I was wondering: it’s my impression that the same people now warning about the alleged Treasury bubble dismissed warnings about the housing bubble. Is this true?

I think so. Morgan Stanley, September 2006:

The pessimists argue that the bursting of a putative housing bubble means that prices could decline significantly. There is some risk that prices could decelerate faster or even decline in real terms — after all, investment and speculative activity has picked up in the past five years. But the character of housing demand makes the much-feared decline in prices on a nationwide basis unlikely …

Hmmm.

Coincidently Morgan Stanley and Goldman Sachs economists are now calling on the Fed to target nominal GDP. (via DeLong)

Thoughts by one who supported Nader in 2000, supported Obama since Iowa, and is a supporter of the 99 percent movement (me) 
(or circle firing-squad time)

Henwood:

No doubt you’ve all heard and read about the huge and wonderful Occupy Wall Street satellite rally in Times Square this afternoon.

This crowd was anything but the shiftless hippies of Ann Coulter’s imagining. I bet a lot of them were Democrats, which means that the process of productive disillusionment I’d hoped for in the summer of 2008 is finally kicking into gear, after a long delay:

I could have told you by looking at the polls that Democrats are not happy with Obama. The economy is horrible.

Why is it so awful? Well there was the Reagan revolution. Thirty years of anti-government propaganda arguing that deregulation and privatization are the route to prosperity have raised inequality, spawned financial panics and slowed growth. The Republican party has become the party of tax cuts uber alles. As Cheney said, deficits don't matter.

Clinton merely reinforced that message with words ("era of big government is over") and actions (his dismantling of Glass-Steagall and his ending of welfare as we knew it.) (Clinton reinforced big government with regards to the police state and the war on drugs.) Obama's primary victory over Hillary was in part a repudiation of Clintonism. In a campaign interview with David Leonhardt, Obama argued that workers' wages haven't risen alongside productivity gains over the last 30 years and we need government to even things out. That's big government liberalism. (My disagreement with the Reagan revolution and Clinton's reinforcement of it is why I supported Nader in 2000. In hindsight, given what happened because of 9-11 and the Bush tax cuts, it was a mistake.)

Obama got the biggest stimulus he could get out of Congress in 2009, probably the biggest stimulus ever. He brought government regulation into the bloated, dysfunctional health care system, getting the most he could out of Congress, pushing the ball down the field. The Dodd-Frank Act falls short too, but moves the ball in the right direction. Again Obama probably got the most he could out of Congress.

Since I played football I recognize how important it is to move ball down the field and get the first down. You need first downs to get a touch down. Hail mary's rarely work hence the name "Hail Mary" a prayer. One can't depend on prayers. My idea of what a touchdown would mean is probably aligned with Henwood. I just don't see OWS as mostly a repudiation of Obamamania. It is in a way but Henwood for some reason just wants to bait good people like Barabara Ehreinreich and Christopher Hayes for indulging in a hope that things could change for the better and for putting a positive spin on Obama's election.

In the 2008 Democratic primary, people wanted something new. That's why Hillary lost. (Plus Obama ran a better campaign.) His message to Hillary supporters after the election was that "we're on the same team" and he brought her into the cabinet as Secretary of State, a prestigious position.  Obama's message to independents in the general was I don't care about the blue versus red cable news culture wars, I will do things that work and move the country in the right direction.

The problem is he didn't. (Well he did but not enough.) The Republicans have been unusually obstructionist but Obama had many unforced errors. As the Fed's iPad App will tell you, Obama left two seats open on the Federal Open Market Committee. Bernanke has gone above and beyond to such an extent that the Fed has drawn the glare of the great Sauron's Eye of conservative Republicans. The victorious House Republicans put Fed Abolitionist Ron Paul in charge of the committee overseeing the Federal Reserve. Viable Presidential candidate Rick Perry called Bernanke's accommodating monetary policy treasonous. Bachmann railed at the Fed for printing money. Republican leaders of Congress mailed Bernanke a threatening letter warning him not to try to help the economy recover. And so on. Still the Fed has not done enough. Their forecasts have been reliably over-optimistic. Opportunistic disinflation continues apace.

Right now the votes on the FOMC have been 7-3. Maybe 9-3 vote splits wouldn't make that much of a difference but two more rational voice echoing what Charles Evans has been saying about having their hair on fire over the jobs recession could make a difference. Narayana Kocherlakota recently gave a speech where he described the process of a regular Fed meeting:

At a typical meeting, there are two so-called go-rounds, in which every president and every governor has the opportunity to speak without interruption. The first of these is referred to as the economics go-round. It is kicked off by a presentation on current economic conditions by Federal Reserve staff economists. Then, the presidents and governors describe their individual views on current economic conditions and their respective outlooks for future economic conditions. The presidents typically start by providing information about their district’s local economic performance. We get that information from our research staffs, but also from our interactions with business and community leaders in industries and towns from across our districts.

The chairman speaks at the end of the first go-round. He briefly but thoroughly summarizes the preceding 16 perspectives. I can assure you that this is no easy task—and the chairman’s balanced and thoughtful treatment of our remarks is one of the many reasons that he commands such respect among his colleagues. He then provides his own views on the economy.

The Committee next turns to the second go-round, which focuses on policy. Again, the staff begins, with a presentation of policy options. After that, each of the 17 meeting participants has a chance to speak on what each views as the appropriate policy choice. This set of remarks is followed with a summary by the chairman, in which he lays out what he sees as the Committee’s consensus view for future policy. The voting members of the FOMC then cast their votes on this policy statement and thereby set monetary policy for the next six to seven weeks.

Two additional voices of reason could make a difference.

Green Shoots
Another big failure was that Obama smoked some Hawaiian green shoots. As early as 2009-2010 he turned to deficit-reduction. Instead of taking out insurance in case the recovery was "L" shaped instead of "V" shaped, Obama turned to happy talk and mistaken analogies about how the government needs to tighten its belt just as families do. And so the economy still sucks and people have become motivated to protest Wall Street's complicity in this state of affairs. Yes the American Jobs Act would help, and I'm not surprised as an Obama supporter that Obama proposed it, but the Senate is blocking it. They might get the payroll tax cuts through, that's something but it may not be enough to help Obama get re-elected and certainly not enough to bring down the unemployment rate much.

As an Obama supporter I was very disappointed the way Obama got rolled during the debt-ceiling clown show. The Republican establishment wanted to take Obama's regressive deal even it meant raising taxes. They saw it for what it was. The Tea Party stopped it. (Maybe it was partly a re-election ploy by the White House to demonstrate to independents how looney the Republican Party has become. Even if that's true, the spectacle demoralized Democrats.)

As an Obama supporter I'm deeply worried about another possible scenario being true. The Obama administration cares about re-election uber alles. So much so that it's plausible to me that the Obama administration brought Romneycare to the Federal level in part to alienate their likely opponent in the re-election contest from his conservative base. Early on, Obama said he wanted to win re-election because he said he didn't want to have spent all that time and energy fixing the economy only to hand it over to Romney so he could take credit.

According to this graph Obama won the electoral college and the Presidency by winning states where voters have high levels of eduction, such as purple states like Virginia and North Carolina. They will be focusing more on these states than redish swing states like Ohio in order to win. The unemployment rate of people with a four-year degree is only 4.3 percent. Maybe this is why they didn't take out any insurance against a "L"-shaped recovery even though the last two recoveries were L-shaped with weak job growth and as Reinhart-Rogoff showed in their book "This Time It's Different" recoveries usually take longer after a financial crisis. They thought the stimulus would cushion the blow and that the private sector would pick up the growth baton and the economy would reach escape velocity. Maybe they thought the Fed would do more but according to Ron Suskind's book they didn't give the Federal Reserve much thought except to mistakenly believe their continually overly-optimistic forecasts. Suskind's portrayal certainly rings true given that there are two vacant seats on the FOMC. What would people say if Obama was leaving two seats open on the U.S. Supreme Court?

If Obama does win in 2012 - and the Republicans certainly are not enchanted with Romney: first Bachmann, now Perry, now Cain - I will grind my teeth constantly over glib news analyses about how the unemployment rate doesn't matter. I remember Yglesias linking to an obnoxious blog post by a poli-sci professor arguing this very exact thing. If Obama isn't re-elected maybe the next Democrat elected in the midst of the next lesser depression would create a 21st century WPA modeled on the National Science Foundation and how it goes about doling out grants. This would provide much bang for the buck in stimulus and certainly help said Democrat get re-elected. (That is if the Senate didn't block its creation.) If Obama isn't re-elected though, the Republicans may severely traumatize the country. It's possible. Although the talk is now that the Senate and House will flip parties.

You would think Henwood would recognize the fact that the 99 percent movement would want to appeal to Obama supporters - when asked, Obama himself said the protesters were legitimately frustrated with a  financial system that is responsible for the mess we're in. They're protesting on Wall Street not in front of the White House.

Does Henwood believe Elizabeth Warren's candidacy for the US Senate has some potential for "productive disillusionment"? According to Ron Suskind's book Confidence Men, Obama was impressed with her early on. The Consumer Finance Protection Agency - created by Frank-Dodd - could be good if the Republicans don't gut it.

In Protest, the Power of Place by Michael Kimmelman

We tend to underestimate the political power of physical places. Then Tahrir Square comes along. Now it’s Zuccotti Park, until four weeks ago an utterly obscure city-block-size downtown plaza with a few trees and concrete benches, around the corner from ground zero and two blocks north of Wall Street on Broadway. A few hundred people with ponchos and sleeping bags have put it on the map.

Great-grandmother's slump

Krugman in 2002:

The key point is that this isn't your father's recession -- it's your grandfather's recession. That is, it isn't your standard postwar recession, engineered by the Federal Reserve to fight inflation, and easily reversed when the Fed loosens the reins. It's a classic overinvestment slump, of a kind that was normal before World War II. And such slumps have always been hard to fight simply by cutting interest rates.

Now there's no question that the Fed's rapid rate reductions last year helped avert a much bigger slump. But a hard look at monetary policy suggests that the Fed hasn't done enough -- and possibly can't do enough. Although the Fed funds rate, the usual measure of monetary policy, is at its lowest level in generations, the real Fed funds rate -- the interest rate minus the inflation rate, which is what matters for investment decisions -- is actually about the same as it was at the bottom of the last recession, in the early 1990's, because inflation is considerably lower.

The link is found in this blog post from February 2009:

So, how does this all end?

I’ve been saying for a long time that this isn’t your father’s recession — it’s your grandfather’s recession. (I actually used the phrase about the last recession, too.) That is, it isn’t something like the 1981-82 recession, which was brought on by the Fed to control inflation, and ended when the Fed decided that we had suffered enough. Instead, it’s like the 1929-33 recession — or the recession of 1873-1879 — a slump brought on by the collapse of an investment and credit bubble. And monetary policy, at least in its conventional form, has already reached its limits.

Now, the Great Depression was ended by massive fiscal expansion, in the form of World War II. Maybe that will happen again; but so far policy seems inadequate to the task, and the political environment raises concerns about whether we’ll be able to do much more.

So we may end up waiting for the economy’s ills to go into spontaneous remission. Which raises the question, how does that happen?

And it turns out that this is a question our grandfathers thought about quite a lot. Maybe it’s time to dust off Keynesian business cycle theory.

Keynes himself actually didn’t have much to do with this theory. In fact, one of the key moves in his development of the General Theory was the decision to focus on how economies stay stuck in depression for extended periods, rather than on the more complex question of explaining the economy’s ups and downs. But he did devote a brief chapter at the end to the subject, and Hicks elaborated on this quite a lot.

What’s notable about this theory is that it made no use of the self-correcting mechanism expounded in every principles textbook, mine included — the mechanism in which falling prices lead to a rising real money supply, which shifts the aggregate demand curve out moves the economy down the aggregate demand curve. Why? Well, as we’ve now learned the hard way, a sufficiently severe bubble-bursting pushes you into the liquidity trap, and makes the aggregate demand curve more or less vertical.

Instead, recovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.

And what do we mean by use, delay, etc.? Calculated Risk had a nice piece on auto sales, which I find helps me to think about this concretely. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won’t happen. Even if the desired number of vehicles doesn’t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they’re worth replacing to get the spiffy new features (obsolescence).

As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail. On the other hand, in the long run …

How is Japan's lost decade different? Deflation?

Winter Work Done on the Farm by Robert J. Shiller (October 15, 2011)

Winter Work Done on the Farm by Mark Thoma (December 8, 2010)

Pehaps it's a common analogy used in Economics?

What Really Caused the Eurozone Crisis? by Kash Mansori

From a recent speech by Narayana Kocherlakota

But this connection between bank reserves and inflation is simply not operative right now. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits. In other words, banks have the licenses to create money, but are choosing not to do so.

Endless Stagnation is Bad for Banks by Yglesias

Dallas Fed Board of Directors

Minneapolis Fed Board of Directors

Philadelphia Fed Board of Directors

From Greider's Secrets of the Temple: How the Federal Reserve Runs the Country:

The ideological implications of the money system had to be understood on two different planes. The idea of money created through new debt offended many conservatives because, in essence, it was a forward-looking process, a social commitment to the future. Bankers were not ordinarily thought of as a progressive element in American politics, yet banking itself functioned on the premise of progress, on a working belief that reliable gambles could be made in the future. On this faith rested the process of economic growth, the financing of new ideas and ventures, of change and innovation. The folk wisdom feared debt, yet future prosperity depended on it.

The folk fears were correct in only one sense: if a society contracted too many claims against the future, if it amassed debts that the future economic effort could not possibly pay off, sooner or later it would pay the consequences.... Bankers as a consequence dwelt between two conflicting commandments: one was to be generous with the future, to take risks and make loans that businesses needed to expand and consumers needed to buy: the other was to be always prudent in the risk taking...

interview with Frances Fox Piven

Arrested Development film in the works

The Demands of Occupy Wall Street

Yglesias relays that Rush Limbaugh endorses The Lord's Resistance Army.

Hitchens article from 2006.

On the Fed (from Doug Henwood's book Wall Street, downloadable here)

"Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah's Flood."

Overcoming America's Debt Overhang: The Case for Inflation by Christopher Hayes (Sept. 9, 2009 two years ago)

(via Rortybomb)

Also from Rortybomb:

First, also from Ezra’s article, Joe Stiglitz gets the core of it:

Yet even among economists who admire Reinhart and Rogoff’s work, there is skepticism.  One source comes in how Reinhart and Rogoff find the economic phenomena they’re trying to study. “There’s an identification problem,” Stiglitz says. “When you have underlying problems that are deep, they will cause a financial crisis, and the crisis itself is a symptom of underlying problems.”

Next Ben Bernanke, transcript:

CHAIRMAN BERNANKE: …I thought [This Time It's Different] was informative and as you say, it makes the point that as a historical matter, recoveries following a financial crisis tend to be slow.

What the book didn’t do is give a full explanation of why that’s the case. Part of it has to do with the problems in credit markets. My own research when I was in academia focused a good deal on the problems in credit markets on recoveries…

That said, another possible explanation for the slow recovery from financial crises might be that policy responses were not adequate. That the recapitalization of the banking system, the restoration of credit flows and the monetary fiscal policies were not sufficient to get as quick a recovery as might otherwise have been possible.

Here is Joe Gagnon:

Some have argued that economies take longer than normal to return to full employment after financial crises (Reinhart and Rogoff 2009). However, there is a wide range of growth outcomes after financial crises, and the worst outcomes tended to be associated with the poorest policy responses.

The goal of policymakers should be to learn from the past and achieve a better outcome than simply the average of past outcomes. In the current crisis, the zero bound on interest rates has been a major factor preventing monetary policymakers from doing as much as they otherwise would to speed recoveries. But, as discussed below, the zero bound is not a limit on what monetary policy can do. There is plenty of scope for further monetary stimulus.

DeLong sends us to Miguel Almunia, Augustin S. Bénétrix, Barry Eichengreen, Kevin H. O’Rourke, and Gisela Rua: 18 November 2009:

The effectiveness of fiscal and monetary stimulus:

There is one important source of information on the effectiveness of monetary and fiscal stimulus in an environment of near-zero interest rates, dysfunctional banking systems and heightened risk aversion that has not been fully exploited: the 1930s.... [W]here fiscal policy was tried, it was effective.

...
Cross-country comparisons can thus help us untie the Gordian Knot and move the debate from the realm of ideology to that of evidence. Our project therefore focuses on assembling annual data on growth, budgets and central bank policy rates, mainly from League of Nations sources, for 27 countries covering the period 1925-39....

The details of the results differ, but the overall conclusions do not. They show that where fiscal policy was tried, it was effective. Our estimates of its short-run effects are at the upper end of those estimated recently with modern data; the multiplier is as large as 2 in the first year, before declining significantly in subsequent years....

The results for monetary policy are less robust but point in the same direction. A positive shock to the central bank discount rate leads to a fall in GDP... [that] just misses statistical significance at conventional levels.... This result is notable, given the presumption, widespread in the literature, that monetary policy is ineffective in near-zero-interest-rate (liquidity trap) conditions. On the contrary, in the 1930s it appears that accommodating monetary policy helped, by transforming deflationary expectations (Temin and Wigmore 1990) and by helping to mend broken banking systems (Bernanke and James 1991). Given the prevalence of both problems circa 2008, we suspect that the results carry over...

So ... fiscal policy gives more bang for the buck with a multiplier of 2 and monetary policy is less robust but pointing in the same direction. "Accomodating monetary policy helped, by transforming deflationary expectations and by helping to mend broken banking systems."

The Beatings Will Continue*

Who'll Stop the Pain? by Krugman (February 19, 2009)

So will our slump go on forever? No. In fact, the seeds of eventual recovery are already being planted.

Consider housing starts, which have fallen to their lowest level in 50 years. That’s bad news for the near term. It means that spending on construction will fall even more. But it also means that the supply of houses is lagging behind population growth, which will eventually prompt a housing revival.

Or consider the plunge in auto sales. Again, that’s bad news for the near term. But at current sales rates, as the finance blog Calculated Risk points out, it would take about 27 years to replace the existing stock of vehicles. Most cars will be junked long before that, either because they’ve worn out or because they’ve become obsolete, so we’re building up a pent-up demand for cars.

The same story can be told for durable goods and assets throughout the economy: given time, the current slump will end itself, the way slumps did in the 19th century. As I said, this may be your great-great-grandfather’s recession. But recovery may be a long time coming.

The closest 19th-century parallel I can find to the current slump is the recession that followed the Panic of 1873.** That recession did eventually end without any government intervention, but it lasted more than five years, and another prolonged recession followed just three years later.

You can see, then, why some Fed officials are so pessimistic.

Let’s be clear: the Obama administration’s policy initiatives will help in this difficult period — especially if the administration bites the bullet and takes over weak banks. But still I wonder: Who’ll stop the pain?

Krugman is prescient again as usual.

I've been rereading William Greider's Secrets of the Temple: How the Federal Reserve Runs the Country. He argues that Arthur Burns - Fed Chairman from 1970-78 - is the original History's Greatest Monster. An economics professor at Columbia, Burns was appointed by Nixon (thanks tricky Dick!) and had a reputation as a real hardass inflation hawk. However he was accused of priming the pump to help Nixon win the 1972 election. Nixon's Federal budget was already highly stimulative and the Fed added rapid money growth which approached 11 percent three months before the election. The following year had runaway inflation followed by the Fed tightening and a painful recession. Greider reports that some governors said Burns and the Fed had made an "honest mistake" and there was no conscious political manipulation of the economy. Later the Bush clan would blame Greenspan for causing Poppy to lose his re-election campaign to Clinton.***

Carter replaced Burns with G. William Miller and as Greider writes:

In Wall Street circles Miller was blamed for the surging inflation of 1978 and 1979, but Fed insiders understood that Miller had inherited errors made earlier by Burns - excessive monetary growth in late 1976 and 1977. One Fed official who worked closely with Burns attributed the mistakes to Burns's deep desire to win appointment to another term as chairman from the new Democratic administration elected in 1976. Money growth accelerated in the months right after Carters election - and Burns began a private campaign to ingratiate himself with the Carter White House. His campaign for reappointment ultimately failed, but monetary economists attributed the subsequent surge in inflation to Burns's overly generous money policy in the opening months of the Carter Adminstration.

There was also the oil shocks of the 1970s and unions could negotiate price hikes into contracts.
-----------------------------
* Until Morale Improves ... or Not.

** Wikipedia entry on the "Long Depression."

Monetary responses

In 1874, a year after the 1873 crash, the United States Congress passed legislation called the Inflation Bill of 1874 designed to confront the issue of falling prices by injecting fresh greenbacks into the money supply.[34] Under pressure from business interests, President Grant vetoed the measure.[34] In 1878, Congress overrode President Hayes's veto to pass the Silver Purchase Act, in a similar but more successful attempt to promote "easy money."[21]

Labor unrest
The United States endured its first nationwide strike in 1877, the Great Railroad Strike of 1877.

*** According to the Wikipedia entry on Burns:

When Vice President Richard M. Nixon was running for President in 1959–1960, the Fed, under the Truman-appointed William McChesney Martin, Jr., was undertaking a monetary tightening policy that resulted in a recession in April 1960. ^{[further explanation needed]} In his book Six Crises, Nixon later blamed his defeat in 1960 in part on Fed policy and the resulting tight credit conditions and slow growth. After finally winning the presidential election of 1968, Nixon named Burns to the Fed Chairmanship in 1970 with instructions to ensure easy access to credit when Nixon was running for reelection in 1972. 

They told me not to smoke drugs but I wouldn't listen,
Never thought I'd get caught and wind up in prison,
Chalk it up to youth, but young age I ain't dissin',
I guess I just had to get it out of my system,
out of my system, out of my system,
Although I'd never do it now - I know what I ain't missin', 
That I went and got it all out of my system,

...

They told me not to steal cars, said I'd wind up in prison,
Thought I knew it all, yeah I wouldn't listen,
Chalk it up to being young, but youth I ain't dissin',
I guess I just had to get it out of my system,
out of my system, out of my system,
Glad I did it all then now I know what I ain't missin', 
That I went and got it all out of my system,

Jeff Madrick on "A Zucotti Park Education"

There was no need at all to worry. Joe Stiglitz, the Nobel laureate economist, and I did a “teach-in” together at Zuccotti Park. It was two Sundays ago now...

...The press, almost uniformly derisive during the initial weeks, shows signs of understanding that the group touches a deep-seated anger and confusion in America. President Obama had to respond to a question about it last week, and said he understood the concerns. Occupy Wall Street is truly national—indeed international. Journalists in Australia and Switzerland have called me for interviews. I am sure others are receiving many such calls.

How could this have happened? Two reasons. The mostly young people who are driving the movement are very well-intentioned. They are almost all well-behaved. Many are highly-educated. They want to learn. And they perceive profound injustice in the land. The crisis they see is not just economic. It is about fairness and democracy. How could one blame those in their twenties for frustration when they can’t get a job with youth unemployment rates so high while Wall Street doles out enormous bonuses?

And the Cold War has long been over.

Doug Henwood on Occupy Wall Street and the Fed

Divisions Grow on Federal Reserve’s Policy Committee by Binyamin Applebaum

WASHINGTON — The Federal Reserve’s policy-making committee is increasingly divided between advocates for stronger steps to bolster the economy and dissenters who see little benefit and considerable risk in such efforts, according to minutes of the committee’s most recent meeting.

The Federal Open Market Committee voted at the end of a two-day meeting in September to begin an effort to reduce long-term interest rates, allowing businesses and consumers to borrow more cheaply.

The Fed disclosed at the time that three members of the 10-person board had voted against the decision. The minutes released Wednesday record that on the other side, two members wanted the Fed to take even stronger action.

...

The minutes do not disclose the names of the two members who favored stronger action, although one obvious candidate is Charles L. Evans, president of the Federal Reserve Bank of Chicago, who has argued publicly that the Fed should move more aggressively to stimulate the flagging economy. 

The names of the three dissenters, however, are public: Richard W. Fisher, president of the Federal Reserve Bank of Dallas; Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis; and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia. They argued that the Fed’s actions were unlikely to help the economy and would increase the chances of a faster pace of inflation.

All three were appointed by the banks in their respective regions. All five members of the committee appointed by the President and approved by Congress voted for more action.

The Fed iPad App

Matt Taibbi on OWS

E.J. Dionne on Elizabeth Warren and George Will

(via DeLong)

MMT or Chartalism

In Krugman's blogpost on the quasi-monetarists he links to Mike Konczal who mentions MMTers alongside Richard Koo, i.e. those who are skeptical of monetary policy. From Wikipedia:

"Austrian economist Robert P. Murphy states that "the MMT worldview doesn't live up to its promises" and that it seems to be "dead wrong".^[18] Daniel Kuehn of the Urban Institute has voiced his agreement with Murphy, stating "it's bad economics to confuse accounting identities with behavioral laws [...] economics is not accounting.""

"New Keynesian Brad DeLong has suggested MMT is not a theory but rather a tautology"

Proponents:
"Bill Mitchell, from the Centre of Full Employment and Equity (CofFEE), at the University of Newcastle, Australia, refers to modern Chartalism as Modern Monetary Theory in the body of work he has developed in the field."

"Cullen Roche, a California based investment manager, published one of the most widely read pieces on MMT titled "Understanding The Modern Monetary System." ^[28] Roche has become one of MMT's most vocal proponents and has engaged Paul Krugman in several debates on the subject of MMT."

"Hyman Minsky seems to favor a Chartalist approach to understanding money creation in his Stabilizing an Unstable Economy^[32], while Basil Moore, in his book Horizontalists and Verticalists^[33], delineates the differences between bank money and state money."

"James K. Galbraith supports Chartalism and wrote the foreword for Mosler's book Seven Frauds in 2010."

The DeLong quote is linked to blogpost titled "Is "Modern Monetary Theory" Modern or Monetary or a Theory?" which is a reaction to a blog post by Steve Randy Waldmann.

I really enjoyed these comments by Waldmann:

In general, the MMT community would be well served by adopting a more civil and patient tone when communicating its ideas. I’ve had several conversations with people who have proved quite open to the substance, but who cringe at the name MMT, having been attacked and ridiculed by MMT proponents after making some ordinary and conventional point. Much of what is great about MMT is that it persuasively challenges a lot of ordinary and conventional views. But people who cling to those views, even famous economists who perhaps “ought to” know better, are mostly smart people who simply have not yet been persuaded. Neither ridicule nor patronizing lectures are likely to help.

My complaint is a bit unfair. The MMT community has been sinned against far more than it has sinned, especially within the economics profession. Whether you ultimately agree with them or not, the MMT-ers have developed a compelling perspective and have done a lot of quality work that has pretty much been ignored by the high-prestige mainstream. But a sense of grievance may be legitimate and still be counterproductive.

The internet is a fractious place. Many MMT-ers are civil and patient, and devote enormous energy to carefully and respectfully explaining their views. There’s no way to police other peoples’ manners. Still, even by the standards of the blogosphere, MMT-ers have a reputation as an unusually prickly bunch. That might not be helpful in terms of gaining broader acceptance of the ideas.

Sometimes I tend to get abusive on the Internet in response to perceived abuse.

Krugman on MMT

Jonathan Chait on Republicans' rank dishonesty and galling hypocrisy

... Rather, it’s that a McCain presidency would, for purely political reasons, offer the possibility of greater Keynesian demand-side response.

Douglas Holz-Eakin, the chief economic advisor to John McCain in 2008 and the president of American Action Forum, a Republican agitprop group, offers a few tantalizing clues. First, he concedes that economic stimulus does in fact boost economic growth:

“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”

Holz-Eakin, like most economists, but unlike the entire elected wing of the Republican Party since 2009, understands that economic stimulus does in fact stimulate the economy and is the proper response to a disaster like the one we’re experiencing.

The one truly large-scale response to the crisis that exceeded Obama’s response may have been an attempt to shore up the housing market. This bit, from Holz-Eakin, is also tantalizing:

In late 2008, when the economy was cratering, Holtz-Eakin convinced McCain that the way out of a housing crisis was to tackle housing debt directly. “What we proposed at the time was to buy up the troubled mortgages, pay them off and let people refinance at the lower rates,” he recalls. “That would have filled up the negative equity and healed bank balance sheets.” To this day, Holtz-Eakin thinks the proposal made sense. There was one problem. “No one liked that plan,” he says. “In fact, they hated it. The politics on housing are hideous.”

The politics were, indeed, hideous. But they were horrible in a way deeply aggravated by the political circumstances of the moment. You had an all-Democratic government, led by a charismatic, young, black president. Any measures to alleviate the crisis struck millions of conservatives as a terrifying redistribution of wealth, a frightful and permanent unmooring of the nation from its tradition of liberty. This helped encourage the hyper-partisan response of Republican leaders, who abandoned the belief in Keynesian stimulus that they had previously endorsed in 2001 and 2008. (Yes, Republicans passed a stimulus bill in 2008. Their turnabout against stimulus was rapid and total.)

(via Mark Thoma)

Holz-Eakin is advising Romney, as is Mankiw.

(Mankiw on the IS-LM model)

Krugman on the quasi-monetarists (QMs?):

And the diatribes against unorthodox monetary policy seem to me to come completely out of left field, not derived in any way I understand from Koo’s basic analysis. They have the feeling of arguments half-baked on the spot out of annoyance that people aren’t totally buying Koo’s insistence that fiscal policy is the answer; as you can see, I’m for fiscal policy myself, but see monetary policy as a useful supplement.

The queasy quasi-monetarists are, in a way, the mirror image of this position, so focused on the monetary solution that they rail against any suggestion that fiscal policy might play a useful role.

I would submit, by the way, that the quasi-monetarists — QMs? — have actually backed up quite a bit on their claims. They used to say that the Fed can easily and simply achieve whatever nominal GDP it wants. Now they’re more or less conceding that the Fed has relatively little direct traction on the economy, but can nonetheless achieve great things by changing expectations. That’s pretty close to my original view on Japan.

But changing expectations in the way needed is hard, especially when the Fed (a) faces massive sniping from the right and (b) has a number of hard-money obsessives among its own officials.

So my view is that we need to use everything we can — fiscal and monetary policy. And we shouldn’t let a desire to promote our pet solutions block other things that might help.

Well the Senate is blocking Obama's American Jobs Act. Bernanke needs to pull a Volcker.

Bad editorial from the New Republic on OWS and the 99 Percent Movement

Ivan Werning - Managing A Liquidity Trap: Monetary and Fiscal Policy

(via DeLong)

Dawes with a nice tribute to Paul Newman.

If I Wanted Someone

Could A Determined Central Bank Fail to Inflate? by Yglesias

Fed Chief Gets Set to Apply Lessons of Japan's History by John Hilsenrath

The liberal-left has long ignored monetary policy. Fiscal policy (FDR's WPA and public works programs) has long been romanticized.

The "debate" is similar to the one over health care reform. Some argued that nothing would be better than what eventually passed. See, they're hardcore and they wanted the public option. Everyone else are sellouts. Similarly, monetary policy can't do anything more. We need fiscal policy. No matter that Senate Democrats are blocking it. Getting nothing is better than trying more monetary policy.