David Romer: Short-Run Fluctuations (January 2013 version).
David Romer: Short-Run Fluctuations (January 2013 version).
Three things struck me of especial note last night:
First, Reynolds's willingness to throw George W. Bush completely over the side--not even any of Nooners's "he was incompetent, and flawed, and a failure, but he was a regular guy--not somebody who thought he was smarter than you--and in a way we miss him". None of that.
Second, Reynolds's praise for Bill Clinton--twelve years after Clinton left office. I now look forward to hearing Alan Reynolds praise Barack Obama for his attempts to start reining-in Medicare spending via the ACA and the IPAB come... 2029. But it would be nice if we could during that forward in time to the present--it would be really nice if we could have brung his praise of Clinton forward in time to 1993 when we really could have used it...
Third, the extent to which those who don't know IS-LM are blind persons in the country of the one-eyed. Reynolds said: "In fiscal policy the government prints bonds, in monetary policy the government--the central bank--buys bonds, if one of these is stimulative, how can the other be?" And he was genuinely puzzled.
The euro crisis: The Frankfurt veto: AUSTERITY has been under fire from all corners, lately: from IMF reports showing painfully high multipliers on fiscal cuts, to challenges to the Reinhart-Rogoff debt-threshold research, to the European Commission, whose president, Jose Manuel Barroso, noted this week that austerity in Europea has "reached its limits". Even the data itself appears to be rebelling. Eurostat released updated figures this week on euro-area fiscal statistics, which show remarkably little progress toward fiscal goals; Germany was the only European Union economy to run a fiscal surplus in 2012. But despite this, yields on peripheral sovereign debt continued their long march down. Soaring borrowing costs apparently weren't about indebtedness at all, but about uncertainty over the European Central Bank's willingness to act as lender of last resort.
George Soros Comment On Hans-Werner Sinn: Hans-Werner Sinn has deliberately distorted and obfuscated my argument. I was arguing that the current state of integration within the eurozone is inadequate: the euro will work only if the bulk of the national debts are financed by Eurobonds and the banking system is regulated by institutions that create a level playing field within the eurozone.
Rethinking Macroeconomic Policy: Rethinking and reforms are both taking place. But we still do not know the final destination, be it for the redefinition of monetary policy, or the contours of financial regulation, or the role of macroprudential tools. We have a general sense of direction, but we are largely navigating by sight. I shall take six examples….
Brad: R&R, Hamilton, and many other serious, bright, empirical economists that are not part of your "faction" frequently argue "interest rates may be low now, but they could rise quickly." (Similarly, stock prices may be high now, but they could fall, particularly if long-term interest rates rise.) And in the next breath, they argue that because debt levels are slower and more costly to adjust than asset prices, the prudent course is to slow the growth of debt now.
What say you to this? In your title, you speak of "Risk". Theirs is (I think) a risk-management argument. Surely it deserves acknowledgement.
Tame Inflation to Keep Fed on Course - WSJ.com: Federal Reserve officials are likely to continue their easy-money policies at the central bank's policy meeting on Tuesday and Wednesday, in part because several recent inflation measures have fallen well below the Fed's 2% target.
With inflation now lower than the Fed wants, officials are likely to conclude their policies show no sign of overheating the economy. That allows them to maintain their $85 billion-a-month bond-buying program, which the central bank is employing to ease credit conditions and spur spending, investment and hiring.
Fed officials after their March policy meeting talked about tapering off the bond purchases later this year if the economy continued to gain strength. But inflation readings have since slipped, and employment numbers have been disappointing.
The Commerce Department reported Friday that its personal consumption expenditure price index—one of the Fed's favored measures of consumer price inflation—was up 1.2% in the first quarter from a year earlier, well below the central bank's target. It was the weakest annual reading since the third quarter of 2008, when the U.S. was consumed by the financial crisis.
The world wisely edges away from talk of a currency war: The diplomatic communiqués that follow international summits are rarely noteworthy. They have to be acceptable to everyone, so tend toward the lowest common denominator. But the Group of 20’s most recent communiqué, following its meeting on the sidelines of the spring meetings of the International Monetary Fund and World Bank, contains one sentence of consequence. “Monetary policy,” it reads, “should be directed toward domestic price stability and continuing to support economic recovery according to the respective mandates of central banks”.
The significance of this addition should not be overlooked. It means that the Bank of Japan is to be applauded, not criticised, for the aggressive asset-purchase programme it has adopted in the effort to hit its 2 per cent inflation target.
It also implies that the Federal Reserve’s heavy use of quantitative easing and forward guidance are entirely appropriate given its dual mandate to pursue low inflation and high employment – more so now that other instruments that could be used to achieve those goals, notably fiscal policy, are currently unavailable.
This is a significant advance from the “currency war” rhetoric that prevailed earlier this year. Back then, the BoJ's new policies were impugned as an effort to depreciate the yen and gain an export advantage. The BoJ and Fed were criticised for unleashing a torrent of capital flows into emerging markets. Now, in contrast, officials in other countries, while still less than fully comfortable about the consequences, realise that they would be even worse off had the Fed and the BoJ responded to them. Capital inflows and local currency appreciation may be uncomfortable for emerging markets but renewed recession in the US and Japan, which could be induced by premature abandonment of easing, would be worse.
You do Mervyn King a very bad service indeed, David, when you claim that he understood the economy he was dealing with as Governor of the Bank of England, and backed the Tory-Salad austerity coalition anyway.
David Ignatius on April 24, 2013:
Mervyn King’s hard lessons in Keynesian economics: King is… one of those mild-mannered Englishmen who can dominate a room the moment he begins to speak, with a wry humor that can amuse, charm and eviscerate at will…. King… said events have shown that “purely monetary stimulus will not be enough…. Monetary policy is pushing on a string. It has some effect but less than we might have thought.”… For King, the past decade reinforced the lessons Keynes drew from the 1930s… the psychological quirkiness of investors… monetary policy could not persuade frightened people to spend and invest…. King couldn’t fix the British economy, but he did understand it.
(Final?) Notes on the Reinhart/Rogoff Saga: As pointed out elsewhere, the claim that the UMASS paper actually supports R&R’s alleged core finding of a significant relationship between high debt and slow growth is flat wrong. Yes, the midpoint average growth rate of high-debt countries (over 90 percent of GDP) is lower than the average growth of lower-debt countries, but the differences are not statistically significant…. More importantly, the real argument all along has been two-way causality: data showing that there is lower growth at high debt levels does not show that high debt causes low growth…. Arin Dube demonstrated this very well in his note on Reinhart and Rogoff’s entire data-set, and for the U.S. John Irons and I did the same with Granger causality tests on the U.S. data in July 2010, nearly three years ago. Paul Krugman kindly referred to our results in his blog saying “John Irons and Josh Bivens have the best takedown yet of the Reinhart-Rogoff paper (pdf) claiming that debt over 90 percent of GDP leads to drastically slower growth.” So the causality problem has been well known for some time.
By the way, we compiled the data we used ourselves because emails to Reinhart and Rogoff requesting their data went unreturned. Perhaps if they had shared their data at that time their actual weighting procedure would have become clear much sooner and even their spreadsheet error could have been corrected. Kudos to the UMASS authors for being more persistent than us and for the work they did.
Lastly, Reinhart and Rogoff argue against the thesis that slow-growth causes debt rather than vice-versa based simply on the fact that high-debt episodes are often long-lived…. [T]he simple point is that “downturns in the business cycle” seems to be an intentionally narrow claim being put forward by Reinhart and Rogoff…. [O]ne could argue (if one was feeling tendentious) that budget deficits in 2010, 2011 and 2012 were not driven at all by the economy being in outright recession in those years (hence not driven by “downturns in the business cycle”), since the economy wasn’t in an official recession. Yet these deficits were certainly driven by a shortfall of aggregate demand. A clue that this is indeed what is going on in lots of the Reinhart and Rogoff data is their other persistent finding that the slower growth associated with (again, associated with, not caused by) high-debt in their data is not durably associated with high interest rates….
Finally, I’d just like to add that another problem with the larger R&R narrative that both their book and their paper have constructed. This narrative presents financial crises as consigning economies to slow growth through some iron law of nature—and their 90 percent debt threshold is clearly intended to imply that efforts to use fiscal stimulus to combat this slow growth in the wake of the U.S. housing bubble’s burst will be thwarted. But this narrative is wrong…. [P]olicy failure, not “debt” or “financial crisis” should be clearly identified as the stumbling block to full recovery.
 I say “alleged core finding” because the real core finding was the claim that a 90 percent debt/GDP ratio was a clear tipping point over which growth slowed. This is obviously the finding that stuck in the public debate, and the authors themselves just helped to push this impression.
Carmen Reinhart and Ken Rogoff:
Debt, Growth and the Austerity Debate - NYTimes.com: IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.
Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.
Paul Krugman (2012): Economics in the Crisis:
To say the obvious: we’re now in the fourth year of a truly nightmarish economic crisis. I like to think that I was more prepared than most for the possibility that such a thing might happen; developments in Asia in the late 1990s badly shook my faith in the widely accepted proposition that events like those of the 1930s could never happen again. But even pessimists like me, even those who realized that the age of bank runs and liquidity traps was not yet over, failed to realize how bad a crisis was waiting to happen – and how grossly inadequate the policy response would be when it did happen.
And the inadequacy of policy is something that should bother economists greatly – indeed, it should make them ashamed of their profession, which is certainly how I feel. For times of crisis are when economists are most needed. If they cannot get their advice accepted in the clinch – or, worse yet, if they have no useful advice to offer – the whole enterprise of economic scholarship has failed in its most essential duty.
Keith Hennessy on Bush and the financial crisis: How Involved Was George W. Bush in the Fall of 2008?: As most of us recall, George W. Bush was president of the United States during the crucial year of 2008 when the economy slid into recession and a series of panics and runs gripped the shadow banking system. As we also recall, Bush did not play a significant public-facing role in the response. Presidential candidates Barack Obama and John McCain said a lot, Federal Reserve Chairman Ben Bernanke was visible, America got to know the previously obscure figure of New York Fed President Timothy Geithner, and Treasury Secretary Hank Paulson was frequently on television. But Bush was president, and one assumes he was doing something. But what, exactly?
Abba Lerner (1943): "Functional Finance":
The first financial responsibility of the government (since nobody else can undertake that responsibility) is to keep the total rate of spending in the country on goods and services neither greater nor less than that rate which at the current prices would buy all the goods that it is possible to produce. If total spending is allowed to go above this there will be inflation, and if it is allowed to go below this there will be unemployment. The government can increase total spending by spending more itself or by reducing taxes so that taxpayers have more money left to spend. It can reduce total spending by spending less itself or by raising taxes….
I really wish that Jonathan Portes had written this before I had to give my talk on economists as public intellectuals yesterday…
Not the Treasury view...: Which (macro)-economists are worth listening to?: [W]hen economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?… I [had] pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".
Noahpinion: KrugTron the Invincible: If you grew up in the 80s you probably remember Voltron. Although the show often had convoluted plotlines, it would somehow always end with Voltron (a super-powerful robot formed from five mechanical lions) facing off against a monster called a "Robeast"…. [T]o a four-year-old, it was pure gold.
In the econ blogosphere, a similar dynamic has played out over the last few years. Each week a Robeast will show up, bellowing predictions of inflation and/or soaring interest rates. And each week, Paul Krugman… I mean, KrugTron, Defender of the Blogoverse, will strike down the monster with a successful prediction of… low inflation and continued low interest rates. Goldbugs, "Austrians", New Classical economists, and harrumphing conservatives of all stripes have eagerly gone head-to-head with KrugTron in the prediction wars, and have been summarily cloven in twain…. [H]ere's a quick (partial) episode guide: Krugman vs. Peter Schiff (see also here)… Krugman vs. Ron Paul… Krugman vs. Robert Murphy… Krugman vs. Niall Ferguson (see also here)… Krugman vs. Allan Meltzer… Krugman vs. a giant hive-mind of goldbugs.
Monetary policy: How does inflation matter?: THE IMF's recently published a thought-provoking analysis on changes in the apparent relationship between inflation and unemployment…. I've since reflected more on the work, and on some related writing by Nick Rowe…. The IMF notes the stability of inflation expectations and reckons that it is attributable to central bank credibility…. Inflation expectations became so well anchored that not even the worst few months of economic performance since the 1930s could produce deflation. I've been thinking about whether that narrative seems right….
It really does seem as if Allan Meltzer does not understand the basic economics of money demand--does not understand that the short-term safe nominal interest rate is the opportunity cost of holding cash balances. And not understanding that makes it impossible to think coherently about nearly any issues in monetary economics…
Trap Denial: OK, probably going on too much about this, but I want to return briefly to the issue of puzzled economists, specifically Allan Meltzer.
Four years ago Meltzer and I effectively had a debate about the effects of the rapidly expanding Fed balance sheet. He (and others) warned of inflation ahead; I (and others) said that we were in a liquidity trap, so that the Fed’s bond purchases would basically just sit there. So here we are four years later, the huge expansion of the Fed’s balance sheet has not, in fact, led to inflation. And Meltzer is puzzled by the fact that all those bond purchases just sat there:
Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked: “Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.
He made a monetary prediction; I made a monetary prediction; his prediction was wrong. Therefore, it must be because of Obamacare!
And, of course, if ObamaCare was causing structural problems and reducing aggregate supply, that would make inflation not undershoot but overshoot Meltzer's forecast. What we have here on Meltzer's part is simply badly-prepared word salad.
The Non-Secret of Our Non-Success: The Non-Secret of Our Non-Success Chris Giles of the FT reports that central bankers are worried that they are “flying blind”; he quotes Lorenzo Bini-Smaghi, formerly of the ECB governing board, saying “We don’t fully understand what is happening in advanced economies.” Um, guys, that’s because you don’t want to understand. Nothing about our current situation, except maybe the absence of outright deflation, is at all surprising or mysterious.
We had a huge financial crisis, and the combination of a housing bust (on both sides of the Atlantic) and an overhang of household debt (also on both sides) has acted as a drag on private demand. Monetary policy quickly found itself up against the zero lower bound, while fiscal policy, after providing some stimulus, soon turned strongly contractionary….
Right now I am in the middle of a long project with Larry Summers on fiscal policy in a depressed economy. It has a lot of moving parts. Right now, however I am finding it difficult to make progress because it is not clear to me who the audience for this--who we should be trying to convince of what.
So let me, right now, try to spend tonight telling you what I think but rather what I think others think.
Whenever I read Abba Lerner (1943) or his latter-day disciples, I find myself puzzled by their near-certainty: they know that fiscal expansion and contraction can keep employment high and inflation equal to expectations, and that monetary expansion can keep interest rates so low that there is no government budget financing constraint that binds.
As with so much else, a remarkably large measure of clarity can be achieved quickly by casting their argument in Hicksian (1937) IS-LM terms.
When the average interest rate r on U.S. Treasury debt is and is expected to remain lower than the economy's trend growth rate g, the U.S. Treasury is not a cost center--debt amortization is not an expenditure category--but rather a profit center--analogous to the medieval Medici Bank, which Florentines and others paid handsomely to safeguard their money…
Brad DeLong: Friday February 18, 2011: Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist--a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.
We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle--to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody--bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.
From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Cours Complet d'Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium "general glut" of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.
DRAFT: The 1919-1939 interwar period taught us four lessons:
In order for the world economy to be prosperous, adjustment to macroeconomic disequilibrium needs to be undertaken by both "surplus" and "deficit" economies--not by "deficit" economies alone.
If the world economy is to have any chance of avoiding or limiting crises, an integrated banking system requires an integrated bank regulator and supervisor.
In order for crises to be successfully managed, the lender of last resort must truly be a lender of last resort: it must create whatever asset the market thinks is the safest in the economy, and must be able to do so in whatever quantity the market demands.
In order for any monetary union or fixed exchange rate system larger than an optimum currency area to survive, it must be willing to undertake large-scale fiscal transfers to compensate for the exchange rate movements to rapidly shift inter-regional terms of trade that it prohibits.
I, at least, thought that everybody--or everybody who mattered in governing the world economy--had learned these four lessons that 1919-1939 had so cruelly taught us. Now it turns out that the dukes and duchesses of Eurovia had, in fact, learned none of them. History taught the lesson. But while history was teaching the lesson, the princes and princesses of Eurovia and their advisors were looking out the window and gossiping on Facebook.
Tim Duy asks, when can we all admit that the euro is a failure? The answer, of course, is never. Too much history, too many declarations, too much ego is invested…. Even if the project ends in total disaster, they will insist that the euro didn’t fail Europe, Europe failed the euro.
But it it occurs to me that it might be a good idea for me to recapitulate my view of what really ails Europe, and what could yet be done.
Second, if the problem is that people don’t have enough cash--well, then, find some organization, a Bank of England, a Federal Reserve--and have it print cash until people no longer think they should spend less than their income to build up their cash. Flood the economy with money until people no longer want to hoard more cash than they currently have.
That's a pretty crass response to a crisis, it is just the usual "pump up asset prices" one from the likes of Greenspan and Summers.
What about addressing the REASON why "people" think they don't have enough cash?
Most people (other than the speculation oriented millionaires who sponsor Summers and other economists) are heavily invested in their JOBS, think that their job is an income-producing asset, and save more in safer assets if they think that their jobs have become less safe assets. Sure a bit more liquidity going round the real economy may make some jobs safer assets, but the main effect is boosting asset prices.
Students in the late 1960s and early 1970s got top marks by grasping that it was a sacred calling of their discipline to guide the economy in ways that avoided the huge costs associated with recessions and high unemployment. This was best done through the aggressive application of strong policies, especially government deficits, to assure adequate demand…. By the 1990s, even at the so-called “saltwater” institutions on the US coasts where Keynesians were ascendant, students now learnt that business cycles were not a hugely important matter. Any output lost during troughs would be made up during booms and, in any case, the “great moderation” that began in the mid-1980s meant that such fluctuations as took place were not very severe. Credibility and transparency took precedence over the mitigation of recessions; above all, policy makers sought to ensure that they themselves were not sources of inflation or economic instability. And it became fashionable to suppose that the route to accelerated growth was likely to involve paying down debt, as practised by the Clinton administration in the US and a number of European countries, rather than fiscal expansion.
This year I am on sabbatical--which means I do not teach. And I do miss it. Thus, from my perspective at least, this next hour is going to be an hour of pure fun.
I hope it will be an hour of pure fun for you all as well.
As Bob Strom said, right now in this MBA class you are transitioning from studying micro to studying macroeconomics. You are moving away from studying that part of economics where you talk about how the market system works well: how supply balances demand to make the maximum possible amount and value of win-win deals, and how people respond to the incentives they’re given to change their behavior. To the extent that things go wrong in microeconomics--to the extent that when you step back and look at the situation you say "Geewillickers! I really wish this had not happened!"--it is because you wish that you or the market system had not given people the incentives that it in fact did.
Is this grandma’s liquidity trap?: I say no and David Andolfatto agrees: 'In grandma’s liquidity trap, the real interest rate is too high because of the zero lower bound. Steve [Williamson] argues that in our current liquidity trap, the real interest rate is too low, reflecting the huge world appetite for relatively safe assets like U.S. treasuries. If this latter view is correct, then “corrective” measures like expanding G or increasing the inflation target are not addressing the fundamental economic problem: low real interest rates as the byproduct of real economic/political/financial factors.' I remain surprised at how many policy discussions fail to draw this basic distinction."
The large demand for relatively safe assets like U.S. Treasury securities means that the interest rate consistent with full employment--the "natural" interest rate, in Wicksell's terms--is lower than normal, and the natural rate is in fact less than zero. Since the market interest rate is bounded below by the zero lower bound, the market rate is too high.
Once you distinguish--as Knut Wicksell does: this is cutting-edge economics as of 1890 after all--all of the following things are true:
In general, when the market rate of interest is higher than the natural rate of interest--when ex ante saving at full employment is greater than ex ante investment--you can fix the problem and restore full employment by (i) reducing the market rate of interest via expansionary monetary policy, (ii) raising the natural rate of interest via expansionary fiscal policy, (iii) raising the natural rate of interest via summoning the Confidence Fairy, or (iv) raising the natural rate of interest via summoning the Inflation Expectations Imp. At the ZLB, (i) is out of the question, so you must have resort to one or more of (ii), (iii), and (iv)...
This is not rocket science. This is basic Geldzins und Guterpreis...
I’ve made it clear that I very much approve of Japan’s new monetary aggressiveness. But I gather that some readers are confused – haven’t I been arguing that monetary policy is ineffective in a liquidity trap? The brief answer is that current policy is ineffective, but that you can still get traction if you can change investors’ beliefs about expected future monetary policy – which was the moral of my original Japan paper, lo these 15 years ago. But I thought it might be worthwhile to go over this again.
So, at this point America and Japan (and core Europe) are all in liquidity traps: private demand is so weak that even at a zero short-term interest rate spending falls far short of what would be needed for full employment. And interest rates can’t go below zero (except trivially for very short periods), because investors always have the option of simply holding cash. Incidentally, this isn’t just a hypothetical: there has been a surge in currency holding….
Central Bank Transparency Grows Under Geraats's Pressure: Petra Geraats experienced the opacity of central banks first-hand. As a doctoral economics student at the University of California-Berkeley, she spent the summer of 1999 at the European Central Bank in Frankfurt. The paper she wrote said the infant institution should publish its economic forecasts.
Barry Eichengreen at Project Syndicate:
The Use and Abuse of Monetary History: Imagine two central banks. One is hyperactive, responding aggressively to events. While it certainly cannot be accused of ignoring current developments, its policies are widely criticized as storing up problems for the future. The other central bank is unflappable. It remains calm in the face of events, seeking at all cost to avoid doing anything that might be construed as encouraging excessive risk-taking or creating even a whiff of inflation…. It is, in fact, a capsule depiction of the United States Federal Reserve and the European Central Bank.
Economist's View: Solow: Has Financialization Gone Too Far?: Robert Solow has an essay that begins with lots of praise for Ben Bernanke….
Central banking is not rocket science, but neither is it a trivial pursuit…. Running a central bank is in one way a little bit like flying a plane or sailing a boat… every so often a situation arises in which fundamental understanding, knowledge of history, and good judgment can make the difference between riding out the storm and crashing. There was no such person in charge in 1929, and the result was disaster. There was one in 2008….
This is a bad employment report.
Twenty years from now, young whippersnapper economic historians will come to interview me.
They will ask: "Why don't you think Ben Bernanke was the worst Fed Chair since the Great Depression--worse even than the hapless G. William Miller--because of his failure to understand even one of (a) the implications of the pre-2008 growth of leverage, derivatives, and shadow banking; that his job in the summer and fall of 2008 was not to curb moral hazard but to prevent depression; (c) the goals of his dual mandate; the structure of the economy he was managing; and (e) how to mark his beliefs to market when the economy did not evolve as he had predicted?"
What answer am I going to be able to give?
What was Barack Obama thinking? What was Tim Geithner thinking? What was Ben Bernanke thinking?
What is Barack Obama thinking? What is Jack Lew thinking? What is Ben Bernanke thinking?
Will Ben Bernanke listen to Ben Bernanke anytime soon?
Ben McLannahan, Jonathan Soble, and Josh Noble:
Bank of Japan unveils aggressive easing: The Bank of Japan will aim to double the monetary base over two years through the aggressive purchase of long-term bonds, in a dramatic shift aimed at ridding Japan of the deflation that has dogged the country for almost two decades. Haruhiko Kuroda on Thursday announced his arrival as central bank governor with a “new phase of monetary easing”, a move that comes after Prime Minister Shinzo Abe told the bank to target a 2 per cent rate of inflation. “We can’t escape deflation with the incremental approach that’s been taken until now,” Mr Kuroda said after the announcement. “We need to use every means available.”…
The Nikkei 225 stock average closed up 2.2 per cent, snatching back losses earlier in the day. The benchmark 10-year bond yield fell almost a fifth to 0.446 per cent, matching the all-time low of June 2003. The yen tumbled from 92.91 to the US dollar to a two-week low of about 95.20. The BoJ said it would double Japan’s monetary base from Y135tn ($1.43tn) to Y270tn by March 2015, mainly by buying more long-term government bonds. That will raise the average remaining maturity of its holdings from about three years to seven years, keeping downward pressure on yields all along the curve. Under the new measures, the BoJ will expand its balance sheet by 1 per cent of gross domestic product each month this year and by 1.1 per cent per month in 2014, according to estimates from Barclays…
Decoupling: One expensive euro: [L]essons learned from the [Great] Depression… a nasty feedback loop…. [H]eavily indebted economies… faced pressure to begin running large current account surpluses in order to pay back loans. The gold standard prevented devaluation, however, and instead forced countries into import-crushing downturns to generate the needed surplus. Other economies, unwilling to allow their current accounts to swing to large deficits lest they suffer gold outflows, tightened monetary policy in response…. At the same time, economic downturns squeezed banks, leading to waves of bank failures…. Capital outflows placed pressure on central banks to raise interest rates (to hang on to gold reserves), which increased the odds of bank failure, which accelerated the pace of outflows. The result was economic collapse and catastrophe, broken only by the end of the gold standard and which even then left political chaos in its wake….
[T]oday's policymakers do know more about how not to fight crises than their 1930s counterparts. That difference in knowledge is the reason the euro area is falling hundreds of billions short of an achievable output path rather then several trillion. And so I think there might be a different and more effective way to describe what's happening in Europe.
Mervyn King: There were many interesting comments that were made [during the presentations]. There were fascinating views about the future roles of central banks, about which I am sure many of you will have questions. But before I throw it open to [audience] questions, I cannot resist taking Larry [Summers's] challenge that we need to "reconstruct macroeconomics", and getting the views of others around the table. Ben [Bernanke], how would you "reconstruct macroeconomics"?
A correspondent complains that John Cochrane's (February 27, 2009) "Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?" appears to have disappeared from the internet. It may well be a configuration problem at http:/chicagogsb.edu/, but a quick check of the Wayback Machine does indicate that, indeed, "Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?" has not been successfully crawled since February 20, 2012.
And here, from four years ago, is my comment on Cochrane's fallacies at the time:
Time to Bang My Head Against the Wall Some More (Pre-Elementary Monetary Economics Department): Oh boy. John Cochrane does not know something that David Hume did--that the velocity of monetary circulation is an economic variable rather than a technological constant. Cochrane:
Fiscal Fallacies: First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...
But it does need a complex argument about "crowding out" to work. It is not just accounting.
It is not just accounting because there is no requirement that you spend your cash rather than hoard it, and even if you are spending your cash there is no requirement that you spend it always at exactly the same rate.
To assume that there is is to make a mistake that Thomas Robert Malthus and John Stuart Mill never made, and that Jean-Baptiste Say had figured out was wrong by 1829. We do not live in a pure cash-in-advance economy with an inelastic stock of money and a technologically fixed and rigid velocity of circulation.
I find this--still--fracking unbelievable.
I cannot imagine how anybody who has ever thought about how they pay for things for even an instant could say this.
Let us take this slowly and see if we can fix it...
Program | Future of the Euro: Lessons from History: A Conference at UC Berkeley | April 15-16, 2013:
April 15, 2013: 5 p.m. Keynote and Reception
Welcome: Anton Fink, Partner and Managing Director, Dale Investment Advisors and Trustee, Marshall Plan Memorial Foundation
How to Correct the Design Failures of the Euro Area: Helene Schuberth, Senior Advisor, Austrian National Bank
April 16, 2013: 8:30 a.m. Welcome
- Introduction: Barry Eichengreen, George C. Pardee and Helen N. Pardee Professor of Economics and Professor of Political Science, UC Berkeley
9:00 a.m. Political Union
Chair: Dieter Stiefel, Professor Emeritus for Social and Economic History, University of Vienna
Benjamin Jerry Cohen, Louis G. Lancaster Professor of International Political Economy, UC Santa Barbara
Harold James, Professor of History and International Affairs, Princeton University, and Professor of History, European University Institute Florence
J. Bradford DeLong, Professor of Economics and Chair of the Political Economy of Industrial Societies major, UC Berkeley
10:45 a.m. Coffee and Refreshments
Olivier Blanchard’s Five Lessons for Economists From the Financial Crisis: Here are Mr. Blanchard¹s five lessons in his own words, lightly edited by The Wall Street Journal’s David Wessel:
1.Humility is in order: The Great Moderation [the economically tranquil period from 1987 to 2007] convinced too many of us that the large-economy crisis - a financial crisis, a banking crisis - was a thing of the past. It wasn’t going to happen again, except maybe in emerging markets. History was marching on. My generation, which was born after World War II, lived with the notion that the world was getting to be a better and better place. We knew how to do things better, not only in economics but in other fields as well. What we have learned is that¹s not true. History repeats itself. We should have known.
I confess that I am having a hard time understanding Marty Feldstein's latest column…
To paraphrase, the argument as I see it seems to go as follows:
"Banks and investors are currently paying much more than the fundamental value for long-term treasury bonds."
"Therefore the Federal Reserve needs to raise short-term interest rates now and keep them higher than it would otherwise." But why? Raising short-term nominal rates reduces the fundamental value of long-term Treasuries, And if Treasury prices normalize before maturity increases the losses that long-term Treasury holders will suffer. If the big problem is that Treasury bondholders are going to suffer losses, why does increasing those losses help? Moreover, higher interest rates increase unemployment. Surely, given the current elevated level of inemployment increasing unemployment is the last thing we should do.
"And the Federal Reserve needs to sell off the long-term Treasuries it was planning to hold to maturity." But again why? Selling off long-term Treasuries will force them to be held by those who value them less, and increase the capital losses that those currently holding long-term Treasuries but planning to trade them rather than hold them to maturity will suffer.
"To the extent that banks and other highly leveraged financial institutions hold long-term Treasuries, their forthcoming price decline could cause bankruptcies and financial-market breakdown." But isn't that an argument for (a) the Fed's buying more Treasuries and holding them to maturity in order to diminish banking-sector exposure and thus the risks of financial-market breakdown, and (b) application of much stricter regulatory rules to force banks to exchange hot-money debt liabilities for equity as a funding source so that any price declines are handled well--as in the dot-com crash of 2000-2001--rather than badly--as in the mortgage-backed security crash of 2008-2009.
Marty closes by writing "we may look back on these years as a time when official policy led to individual losses and overall financial instability." But isn't that an argument for doubling down on the current expansionary monetary policy, not backing away from it?
BERKELEY – In the 12 years of the Great Depression – between the stock-market crash of 1929 and America’s mobilization for World War II – production in the United States averaged roughly 15% below the pre-depression trend, implying a total output shortfall equal to 1.8 years of GDP. Today, even if US production returns to its stable-inflation output potential by 2017 – a huge “if” – the US will have incurred an output shortfall equivalent to 60% of a year’s GDP.
In fact, the losses from what I have been calling the “Lesser Depression” will almost certainly not be over in 2017. There is no moral equivalent of war on the horizon to pull the US into a mighty boom and erase the shadow cast by the downturn; and when I take present values and project the US economy’s lower-trend growth into the future, I cannot reckon the present value of the additional loss at less than a further 100% of a year’s output today – for a total cost of 1.6 years of GDP. The damage is thus almost equal to that of the Great Depression – and equally painful, even though America’s real GDP today is 12 times higher than it was in 1929.
The Jeremy Stein argument: At very low interest rates, banks will gamble not quite for resurrection but for (apparent) profitability, because bank executives who report losses tend to lose their jobs. Thus it is very important that the central bank keep nominal interest rates on loans banks can safely make above 3%/year in order to prevent the impact of the lower bound on deposits from generating unwise reaching for yield, and consequent systemic vulnerability.
The Gavyn Davies argument: Central banks won't dare unwind because politicians won't like it when central banks report losses. Therefore central bankers dare not adopt policies that have a chance of incurring losses because they will not be able to execute such policies.
(2011) 2013: The Interest Rate That Did Not Bark in the Night: The Surge in U.S. Treasury Debt and the Non-Reaction of Rates: A U.S. government that had been paying back $240 billion a year at the start of the 2000s and issuing a net of $300 billion a year in the mid-2000s was suddenly issuing $1.1 trillion a year of bonds.
Back in the third quarter of 2008 I wondered: "Who is going to buy all of these things?" There were nearly $4.3 trillion of Treasuries held by the real public in mid-2008. But we were about to start adding to that at a pace of $1.1 trillion a year: $5.4 trillion by mid-2009, $6.5 trillion by mid-2010
$7.6 trillion by mid-2011--doubling U.S. Treasury debt held by the public in four short years.--and we are on track to have $10.7 trillion early 2014, an increase to a factor of 2.5 in less than five years.
Who I wondered back in 2008 would buy these things?
And at what prices would they buy and hold them?
At the very start of the 2000s in the years of the Clinton budget surpluses--remember those?--the U.S. government was repaying its debt at the rate of $60 billion a quarter: each quarter saw $60 billion less of U.S. Treasury debt out there in the private market for savers to hold.
George W. Bush--with assistance from Alan Greenspan and the entire rest of the Republican Party--quickly fixed that: from 2002 to 2007 the average quarter saw net Treasury issues of some $70 billion. Each quarter saw the U.S. Treasury having to find extra buyers for another $70 billion of bonds.
A bunch of us (definitely including me) feared that this shift from prudent to feckless fiscal policy would put substantial upward pressure on interest rates. We were wrong. A weak economy lowered private issues of bonds to fund investment. The desire of China and other emerging economies to keep their currency values low made them eager to soak up every dollar earned by their businesses' exports that they could find and invest it in U.S. Treasury debt. Add to that the emerging private rich abroad for whom U.S. Treasuries became more and more desirable as a hedge, and late-2007 saw the 10-year U.S. Treasury rate exactly where it was when the Clinton surpluses had come to an end at the end of 2001. The market took six years of this swing in bond issues and ate it, without a burp.
Then came the recession. Revenues collapsed. Spending on unemployment insurance and other social insurance expenditures rose. The Recovery Act added an extra $600 billion of debt on top of that. And Treasury interventions in financial markets required debt issues as well. A U.S. government that had been paying back $60 billion a quarter at the start of the 2000s and issuing a net of $70 billion a quarter in the mid-2000s was suddenly issuing $380 billion a quarter of bonds.
Lawrence Summers says that Axel Weber is "crying 'Fire! Fire!' in Noah's Flood":
I think you got it right when you spoke of allowing people to have higher living standards and more choices in their lives and to live more comfortably. I cannot resist taking the opportunity, though, to disagree with the broad spirit of Axel [Weber's] last comment. I do not believe that the long run can be ceded to the avatars of austerity.
I am the father or stepfather of six children. Yes, on their behalf, I am concerned about the possibility that an overly inflationary psychology will develop in my country. Yes, on their behalf, I am concerned that an excessive debt not be placed upon them.
But I am vastly more concerned, because I care about their long-run future, that a slack economy will not provide them with adequate jobs when they leave school. I am vastly more concerned, on behalf of their long-run future, that they will live in a country with decaying infrastructure that will not permit investment to maintain leadership. I am more concerned on their behalf that inadequate resources forced by countercyclical austerity will stunt the ability of their generation to be educated. I am more concerned, on their behalf, that excessive austerity-oriented policies will lead to slower economic growth, and as a consequence to ultimately higher debt-to-annual-GDP ratios--and more pressure, in terms of higher tax burdens, on the future.
Those concerns, which come out of the improper management of current conditions, seem to me to be a larger issue especially for the long run than the concern that somehow unstable and overly expansionary policy starting from where we are now will stunt the opportunities that are open to them.
Now, of course, if policy were starting from a different place I would reach a different judgment.
But starting from where the United States or much of Europe or much of the rest of the industrialized part of the world is starting today, the risks of profound stagnation are a more pressing concern than the risks of a resurrection of stagflation.