The natural human revulsion against unconventional monetary stimulus
Harvard economist Al Roth claims there’s natural human revulsion against all sorts of things. We all know about the sight of blood or sewerage sewage. But there’s also a revulsion against certain concepts, such as the sale of human body parts. I’d like to add unconventional monetary stimulus to that list.
Start with the fact that getting progressives interested in the notion has been like pulling teeth—even though it fits in well with their pro-stimulus agenda. But it’s even worse with conservatives. I used to read the newspapers from the 1930s, and I kept scratching my head over what I read. The conservative business press hated unconventional monetary stimulus, even more than they hated socialism. Indeed their hatred was so intense that at times it became absolutely irrational. This may sound preposterous, but you’ll have to take my word. They actually claimed two flaws in monetary stimulus; it wouldn’t work (the so-called pushing on a string argument) and it would lead to hyperinflation, such as what Germany had recently experienced. Yes, I know that both arguments can’t be true, but that didn’t stop them from making them.
At the time I assumed we were much superior. We had models like AD/AD AS/AD that clarified things; that eliminated this sort of sloppy thinking. But consider the following from Mikihiro Matsuoka at Deutsche Securities:
The Bank of Japan (BoJ) may conduct additional easing operations after the scheduled 27 October monetary policy meeting on the back of persistent JPY strength and uncertainty over the Euro sovereign crisis, according to an article in today’s Nikkei. The article suggested that easing options might include an expansion of the ongoing asset purchase program, with more emphasis on the purchase of long-dated government debt. In our view, it is certainly better to have something, rather than nothing. That said, if the BoJ response were to simply expand the asset purchase program, say by another JPY 5trn, we would be disappointed because it represents nothing more than their typical backward-looking, reactive response without any strategic commitment over the long-run.
The BoJ is highly unlikely to change its behavior as long as Mr Shirakawa, whose term end term ends on 8 April 2013, is in charge. He has continued to reinforce the Bank’s view that QE failed to stimulate the economy from 2001-06. But is this really true? This view does not explain why the Japanese economy enjoyed the longest economic expansion (2001-08), supported by stable and weak exchange rates, even as fiscal policy continued to tighten during those seven years. The BoJ has also made a habit of reiterating the warning that if the central bank embarks on unprecedented actions such as financing government debt, it would lead to accelerating inflation. Wait. How can this ‘ineffective’ monetary policy stimulate economic activity and lead to accelerating inflation? Obviously, these two arguments (ineffective QE and inflation fear) contradict. Until the BoJ recants their statement of ineffective QE, we cannot expect monetary policy to be used as an instrument to rescue for the Japanese economy.
OK, but we all know the Japanese have strange views of monetary policy (as Ben Bernanke informed us.) Thank God we don’t see that at the Fed. To be sure, there are some Fed officials who share the BOJ’s excessive fear of inflation:
Federal Reserve Bank of Dallas President Richard Fisher said the central bank faces a “significant” risk of providing record stimulus for too long and should weigh curtailing its $600 billion bond-purchase plan. . . .
“Continued accommodation presents significant risks,” Fisher said. “In my view, no amount of further accommodation by the Fed would be wise,” whether it is adding more purchases or “tapering” the plan to purchase Treasuries beyond June.
“Indeed, it may well be that we should consider curtailing what remains” of the bond-purchase program, he said. . . .
“We’re there” in terms of the need to end accommodation now, Fisher said, when asked whether he would prefer to wait until June. He added that inflation is “not out of hand yet.”
But at least Fisher’s not also claiming that monetary stimulus would be merely pushing on a string. Oh wait:
Until our fiscal authorities get their act together, further monetary accommodation — be it in the form of quantitative easing or performing ‘jujitsu’ on the yield curve through efforts such as Operation Twist — will represent nothing more than pushing on a string.
Oh dear, it seems to be spreading.
Seriously, here’s what I think is going on. If interest rates were 8% right now, TIPS spreads were 1.5%, unemployment was 9.1%, and this blog recommended cutting the fed funds target to 7.5%, then NO ONE WOULD OBJECT. Not Richard Fisher. Not Bob Murphy. Not Stephen Williamson. Not John Taylor. Not Allan Meltzer. Not Rick Perry. No one.
So why do people object to my proposal for monetary stimulus? Because it’s a proposal for unconventional monetary stimulus. For “printing money” at a time when most people (including most people who agree with me) think money is already incredibly easy. Rate cuts are acceptable, there’s no natural human revulsion against cutting rates from 8% to 7.5%.
Now it just so happens that right now money is tighter than when interest rates were 8% in the 1970s, but you me and about 23 other people are the only humans on the planet who realize that. Hence it seems like I’m proposing Zimbabwe, whereas I’m actually proposing a monetary policy far tighter than the one implemented by Paul Volcker. And that’s one of many reasons why we are where we are.
Still buried with work, but enough of a break where I’ll try to start on the comments.
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26. October 2011 at 14:10
I don’t think Murphy would recommend cutting the rate assuming interest rates were decided in a market system. Since we don’t have a true market system for determining the Fed Funds rate and the discount rate, we don’t have enough information to know what interest rates “should be.”
26. October 2011 at 14:17
OK, I’ll let Murphy comment here. But I don’t think he’d be loudly warning of inflation–parhaps I should have put it that way.
26. October 2011 at 14:25
Great Scott, that was an amazing post!
I suppose they could make the argument that monetary policy is like a ketchup bottle. Nothing, nothing, nothing, and then hyperinflation.
OT: there’s an NGDP level targeting group on facebook: http://www.facebook.com/groups/126000900840454
26. October 2011 at 14:31
over in Europe its effectively like Germany decided the whole continent should be on the Gold standard. we know how that turned out. its pretty clear this euro experiment has not worked. i dont get how bad ideas hold on and never die. I can’t believe after, watching Greece spiral down into depression(and all the failed predictions of expansion), Italy will sign on to budget cuts. sigh…
26. October 2011 at 14:31
Scott hasn’t taught me that money was tighter in 2009 than 1979. He has taught me the incredible relativity of the word “tight.” In a monetary sense at least.
26. October 2011 at 14:34
Scott,
He might be warning loudly of inflation if the Fed had recently exploded the monetary base and headline inflation was pushing 4%. I would be at least.
26. October 2011 at 14:46
Scott
The intervention into the economy by the central bank has been unprecedented. It’s difficult to imagine them buying mortgage backed securities or increases reserves held at the Fed from the low billions to over two trillion 10 years ago. The Fed managed to double it’s balance sheet in a 6 month period. These facts makes this entire blog post asinine.
26. October 2011 at 15:59
Scott hasn’t taught me that money was tighter in 2009 than 1979. He has taught me the incredible relativity of the word “tight.” In a monetary sense at least.
Hmm, maybe I’m missing something from the past discussion, but this comment leaves me a bit confused.
I’d think common parlance (and common sense) is that the supply of something is “tight” when demand for it is rising relative to the supply of it such as to set the price of the thing rising at a fast clip. And the inverse for the supply being “loose”.
Money has a price, of course, in the rate it is exchanged for goods and services as reflected in the general price level.
At the start of 2009 the price of money was rising at a fast clip via the 13% deflation at an annual rate carrying over from Q4 2008. In 1979 the price of money was falling at a fast clip via double-digit inflation.
So the supply of money sure seems to have been a heck of a lot tighter in 2009 than 1979. “Relatively” so? Well sure (in the sense that Babe Ruth was a relatively better home run hitter than Al Weis).
But if there something “incredibly relative” about saying money was tighter in 2009 than 1979, I’m missing it.
(Unless it is the obvious meaning of “incredibly” — money supply was incredibly tighter in 2009 than in 1979, as Babe Ruth was an incredibly better HR hitter than Al Weis.)
26. October 2011 at 16:11
some at the fed might be worried that if velocity suddenly picks up, and triple the base from past qe ops, inflation suddenly jumps.. and they’d have too quickly reduce the base.. as you mentioned in a previous post. I think they are adopting a wait and see approach in the back of some recent good press about the us economy.
ok inflation should be higher, like the uk to get employment going, but they probably think nominal gdp can rise just as fast as it crashed; presumably on the basis of expectations
26. October 2011 at 16:34
Someone else may have posted this already, but John Carney wrote this piece critiquing NGDP targeting for MSNBC today, arguing that it could cause stagflation (or even deflation?). Via Twitter I made the point that at least Scott and Nick Rowe are looking at historical data as well as models, whereas Carney seems to have his own model in his head. Seems to me that he would even argue that FDR’s revaluation of gold in 1933 would cause “stagflation.” I urged him to look at the Bank of England since it’s evident they’re targeting NGDP growth. Carney replied that “We don’t have any comparisons for right now.”
Defending level targeting might be a whack-a-mole game vs. journalists.
26. October 2011 at 16:44
‘Sewerage’is the system of pipes; ‘sewage’ is the stuff that flows through it. I personally am not upset by the sight of pipes.
26. October 2011 at 16:50
“They actually claimed two flaws in monetary stimulus; it wouldn’t work (the so-called pushing on a string argument) and it would lead to hyperinflation, such as what Germany had recently experienced. Yes, I know that both arguments can’t be true, but that didn’t stop them from making them.”
I feel a similar frustration when I read Stephen Williamson claim that printing money can have no effect, after arguing with my Rothbardian friend who thinks that hyperinflation is already happening. It’s annoying to have to defeat both of these extremist claims.
Wrt the instinctive revulsion, I say: yet another reason to focus less on Bernanke, et al, and more on Kim Jong-il. We know that Kim is desensitized to things that ordinarily prompt considerably more revulsion, like mass starvation. Printing a trillion or two “funny money” dollars is nothing to a man like that.
26. October 2011 at 16:57
An update on John Carney, he responds that he’s “very, very open-minded.” So, maybe Scott or another could respond directly to him.
26. October 2011 at 17:11
This reminds me of arguments related to trade deficits. If we have a trade surplus, people will complain about money leaving the country. If we have a trade deficit, people will complain about imports being lower than exports, which obviously, to them, hurts our job market. I’m not sure if anyone is using both of these arguments, but it wouldn’t surprise me.
26. October 2011 at 17:19
Some right-wing economists seem to have conflated partisan posturing with real macroeconomics. There is an obsessive, peevish fixation on inflation and gold, and any type of bold action by the federal Reserve Board. A whole language has grown up around this unhealthy, even perverted fetish for money, including “any inflation is theft.” The Chicken Inflation Little sermonettes and pettifogging continue even as we post the lowest inflation rates since right after WWII and have 9 percent unemployed and we are 15 percent below trend GDP.
Just what is so wonderful about an absolutely stable value of the dollar (how do you even measure that in a world of rapidly evolving goods and services?) is never explained, except by very out-of-date explanations that inflation would distort consumer ability to determine good prices. Hoo-haw.
I get the sense some of the gold-nut types are deeply skeptical about the putative value of economic growth and yes have an absolute and all-consuming revulsion for any inflation. This type is attracted to central banking jobs the way child molesters are to kindergartens.
Perhaps bondholders are just hiring hacks to write against economic growth—after all, robust economic growth would probably cause bond values to go down. Maybe Richard Fisher is just a hireling, a minion of the bond-holding class.
Fisher is a menace to the economic security and prosperity of the USA.
26. October 2011 at 17:59
As one of the folks on the progressive side, I’d like to say unconventionality doesn’t scare me. The more unconventional the better! Hell, I want to tax the piss out of rich people and give their money away to struggling Americans, and also have the government run a permanent WPA-like federal jobs program. I’d also like to reorganize the monetary authority of the United States under an agency that answers more directly to the political branches of the United States government, and expand the size of the public sector. So bring on the unconventionality!
I just fear the unconventional policies being offered by the monetarists are snake oil, another epicycle in the sad Ptolemaic enterprise of monetarism – with its ever shifting proposals to change targets after recurring embarrassing failures to hit the old targets. I don’t think the new stuff will do very much at all, and what little it will do won’t be positive.
It might do some things that are negative – like drive down the real wages of people who can least afford to have their wages reduced, while at the same time making their daily lives more expensive.
Monetarist approaches are also a massive distraction for progressives, a seduction for nice progressive boys like Matt Yglesias who should be out pounding the policy pavements on behalf of a renewed era of fiscalism, instead of getting wrapped up in these banker-side tweaks. Now we even have these demoralized progressives telling us that the way out of our problems is to push down real wages. What will these “progressives” think of next? Ending the minimum wage? Privatizing Social Security? Declaring 9% to be the new “natural” rate of unemployment?
I also tend to think a lot of what I read on behalf of the new monetarism is based on voodoo theories of Fed influence over the economy, and that the defenders cannot even give a clear and consistent statement of how it is all supposed to work that doesn’t depend on embarrassing yarns about powerful wizard central bankers who make the world quake and move with their all-powerful dicta.
The main defenders can’t even agree if they are trying to accomplish something positive that will occur as a result of engineering higher inflation, or if higher inflation will occur only as an epiphenomenon of the policy. And while Scott says that NGDP level targeting is a kind of stimulus, Lars says its really the opposite of stimulus. (http://marketmonetarist.com/2011/10/18/ngdp-targeting-is-not-about-%E2%80%9Dstimulus%E2%80%9D/) Everybody seems to see something they like inside this foggy mirror. What kind of approach to policy is that?
Finally, I don’t think we should be doing anything to empower central banks or enhance their social prestige at this time. One Greenspan era was enough! I’m looking forward to the day when we declare the era of the celebrity central banker over, and get back to choosing our economic future though activist democratic government, instead of relying on unelected banker-saviors to fix everything.
26. October 2011 at 18:05
Peter, Good to hear about the Facebook group.
dwb, Yes, they never seem to learn.
John. And why would anyone be interested in “headline inflation?” Are there any economic theories that say “headline inflation” is important in some way? I haven’t seen any. Does headline inflation have something to do with the “cost of living?” How about the prices of things like housing? If not, why is “headline inflation” interesting, other than as a number to put in the headline of newspapers to sell copies.
In 2009 headline deflation was quite serious, and we had lots of unemployment. Where was Fisher then? Wasn’t he saying ignore headline deflation? It’s just a blip.
I prefer to drive my car by looking down the road, not in the rear view mirror. But that’s just me.
As far as intervention, much of it has been contractionary. You seem to assume all “intervention” is expansionary. It isn’t.
maximilliene, Let’s hope that’s not their thought process, as it would be totally without merit. But I fear you are right.
JTapp, It can’t cause stagflation, but it’s quite possible that stagflation could occur under NGDP targeting. However the average rate of inflation would be no higher than under inflation targeting.
Michael, What was I thinking? Corrected.
Will, Kim may be our only hope.
JTapp, Thanks for the update on Carney.
Peter. Or the way people fear imports, and factories leaving the country. Not realizing that a current account deficit means capital is flowing into the US.
Ben, Yes, it’s hard to figure them out.
26. October 2011 at 18:14
Scott, though it’s laudable that you attempt to respond to your commenters individually I’d like to suggest that it’s not a good use of your time. You’ve gotten too big to be dealing with commenters, especially if it’s taking away time from “striking while the iron is hot”.
26. October 2011 at 18:15
Dan, you said;
“What will these “progressives” think of next? Ending the minimum wage? Privatizing Social Security? Declaring 9% to be the new “natural” rate of unemployment?”
Progressives seem to like the European model. Do you realize that Germany had no minimum wage until a couple years ago? And that 9% has been the natural rate of unemployment in France for 30 years, mostly due to “progressive” labor market reforms?
You said;
“Finally, I don’t think we should be doing anything to empower central banks or enhance their social prestige at this time.”
If I had to summarize the failure of modern progressivism of the Obama era, it would be as follows:
“You may not care about central banking, but central banking cares about you.”
Avoid it at your peril, it’s what drives AD. Ignorance of the Fed may cost Obama re-election.
Fortunately the smarter progressives like Yglesias, DeLong and Krugman are now pushing nominal GDP targeting. Let’s hope they can educate those progressives who lack their understanding of the complex field of monetary economics.
26. October 2011 at 18:16
Policy wank. Yes . . . no time for more.
26. October 2011 at 18:47
If interest rates were 8% right now, TIPS spreads were 1.5%, unemployment was 9.1%, and this blog recommended cutting the fed funds target to 7.5%, then NO ONE WOULD OBJECT. Not Richard Fisher. Not Bob Murphy.
Scott, you’re right I wouldn’t be objecting, but only because it would be like me standing up at a NASCAR event and yelling, “Are you people serious? You like watching this?”
I.e. you would be so conventional, there’d be no point in me objecting. But, I wouldn’t support it, if the action were achieved by the Fed expanding its balance sheet.
Remember, I have this odd notion where counterfeiting is wrong, even when conducted by The Bernank.
26. October 2011 at 19:24
Jim Glass,
In 2009 the monetary base exploded. In that sense monetary policy was extremely loose. Since that is the measure that the Fed has the most control over, I don’t think it is unreasonable to say that the Fed pursued a very expansionary policy in 2009. The fact that NGDP didn’t rise has to do with banks sitting on the money.
Scott,
You love to cherrypick housing as a falling price, but the price of medical care, medical insurance, and school tuition have been steadily exploding. Who cares about headline inflation? People like me that eat food and drive cars.
2009 headline deflation was a tiny, miniscule blimp on an otherwise uninterrupted trend of 40 years (since we left gold) of rapidly rising prices. Any long term graph of the CPI will prove my point.
The government has no interest in contractionary interventions. Aside from isolated mistakes on their part, the government generally pushes for more money and more spending. Nothing in history is better demonstrated.
The point I’m trying to make is that people are being fleeced in the name of “economic growth” and it’s time they woke up to it. Printing money makes GDP figures rise and creates an illusion of growth and profit while crushing the middle class and destroying our ability to save and improve our living standards in the future. A 5% nominal GDP target, just like an inflation target, institutionally enshrines our economic turmoil.
26. October 2011 at 19:25
Scott, central banking only plays a huge role in our lives if we let it. It is crazy and immoral for a self-respecting democratic country like the United States to passively devolve upon a handful of unelected, weakly accountable bankers outright control over all key monetary and financial decisions. And it is extremely frustrating that we cannot efficiently pursue public purposes with our national money because we have given up our direct power over that money and delegated it all to some independent bankers who primarily work for the banks and financial services industry.
According to Yglesias, the power of the central bank largely depends on a tacit social consensus to allow the central banker to call the economic policy shots, and then to form our expectations on the basis of those calls, thus making our expectations both self-fulfilling and rational after the fact. Now fortunately for my sanity, I don’t believe this weird financial sector goose-stepping actually exists. For years, we were told the central bank could control monetary aggregates, but they couldn’t. The we were told they had the gang of Ponzi lenders and rent gougers in the financial sector well in hand. But they spectacularly did not. Then we were told to look out for the great blessings of the recent forays into quantitative policy – but they didn’t materialize either. I’m not a trader or financial trader, but it strikes me that the recent trend is for most of the markets increasingly to say “ho-hum” to Fed statements, as each lesson in the exaggeration of Fed powers sinks in.
Given the performance of the great Alan Greenspan, and his pathetic, goofball testimony to the Senate confessing that his adolescent Ayn Rand theories of free market and corporate behavior have been dashed by the real world, who can any longer believe in the wisdom or prognosticating capabilities of these poseurs?
But if I actually did believe in the existence of such a powerful deferential consensus in America to form mass economic expectations in response to the words of a single unelected official, I would treat it as a kind of social emergency, like the triumph of a cult. I can’t imagine any more slavish and embarrassing attitude for a democratic citizen to adopt.
Fortunately, many of the central bankers themselves seem to have more modest views about their powers than do the faithful flocks. Yet no matter how many times the bankers say, “We can’t really do as much as you think we can,” the believers shout back, “Oh yes you can! Speak! Declare! Form my expectations!” Bernanke seems fairly modest, and doesn’t affect to enact the role of megalomaniacal vizier Greenspan played.
The central bank religion is a doctrine for those who pine for a kind of elite, authoritarian and highly centralized control. I think it is a weird social pathology made more intense by the general crappiness of our present economy and the dysfucntional malevolence of the current do-nothing Congress. Matt seems very negative about democratic institutions in general, and like many Democrats is in something close to desperation about what appears to be the impending Republican-engineered failure of a Democratic presidency. He really wants it to be true that Ben Bernanke could fix in all with a few words about some new target, and regards Bernanke’s refusal to speak these words as some kind of partisan political conspiracy against the public good. Strangely, while he is thoroughly convinced about the tremendous powers of the naked Fed Statement, he thinks those who call for more powerful rallying statements from the President are wrong and naive. Maybe that’s because the President was actually elected, and Matt would prefer to live in a safe world run behind the scenes by Harvard kids.
26. October 2011 at 19:28
You love to cherrypick housing as a falling price, but the price of medical care, medical insurance, and school tuition have been steadily exploding. Who cares about headline inflation? People like me that eat food and drive cars.
Some argue inflation is much worse than it appears, due to the CPI being an out-of-date measure. Does anybody know anything about these guys:
http://www.shadowstats.com/alternate_data/inflation-charts
26. October 2011 at 19:41
Matty is half-wit effete intellect.
His audience are the minority of the minority without a pot to piss in, government jobs, and they hear scary noises emanating from the jungle.
A preacher doesn’t have an easier audience. His traffic originated from .GOV.
Basic provable and valid assumptions like:
Only likely voters matters.
Monetary policy, money, and government exists for the people who actually have money.
Beggars can’t be choosers.
Ruin him.
Here is a sample of his completely uncovered back flank from today:
“If you don’t tax the rich, and you also don’t tax the non-rich, then you can’t really expand social welfare provision.”
http://thinkprogress.org/yglesias/2011/10/26/353832/tax-policy-rules-everything-around-me/
Um no, if you reduce (F, S, and L) public employee compensation to it’s 1998 levels (with inflation), you have HALF A TRILLION DOLLARS to spend on “welfare.”
He isn’t smart enough to investigate the worthlessness of Soros and Podesta.
He isn’t smart enough to start an Internet company.
He’s a rank amateur.
26. October 2011 at 20:19
“Scott, central banking only plays a huge role in our lives if we let it.”
i.e. “Scott, money only plays a huge role in our lives if we let it.”
This is so depressing. Conservatives only admit the importance of money when it comes to hyperinflation; otherwise more deregulation and tax cuts fixes everything. But liberals never admit the importance of money!
This is a far far cry from the American progressives of the 1890s, who understood the power of money and ran a whole presidential campaign predicated on devaluing the dollar (ever heard of bimetallism and the cross of gold?). I thought leftism had made progress when Krugman quite clearly said in the 1990s that the unemployment rate will be what the Fed chair wants it to be, plus or minus an error reflecting the fact that he is not quite god. Clearly, it has regressed.
Dan, your whole post is basically claiming that with pixie dust, more regulation and government spending can fix the economy. I thought you guys were all into behavioural economics, externalities, tragedy of the commons, etc. What is the biggest problem with homo economicus besides the fact that real human beings won’t take nominal pay cuts? What is the biggest tragedy of the commons other than millions having no job and no income because the rest of society won’t accept minuscule reductions in their real income?
26. October 2011 at 20:19
Dan,
Yeah I’ve seen shadow stats but even I think it overstates things. There’s simply no scientific way to do the CPI. I’m convinced you really just have to accept that numbers are flawed and people only use them when they support what that person has to say. The best CPI will always come from housewives that keep good track of their expenses.
26. October 2011 at 20:27
Dan,
I just read through your post on the central bankers and it’s good stuff. You should join the call to end the Fed if you haven’t already. Central banks are unfitting for a free society. I just wish you had an appreciation for Mises, Rothbard, and Hayek because they’ll teach the economics of liberty and why freedom gives you better results than coercion every time.
26. October 2011 at 21:10
Scott, other than IOR, can you lay out by what mechanism the Fed is making money tight? I have a hard time buying the idea that it’s just an expectations game.
26. October 2011 at 22:22
Cassander: Scott addresses that in the FAQs section.
26. October 2011 at 22:34
Good grief there’s a lot of rhetoric in this thread, from just about everyone. It would be more tolerable if there was more substance.
You know who you are.
26. October 2011 at 22:39
PS: John is right on shadowstats and CPI. If you use the shadowstats CPI figures to deflate GDP, you end up with the result that the US economy has been contracting almost continually since the Gipper left office.
To further show the worthlessness of CPI, the Boskin commission concluded that it substantially OVERSTATES price inflation, suggesting that about 15 years of theories based on the assumption that real wages have not been growing are all useless. The lesson here is that we shouldn’t put much stock, if any, in price indexes, especially those so narrow as CPI.
26. October 2011 at 22:45
I must confess, I am unfamiliar with the “AD/AD model.” Does it claim we are always at an eqm since all points of the two graphs overlap or that no eqm can exist? How would you tell them apart?
26. October 2011 at 23:55
CA> I’ve seen that, but it comes up short. He indicates lots of things that don’t indicate lose money, nothing that does, and nothing that indicates tight money. He’s also referred to central bank tightening in 2008, but AFAIK, never said HOW they did it. Basically, if I talk to my economically literate friends and the conversation goes like this
Me: “Well the problem is really tight money”
Them: “But rates are really low, how is that tight money”
Me: “Misleading indicator”
them: “All right, what indicator should we use”
Me: “Mumble mumble, IOR, mumble”
27. October 2011 at 01:02
Dan:
I agree with your notion of the central bank. I don’t agree that it should be more in the hands of bureaucracy, however, because it is my personal belief that the changes to the recourse rule in 2001, made by the part of the Fed that is run by political appointees, in connection with the FDIC, was the one of the largest parts of the impetus for the MBS fiasco and the lack of reserves for when the market for them collapsed. Like most other things in government, they become corrupt and more of a menace to society than producers of the good intentions that were behind them in the first place. Thinking about the banking act in 1933, it really isn’t that much a stretch of the imagination that this huge mess we’re in has very little to do with the bankers themselves, but more the winks and nods, and codification of them within the regulations themselves.
I really do not know how to solve that problem other than to just get rid of it all, go back to a market-based monetary system and replace Federal regulators with State prosecutors. The threat of jail, with an example made here and there, is quite sobering. Just imagine no more bailouts, bankers actually go bankrupt and the get carted off to jail, no more playing fast and lose with the rules on both sides with average Joe left holding the bag of woe.
Though, it isn’t even that necessary for the Federal govt to agree with it. There is an article in our Constitution that would allow the States to prosecute such offenses. And that could be at least one way to run the system, with States providing an rather draconian check on the corruption in the banking system. Right now, several states have a suit against the main federally chartered banks. But they are simply demanding money for restitution, that once its paid from money the Fed gives them, it will disappear into the governmental black hole. It won’t give back the homes people lost. It won’t give back the money pension funds lost. It won’t pay back investors. And it won’t hurt the top management in these firms at all, only the stockholders who were likely as clueless about the makings of the financial crisis as the rest of us. I think we should demand something more, like a pound of flesh, at least going forward.
27. October 2011 at 01:52
Bob,
“Remember, I have this odd notion where counterfeiting is wrong, even when conducted by The Bernank.”
Doesn’t this go down all the way to what you would expect free banking to look like? I take it you assume 100% reserve banking?
27. October 2011 at 03:14
And all this leads to comments like this one from a Chief-Economist (Ian Shepherdson:
“This recession, followed by sluggish recovery, is not the experience of pretty much anyone today,” Mr. Shepherdson said. “So for all intents and purposes nobody in America has any experience for an economy behaving like this. Economists don’t even understand it.”
He added: “So if people don’t really understand what’s going on in the economy, how can they frame reasonable expectations of where it’s going?”
27. October 2011 at 04:06
johnlmeek, if we were still on the gold standard, maybe I would be interested in your monetarist theories. And if I were hearing from the people I knew that they were seeking more credit but having trouble getting it, or that banks and companies were suffering from a dearth of case, I might be sympathetic to the Market Monetarist claim that money is tight. But instead, what I hear from people is that they want to avoid additional credit like the plague. And I hear about companies that are sitting on record-setting piles of cash, and banks possessing spectacularly elevated levels of extra reserves. The monetarists present no empirical data points at all to sustain their wacky “tight money” theories, but only the a priori theory that tells us that money must be tight because things are stagnant, and if that that’s not due to tight money than monetarism is wrong – again.
What is the biggest tragedy of the commons other than millions having no job and no income because the rest of society won’t accept minuscule reductions in their real income?
First, we have already been suffering plenty of wage and salary cuts. People don’t get the commissions and bonuses they used to get, and their nominal wages have been rising more slowly than the cost of living.
Buts just look as what you’re saying. We have abundant data – not theories, data – showing us that the a very small percentage of the most fortunate Americans have been reaping vastly larger shares of our national income over the past decade, while the lower and middle deciles are either seeing their real incomes standing still or declining. And yet your diagnosis is that ordinary Americans are still paid too much, and must be paid even less so that the people who own America can be properly incentivized to hire the unemployed.
Sorry, but that’s just crazy to me. We don’t need more wage cuts. And we sure don’t need more inflation – not unless it is accompanied by correspondingly strong nominal wage increases so the inflation actually helps us deleverage. We just need to pick up our figurative pitchforks and go claim a larger share of our abundant national income.
27. October 2011 at 04:15
Hi John,
My outlook is “bend the Fed”, not “end the Fed.” I want the American public to take charge of the operations performed by the Fed, and govern them through democratic means, rather than turn them over to laissez faire monetary entrepreneurs. I’ve read Hayek and see plenty of value in him, but I’m not buying the grand theory, because I have also read about and seen first hand too many examples of gross market failure and inefficiencies – that have nothing to do with the “state” – and also believe that even when markets “work” the effect are not always socially optimal.
I also think those Austrians have a poor understanding of the nature of competition and the real sources of political power. Competition does not produce an ecological balance in the economy. It is a ruthless game that eventually produces winners and losers, and unless the power of the top winners is checked by the political solidarity of everyone else, those winners will buy for themselves the coercive power to make themselves governments unto themselves, just as powerful and more authoritarian than the fragile but precious democratic governments we have now.
27. October 2011 at 04:37
@policy Wank: +1. I have mentioned this to Scott many times about responding to every single comment and how it saps his time away from meaty posts he might otherwise make. He won’t listen to me 🙂
27. October 2011 at 04:54
Dan, you are deluded.
You want money to be a tool for Democracy? No.
What are you going to do about it? Beat a drum?
Look, these are the real income shift numbers:
http://www.cbo.gov/doc.cfm?index=12485
Look at the 81-99%:
1. they don’t lose anything to the top 1%.
2. they have a ton of money.
Add in the top 61-80%:
Combined the 61-99% have more money that everyone else put together.
They also are likely voters.
So Dan, let’s get this straight, you are worried about the bottom 60%, and you are railing against the top 1%.
But your policy ideas show you to be the WORST GAME STRATEGIST of all time.
ANY game theorist would say your optimal strategy is not to try and lead / win from the bottom 60%, they would say your optimal strategy is to throw your lots in with the 81-99% and LET THEM LEAD.
I think you are just too emotional, I think your own attitudes toward big fish in small ponds, towards the employers in any given small town – you know the Tea Party folk, all 20M+ of them, keeps you from being able see that FOLLOWING THEIR LEAD – giving them control in a take down of the top 1% – is the fastest possible to reverse the effects of the past 15 years.
Why won’t you wake up?
Look at those distributions, which single block has the most money and votes???
Which one comes next?
WAKE UP.
27. October 2011 at 05:22
Dan,
You’re right that market competition producers winners and losers. The winners are those who best use scarce resources to serve other people and the losers are the people who go out of business because they were using resources in a suboptimal way. Fortunately, the people who “lost” benefit from this process in their role as consumers. I think if you read more market friendly literature you’d see that fair or unfair has nothing to do with it. In a market system you make money according to your ability to serve other people. That’s a beautiful thing that progressives don’t seem to get.
27. October 2011 at 07:06
John,
I more or less get that, since I see the benefits of competition all around me in the business world. But I think the trend over time is for people to first win a competition by better using scarce resources to serve other people, and then once they have won the battle to exploit the power of their victorious position to stop serving other people, to serve themselves and solidify their business fortress, and to pre-empt other upstart attempts at competition through a combination of market power and political interest.
Also, some of the winning and losing doesn’t come from efficiently using scarce resources to serve others but from – to put it bluntly – deceiving them and cheating them and taking them for rides. (See the financial sector.) Now maybe in theory cheats and swindlers are driven out of the market over time, but in some cases not until they have already laid waste to a large part of the social landscape and crashed previously functioning economic systems. Some of the malefactors are also never caught and never chastened by either legal or market forces, because the products in which they trade are so complicated that even experienced clients don’t know they are being cheated.
Finally, there are other values that need to be served beyond the provision of goods of the kinds that can be exchanged in markets. It takes hard work to sustain a democratic community, for example, and the survival and thriving of such a community depends on a code of social camaraderie, care and something like sharing. I understand the value generated by extremely competitive individuals, and even by gleeful social Darwinists and triumphal rabble-haters like Morgan. But you can’t have a whole society based on that kind of code. Or at least, if you can have such a society, it is not the kind of society most people would want to live in.
27. October 2011 at 07:29
“I more or less get that, since I see the benefits of competition all around me in the business world. But I think the trend over time is for people to first win a competition by better using scarce resources to serve other people, and then once they have won the battle to exploit the power of their victorious position to stop serving other people, to serve themselves and solidify their business fortress, and to pre-empt other upstart attempts at competition through a combination of market power and political interest.”
Dan, brother, the answer to that is DISTRIBUTISM.
http://biggovernment.com/mwarstler/2011/08/19/tea-party-economics-distributism/
And before you skip over it, also read the comments – that’s Tea Party Central right there.
Look, confronted with the facts as you see them, instead of writing simple laws ans tax codes that FAVOR SMB over large business, that FAVOR newco creation and investment over large firm statism, you want to have a big government.
But big government has the same problems as big companies, to be true to your own observations ad moral system what you want is:
1. favor many small companies over a few big companies.
2. favor many small governments (state ad local) over a big one.
27. October 2011 at 09:20
“if we were still on the gold standard, maybe I would be interested in your monetarist theories.”
So if a gold standard is artificially tightening the money supply, we should fix it, but if policymakers are artificially tightening the money supply, we should pretend it doesn’t matter.
“And if I were hearing from the people I knew that they were seeking more credit but having trouble getting it, or that banks and companies were suffering from a dearth of case, I might be sympathetic to the Market Monetarist claim that money is tight.”
Nominal income growth is stagnant. Not credit, but income. People aren’t getting raises, and people are being laid off instead of seeing their wages cut. It’s a classic demand-side recession with classic demand-side solutions.
“First, we have already been suffering plenty of wage and salary cuts. People don’t get the commissions and bonuses they used to get, and their nominal wages have been rising more slowly than the cost of living.”
Those aren’t nominal wage cuts.
“Buts just look as what you’re saying. We have abundant data – not theories, data – showing us that the a very small percentage of the most fortunate Americans have been reaping vastly larger shares of our national income over the past decade, while the lower and middle deciles are either seeing their real incomes standing still or declining. And yet your diagnosis is that ordinary Americans are still paid too much, and must be paid even less so that the people who own America can be properly incentivized to hire the unemployed.”
Monetary policy isn’t a solution to inequitable income distribution. It’s a solution to stagnant real incomes caused by a demand-side recession. Ordinary Americans are being paid too much relative to poor Americans who aren’t being paid anything at all. Rather than forcing layoffs, monetary policy can put those folks back to work.
“Sorry, but that’s just crazy to me. We don’t need more wage cuts. And we sure don’t need more inflation – not unless it is accompanied by correspondingly strong nominal wage increases so the inflation actually helps us deleverage.”
So basically we agree.
27. October 2011 at 10:57
Dan,
I completely agree that business interests try to pursue a monopoly. The most effective way for them to do this is through the government. The best example is the passing of complicated legislation like health insurance or Dodd-Frank. The big businesses have the resource to comply and take full advantage of new rule changes while small businesses usually don’t. That’s why it’s so important for the government to keep their hands off. I don’t think progressives like you and libertarians like me are really so far off on that issue (but I do have a grudge against pro-bailout progressives like Krugman).
As for free-market, non-government interference monopolies, I really think those are a myth. It is simply hard to find any good cases of them in the real world.
When you say that the economy has to serve non-material interests, I think you’re overlooking the value of material goods. If we didn’t have continual material improvements, society would collapse. Try telling the value of higher, spiritual things to people with empty stomachs.
One interesting side note about this point, there aren’t any stable democracies with low per capita GDPs. It just doesn’t happen. Democracy is a rich country political system. A functioning democracy depends on a large class of materially comfortable people with a vested interest in the system. Take away the material goods and you have desperate people looking to revolution.
27. October 2011 at 11:52
[…] Scott Sumner: The natural human revulsion against unconventional monetary […]
27. October 2011 at 12:20
[…] conclusion is that people are just frightened by the abnormality of it all. Says […]
27. October 2011 at 14:09
Bob, Fair enough.
John, You said:
“You love to cherrypick housing as a falling price, but the price of medical care, medical insurance, and school tuition have been steadily exploding. Who cares about headline inflation? People like me that eat food and drive cars.”
This is a fundamental EC101 error. Inflation doesn’t matter to economists, even Austrian economists, because it affects living standards. Let’s not forget that when the Fed pumps up inflation they do so by raising income, which means the extra amount you pay, raises the incomes of others.
Economists consider (demand side) inflation a problem because it leads to the misallocation of resources. High medical care costs are a microeconomic problem caused by bad regulation, it has nothing to do with monetary inflation.
The fact is that if we are concerned about inflation distorting resource allocation in the economy, we certainly aren’t going to pay attention to headline inflation, but rather something that actually measures, you know, MARKET PRICES.
Dan, You said;
“Scott, central banking only plays a huge role in our lives if we let it. It is crazy and immoral for a self-respecting democratic country like the United States to passively devolve upon a handful of unelected, weakly accountable bankers outright control over all key monetary and financial decisions. And it is extremely frustrating that we cannot efficiently pursue public purposes with our national money because we have given up our direct power over that money and delegated it all to some independent bankers who primarily work for the banks and financial services industry.”
That’s fine, I’d like Congress to set a 5% NGDP target, implemented with futures contracts. Then the Fed would have nothing to say about the money supply or interest rates. The public would determine the money supply.
Dan, Regarding the accuracy of inflation, there’s a problem with the “much worse than it seems” argument. Any errors don’t really impact NGDP. So if true, we are in a Depression. But then all our other data must also be wrong–industrial production, retail sales, employment, car sales, etc, etc. How likely is that? It doesn’t solve any mysteries, just creates new ones.
I’ll let Matt defend himself.
johnleemk, Good point.
Cassander. To me the only sensible definition is relative to what’s needed to create on-target NGDP expectations. Right now me and most other people think faster expected NGDP growth would be good, so by that definition money is too tight. The Fed has three tools:
1. Money supply (OMOs)
2. Money demand (IOR)
3. Expectations of future policy (NGDP target, level targeting) This actually works via money demand, but I think it’s useful to view it separately.
We should think in terms of using tools to raise NGDP expectations. We should set the goal, and let the monetary base be endogenous.
Derrill, Ouch, I’ll correct it.
Marcus, Yeah, I’ve noticed a lot of economists are “puzzled” as to why “easy money” and fiscal stimulus are not promoting a recovery.
27. October 2011 at 16:15
So if a gold standard is artificially tightening the money supply, we should fix it, but if policymakers are artificially tightening the money supply, we should pretend it doesn’t matter.
Show me some empirical evidence, johnlmeek, that the money supply is tight, artificially or otherwise. And I mean evidence – not inference from a monetarist theory. You don’t like to measure tightness with interest rates; you don’t like measure it with the classic monetary aggregates. What do you like?
‘Cuz when discussing monetary tightness and looseness with the monetarists, the discussion usually seems to go like this imaginary discussion with a chiropractor:
– I have a stomach ache.
– That’s because your spine is misaligned.
– Really?
– Yes, we chiropractors know that stomach aches are caused by spinal problems.
– It’s really bad; I’m throwing up.
– Classic spinal misalignment.
– It doesn’t look misaligned.
– You can’t see it by looking in a mirror.
– My back doesn’t hurt.
– Spinal misalignment often produces no pain in the spine itself.
– Well, I have this back x-ray from the hospital, and everything looks fine.
– X-rays don’t show everything.
– But they actually measured my back at the hospital – left/right, forward/back – everything looks normal.
– We chiropractors don’t measure spinal misalignment that way.
– Well how do you know there is something wrong with my spine?
– You have a stomach ache, don’t you?
27. October 2011 at 16:21
When you say that the economy has to serve non-material interests, I think you’re overlooking the value of material goods. If we didn’t have continual material improvements, society would collapse.
I didn’t say we shouldn’t try to serve material interest, John. Of course we should. I just claimed that there are other interests besides material interests we also should work to serve.
27. October 2011 at 19:03
But isn’t that circular? Aren’t you basically saying we know money is tight because NGDP growth is low, but NGDP growth is low because people expect money to stay tight?
27. October 2011 at 19:52
[…] the difficulty in agreeing on “communication” has to do with the title of this Scott Sumner post: “The natural human revulsion against unconventional monetary stimulus”. At the end he […]
28. October 2011 at 18:10
Cassander, NGDP is low because the expected future path of money is too low for on-target NGDP growth. That’s my definition of tight money.
“We know the steering wheel is too far to the right because the ship is drifting toward the starboard. The ship is drifting toward the starboard because the steering wheel is too far to the right.” Is that also circular reasoning?