One accusation that's been flying around a lot over at Yglesias' place is that liberals are ignoring monetary policy. Matt makes the assertion today in a post called Job Creation is the Fed's Job. The story, basically, is that liberals know that the Fed could easily create millions of jobs by changing its policies, but we're fixated on fiscal policy.
Of course this is not the case. The problem is that lots of us, myself included, don't believe that the Fed can do much right now. One thing that's been suggested is that the Fed could increase its inflation target from 2% to something higher. I favor that but don't think it will help the current situation. Another is that the Fed should target NGDP growth instead of inflation. I think that's an interesting idea but don't think it will help the current situation.
Yglesias keeps hammering on two ideas to justify his fixation with monetary policy - one, that Bernanke himself says that the Fed has tools that could help the economy but isn't using them for some reason. This isn't true - Bernanke says the Fed has things it might try if conditions warrant. That's not the same as saying there are things that would help now that he's refusing to do.
The second idea is that there are central banks around the world that are succeeding with the monetary policy ideas he's hawking. Matt's first obsession was Sweden - he linked to an article about Sweden setting its policy rate negative. Unfortunately Sweden never set a negative policy rate - it was an apparent misunderstanding by a reporter that had been debunked before Yglesias ever got involved.
Yglesias continues to claim that Sweden did what they did not do, and has never addressed the Economix piece to my knowledge. And now he's got a new dead horse to flog: Bank of Israel's alleged targeting of NGDP growth. Evan Soltas started a rumor that Bank of Israel was NGDP targeting and that this policy had led to Israel's impressive growth path since the 2008 financial collapse.
Once again, though, Matt has simply catapulted a myth into the mainstream. Bank of Israel is not NGDP targeting. Sweden never had a negative policy rate. All these little mistakes add up to a big imaginary set of data that monetarists seems to have agreed to pretend is actual data. This is no way to discuss the finance policy of the most important nation in the world.
Tuesday, June 12, 2012
Proving that Bank of Israel is Using an Inflation Target
Eric, one of the more rabid market monetarist commenters at Yglesias' place, is still insisting that I prove that Bank of Israel is not using NGDP targeting. So, here goes.
1. Bank of Israel's published policy is a 1-3% inflation target.
2. Bank of Israel publishes a report every quarter explaining how it arrived at its policy by targeting 1-3% inflation.
3. Bank of Israel's policy changes are consistent with a 1-3% inflation target (their stated policy) and inconsistent with an NGDP target (their alleged secret policy that a prep student invented by writing a blog post.) We know this because in late 2009 Bank of Israel tightened rates to curb inflation despite the fact that NGDP growth was below the alleged target rate of 6.5%.
I really, really hope that does it. But somehow I think that it won't.
1. Bank of Israel's published policy is a 1-3% inflation target.
2. Bank of Israel publishes a report every quarter explaining how it arrived at its policy by targeting 1-3% inflation.
3. Bank of Israel's policy changes are consistent with a 1-3% inflation target (their stated policy) and inconsistent with an NGDP target (their alleged secret policy that a prep student invented by writing a blog post.) We know this because in late 2009 Bank of Israel tightened rates to curb inflation despite the fact that NGDP growth was below the alleged target rate of 6.5%.
I really, really hope that does it. But somehow I think that it won't.
Monday, June 11, 2012
The Bank of Israel is not using NGDP Targeting
A couple days back Scott Sumner approvingly linked to a piece by a little-known blogger named Evan Soltas in which Soltas alleged that the Bank of Israel is using NGDP targeting.
Then Matthew Yglesias approvingly linked to the Scott Sumner article, and now around the web you're seeing market monetarists in comment threads bringing up how wonderful NGDP targeting is and wouldn't it be nice if all central bankers were as smart as the ones at Bank of Israel.
Well, there's a problem. The Bank of Israel is not using NGDP targeting. Soltas' "evidence" that the Bank of Israel was using a 6.5% NGDP target is that Israel's NGDP growth rate has hovered around 6.5% the past few years. Seriously, that's the evidence.
Sumner, who despite being by all accounts a nice guy traffics in these kinds of flimsy free-associations all the time, took Soltas' post at face value, and Yglesias, who is not known for his rigor, catapulted the whole myth into what passes for the blogosphere's "mainstream."
This is the same thing that happened with Sweden's fictional negative interest rate policy - Yglesias linked to an old article that had since been corrected and now the myth keeps popping up because Yglesias never, ever corrects anything.
I defend Matt a lot to people who think he's a real nuisance, but this sort of thing makes it hard. Correct the record, Matt. Bank of Israel is not using NGDP targeting - they're using a 1-3% inflation target. Full stop.
Thursday, June 7, 2012
The Television Addiction Situation
Once upon a time there were two children who were very smart and very obedient but whose parents had made a very serious miscalculation. The parents had allowed the children to become addicted to television.
Every morning upon awakening the children would demand television. They would demand to have it before breakfast, and when they were told they could not have it before breakfast, they would demand to have breakfast WITH television, and when they were told they could not have breakfast with television, they would collapse on the floor in tears and refuse to do anything at all for the rest of the day.
The parents were beset by offers from friends and neighbors to break the children of their unhealthy reliance on the glowing storybox, but the parents, being an odd sort of parents, saw in their kids' affliction an opportunity.
One morning when the children awakened they were greeted not with the normal trip to the breakfast table but to a strange room that they had never noticed in the house before. Inside were stacks of cards, each identical to the next, with a drawing of a snake wrapped around a staff, and the signature of the mother and father in the bottom left and right corners, respectively.
The children were told that from now on in order to watch one television program each child must remit one card to either the father or the mother. The cards were acquired by doing chores - one card for sweeping the kitchen, two for cleaning out the shed, and three for planting a berry bush or suchlike improvements to the home.
At first the children worked only for the television they wanted to watch each day, but soon Ruby, who was older, said to her little brother "Luke," for that was her brother's name, "we should spend a day doing chores so that the next day we can spend the ENTIRE DAY watching television."
The prospect of an entire day of doing nothing but watching television so inspired the little one that he did twice his normal work - though it was still a fraction of what his sister could do - and the two saved enough cards to make their dream come true. They could hardly contain their excitement as they lay their heads down to sleep.
When they awakened they did not demand television before breakfast but ate their fill, knowing that a glorious day of television watching lay ahead of them. After finishing their meal they sat down and watched all their favorite movies, and all the best episodes of the very funniest shows.
At lunchtime they ate thoughtfully and talked about their cards. They loved television but they loved the power of the cards as well, and they didn't want to be without television the next day. In the end it was decided that they would go to a friend's house for the afternoon, and use their cards to watch television the next day.
As time went on the children began to acquire so many cards that they could not imagine ever using them all. It was then that things began to get complicated.
Every morning upon awakening the children would demand television. They would demand to have it before breakfast, and when they were told they could not have it before breakfast, they would demand to have breakfast WITH television, and when they were told they could not have breakfast with television, they would collapse on the floor in tears and refuse to do anything at all for the rest of the day.
The parents were beset by offers from friends and neighbors to break the children of their unhealthy reliance on the glowing storybox, but the parents, being an odd sort of parents, saw in their kids' affliction an opportunity.
One morning when the children awakened they were greeted not with the normal trip to the breakfast table but to a strange room that they had never noticed in the house before. Inside were stacks of cards, each identical to the next, with a drawing of a snake wrapped around a staff, and the signature of the mother and father in the bottom left and right corners, respectively.
The children were told that from now on in order to watch one television program each child must remit one card to either the father or the mother. The cards were acquired by doing chores - one card for sweeping the kitchen, two for cleaning out the shed, and three for planting a berry bush or suchlike improvements to the home.
At first the children worked only for the television they wanted to watch each day, but soon Ruby, who was older, said to her little brother "Luke," for that was her brother's name, "we should spend a day doing chores so that the next day we can spend the ENTIRE DAY watching television."
The prospect of an entire day of doing nothing but watching television so inspired the little one that he did twice his normal work - though it was still a fraction of what his sister could do - and the two saved enough cards to make their dream come true. They could hardly contain their excitement as they lay their heads down to sleep.
When they awakened they did not demand television before breakfast but ate their fill, knowing that a glorious day of television watching lay ahead of them. After finishing their meal they sat down and watched all their favorite movies, and all the best episodes of the very funniest shows.
At lunchtime they ate thoughtfully and talked about their cards. They loved television but they loved the power of the cards as well, and they didn't want to be without television the next day. In the end it was decided that they would go to a friend's house for the afternoon, and use their cards to watch television the next day.
As time went on the children began to acquire so many cards that they could not imagine ever using them all. It was then that things began to get complicated.
Monday, June 4, 2012
Yglesias Comment Mirroring
I've been unable to force myself to post here enough to get the blog going, so for at least a while I'm going to try cross-posting my substantive comments from Yglesias' blog. Perhaps after a while this will get me in a good enough posting habit that I can do something a bit more reader-friendly. For now, here goes:
Today Yglesias links to a Mike Konczal interview of former Fed staffer Joe Gagnon.
Yglesias:
This is quite a triple bank shot, but the reasoning is more or less sound. More than anything it points up how ludicrous our self-induced paralysis is - it can't be the case that a currency war between the two most important economies in the world would maximize human welfare. There MUST be better policies available.
As for the linked post, I appreciate learning that the Fed is currently authoritzed to buy FCR in large quantities as I wasn't sure that was the case.
I hope that people read the full interview, especially the part where Gagnon makes it ABSOLUTELY CLEAR that the only impact of Fed asset purchases of bonds is through the interest rate channel:
Gagnon is exactly right - since Fed policy operates through the interest rate channel, when rates are as low as they go Fed policy doesn't do anything. The point of "unconventional" monetary policy is NOT to stimulate the economy directly but to lower long rates. Once long rates hit bottom Fed asset purchases no longer have any effect.
So, if the Fed bought every MBS in the economy Gagnon believes we could lower the mortgage rate for prime borrowers to somewhere a shade under three percent. Would that impact lending? Of course! It would mean that people who are not creditworthy at 3.75 percent but are creditworthy at, say, 2.75 percent could get a loan. That would be stimulative.
So, I will direct to this post anyone who accuses me in the future of saying the Fed is powerless. The Fed has the power to set interest rates, and could lower long rates a bit more by buying up mortgage backed securities. The Fed could also theoretically buy foreign currency. It has no other powers.
For the record I don't at all share Gagnon's belief that it would be a good idea to authorize the Fed to intervene in the stock market.
Today Yglesias links to a Mike Konczal interview of former Fed staffer Joe Gagnon.
Yglesias:
After all, right now the European Central Bank is refusing to engage in the volume of monetary activism that the European Union needs and the Fed is refusing to engage in the volume of activism that the United States needs.
This is quite a triple bank shot, but the reasoning is more or less sound. More than anything it points up how ludicrous our self-induced paralysis is - it can't be the case that a currency war between the two most important economies in the world would maximize human welfare. There MUST be better policies available.
As for the linked post, I appreciate learning that the Fed is currently authoritzed to buy FCR in large quantities as I wasn't sure that was the case.
I hope that people read the full interview, especially the part where Gagnon makes it ABSOLUTELY CLEAR that the only impact of Fed asset purchases of bonds is through the interest rate channel:
In the Treasury market, yields on three-year notes are only 0.3 percent, so the Fed must buy five-year to 30-year bonds to have any effect. With the 10-year yield at 1.5 percent, the scope for further effects is modest. Even if the Fed bought every 10-year Treasury, it would be hard to get the yield much below 1 percent, because the risks on such a bond become tremendously skewed toward future losses.
Gagnon is exactly right - since Fed policy operates through the interest rate channel, when rates are as low as they go Fed policy doesn't do anything. The point of "unconventional" monetary policy is NOT to stimulate the economy directly but to lower long rates. Once long rates hit bottom Fed asset purchases no longer have any effect.
So, if the Fed bought every MBS in the economy Gagnon believes we could lower the mortgage rate for prime borrowers to somewhere a shade under three percent. Would that impact lending? Of course! It would mean that people who are not creditworthy at 3.75 percent but are creditworthy at, say, 2.75 percent could get a loan. That would be stimulative.
So, I will direct to this post anyone who accuses me in the future of saying the Fed is powerless. The Fed has the power to set interest rates, and could lower long rates a bit more by buying up mortgage backed securities. The Fed could also theoretically buy foreign currency. It has no other powers.
For the record I don't at all share Gagnon's belief that it would be a good idea to authorize the Fed to intervene in the stock market.
Wednesday, May 23, 2012
A Place for The Yglesias Banking System Discussion
My wife's out of town so I'm hanging out a lot over at Yglesias' place discussing the banking system. It's getting a little tedious to use the comments over there for such a long discussion, so here's a place we can discuss it. Hopefully I can get Adam to come over here and continue our session, and perhaps some others will follow as well.
Thursday, February 9, 2012
Russ Roberts Interviews William Black
Really good interview via New Economic Perspectives.
I especially like the explanation of the type of fraud that allows banks to continue to report good earnings while they're actually going under.
Basically, as Black explains it, let's say I'm a bank that made a dumb $60m commercial real estate loan to a developer. The developer never makes any money, so he never pays back any part of the loan. Thus I, the bank, am the new owner of a $60m development that's almost certainly not worth $60m.
However, I don't want to eat the loan because it will hurt my profits and I might not get my bonus. So the next time someone darkens the door of the bank, I talk him into taking out an $80m loan to buy my worthless development for $78m and then have $2m "walking away money." Now, I've kicked the can down the road because 1) I sold the property at a profit and 2) the new owner of the development can use some part of his $2m to service the debt for a little while.
During this time, of course the bank is in even worse objective shape (since it's now loaned $80m against the same property we know wasn't even worth $60m) but I can continue to collect bonuses and possibly even stave off regulators if they don't stick their noses too far up into my business.
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