Category Archive for: Monetary Policy [Return to Main]

Friday, August 26, 2011

Paul Krugman: Bernanke’s Perry Problem

I came to the same conclusion:

Bernanke’s Perry Problem, by Paul Krugman, Commentary, NY Times: As I write this, investors around the world are anxiously awaiting Ben Bernanke’s speech at the annual Fed gathering at Jackson Hole, Wyo. They want to know whether Mr. Bernanke ... will unveil new policies that might lift the U.S. economy out of what is looking more and more like a quasi-permanent state of depressed demand and high unemployment.
But I’ll be shocked if Mr. Bernanke proposes anything significant... Why...? In two words: Rick Perry. ... I’m using Mr. Perry — who has famously threatened Mr. Bernanke with dire personal consequences if he pursues expansionary monetary policy before the 2012 election — as a symbol of the political intimidation that is killing our last remaining hope for economic recovery.
To see what I’m talking about, let’s ask what policies the Fed actually should be pursuing right now. ... Well, in 2000 ... Ben Bernanke offered a number of proposals for policy at the “zero lower bound.” True, the paper was focused on policy in Japan... But America is now very much in a Japan-type economic trap, only more acute. ...
Back then, Mr. Bernanke suggested that the Bank of Japan could get Japan’s economy moving with a variety of unconventional policies...: purchases of long-term government debt (to push interest rates, and hence private borrowing costs, down); an announcement that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates; an announcement that the bank was seeking moderate inflation, “setting a target in the 3-4% range for inflation, to be maintained for a number of years,” which would encourage borrowing and discourage people from hoarding cash; and “an attempt to achieve substantial depreciation of the yen”...
So why isn’t the Fed pursuing the agenda its own chairman once recommended for Japan?
Part of the answer is internal dissension..., with three inflation hawks on the committee... The larger answer, however, is outside political pressure. Last year, the Fed actually did institute a policy of buying long-term debt, generally known as “quantitative easing”... But it faced a political backlash out of all proportion...
Now just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly “debase the dollar,” a political firestorm would be guaranteed.
So now you see why I don’t expect any substantive policy announcements at Jackson Hole. ... In effect, it has been politically intimidated into standing by while the economy stagnates. And that’s a very, very bad thing.
Political opposition has already crippled fiscal policy; instead of helping to create jobs, the federal government is pulling back, acting as a drag on output and employment.
With the Fed also intimidated into inaction, it’s hard to see any end to the ongoing economic disaster.

Thursday, August 25, 2011

Why is the Fed Hesitant to Do More for the Economy?

I try to explain why the Fed is unlikely to do more to help the economy:

Why is the Fed Hesitant to Do More for the Economy?

"Rules-based Keynesian Policy?"

Is John Taylor anti-Keynesian?:

Rules-based Keynesian Policy?, Twenty Cent Paradigms: John Taylor, who is one of the most prominent academic critics of administration and Fed policy over the past several years, grapples with the label "anti-Keynesian" that was pinned on him by The Economist. He writes:

In a follow-up to the Economist article, David Altig, with basic agreement from Paul Krugman, argued that it was a misnomer because I developed and used macro models (now commonly called New Keynesian) with price and wage rigidities in which the government purchases multiplier is positive (though usually less than one), or because the Taylor rule includes real variables in addition to the inflation rate. In my view, rigidities exist in the real world and to describe accurately how the world works you need to incorporate such rigidities in your models, which of course Keynes emphasized. But you also need to include forward-looking expectations, incentives, and growth effects—which Keynes usually ignored.

In my view the essence of the Keynesian approach to macro policy is the use by government officials of discretionary countercyclical actions and interventions to prevent or mitigate recessions or to speed up recoveries. Since I have long been critical of the use of discretionary policy in this way, I think the Economist is correct so say that I am anti-Keynesian in this sense of the word. Indeed, the models that I have built support the use of policy rules, such as the Taylor rule for monetary policy or the automatic stabilizers for fiscal policy, which are the polar opposite of Keynesian discretion. As a practical prescription for improving the economy, the empirical evidence is clear in my view that discretionary Keynesian policy does not work and the experience of the past three years confirms this view.

"Keynesian" means different things to different people - at its broadest, it means accepting that there are frictions in the economy which mean that aggregate demand matters and policy can have real effects. This is in contrast to the pure classical view, in which Say's law holds, demand is irrelevant, and output depends on technology and preferences. In the version of Keynesian economics in our undergraduate textbooks - the IS-LM/AS-AD framework - the frictions are nominal rigidities and the Keynesian model deals with "short run" fluctuations around a "long run" equilibrium determined by the classical model. In this setting, both monetary and fiscal policy matter (by shifting the LM and IS curves, respectively), though early Keynesians emphasized fiscal policy and "monetarists" (most prominently Milton Friedman), gave primacy to monetary policy. The version of Keynesian economics in our graduate textbooks and academic journals - "New Keynesian" - combines dynamic optimization with sticky prices, and explicitly addresses the lack of "forward looking expectations" in the traditional textbook version. Furthermore, some argue that both the IS-LM and New Keynesian incarnations really miss the point and gloss over more fundamental irrationality and instability Keynes saw in the capitalist system.

As Taylor describes his views of the economy (and from what I know of his academic work), it seems consistent with mainstream New Keynesian economics (though his version has been less favorable to fiscal policy than some others). His criticism of recent fiscal and monetary policy grows out of another longstanding conundrum in macroeconomics, "rules versus discretion." He is not claiming that countercyclical fiscal and monetary policy are fundamentally impossible, which is what I would say is the true "anti-Keynesian" view. Rather, he is arguing that discretionary policy may do more harm than good, and policy should be based on stable, predictable rules.

A primary argument for rules is that discretionary "fine tuning" is impractical based on "long and variable" lags associated with (i) recognizing the state of the state of the economy, (ii) designing and implementing a policy and the (iii) the policy's impact reaching the economy. Often lurking behind this argument is a political philosophy that is skeptical of government (no coincidence that Milton Friedman was the most famous proponent of rules - Brad DeLong recently argued this is how he resolved the contradiction between an economics that said monetary policy can be effective with a libertarian political philosophy).

Taylor is careful to say that he opposes "discretionary Keynesian policy" - I think "anti-discretion" might be a better characterization of his critique than "anti-Keynesian." Of course, that only matters if it is possible to be "anti-discretion" without being "anti-Keynesian." I think it is.

I don't share the political philosophy, but the experience of the last several years has underscored the practical difficulties of discretionary policy. The early-2009 Obama administration with large congressional majority is about as close to government by center-left mainstream Keynesian technocrats as the American political system is likely to ever give us. In retrospect, it is clear they misjudged the scope and duration of the downturn and were not able make adjustments as that became apparent.

Monday morning quarterbacking in April, I suggested that the stimulus should have been designed in a "state-contingent" fashion to remain in place until the recovery reached certain benchmarks. It is a small step from there to a "rules based" countercyclical fiscal policy - policies like aid to state governments, extended unemployment benefits, payroll tax cuts and even increased infrastructure spending could be designed to kick in and ramp down automatically based on the state of the economy (e.g., with triggers based on the unemployment rate). To me, that's very "Keynesian", but also "rules-based", and its easy to imagine that might have worked better than the actual policies that were put in place.

Monday, August 22, 2011

Krugman: Stop Worrying and Learn to Love Inflation

Paul Krugman is taking a break from his column today (Arrrr!), so here's a summer rerun. Can you guess when he wrote this?:

Stop worrying and learn to love inflation, by Paul Krugman: ...depression economics - the kinds of problems that characterized much of the world economy in the 1930s but have not been seen since - has staged a stunning comeback.
Five years ago hardly anybody thought that modern nations would be forced to endure bone-crushing recessions for fear of currency speculators; that a major advanced country could be persistently unable to generate enough spending to keep its workers employed; that even the Federal Reserve would worry about its ability to counter a financial market panic. The world economy has turned out to be a much more dangerous place than we imagined. For the first time in two generations, failures on the demand side of the economy - insufficient private spending to make use of the available productive capacity - have become the clear and present limitation on prosperity for much of the world.
Economists and policymakers weren't ready for this. The specific set of silly ideas known as 'supply-side economics' is a crank doctrine, which would have little influence if it did not appeal to the prejudices of wealthy men; but over the past few decades there has been a steady drift in thinking away from the demand side to the supply side of the economy. The truth is that good old -fashioned demand-side macroeconomics has a lot to offer in our current predicament - but its defenders lack all conviction.
Paradoxically, if the theoretical weaknesses of demand-side economics are one reason we were unready for the return of depression-type issues, its practical successes are another. Central banks have repeatedly managed demand - cutting rates to keep spending high - so effectively that a prolonged slump due to insufficient demand became inconceivable. Except in the very short run, then, the only limitation on economic performance was an economy's ability to produce - that is, the supply-side. ...
The question of how to keep demand adequate to make use of the capacity has become crucial. Depression economics is back. ... The free-market faithful tend to think of Keynesian policies - deliberate efforts by governments to stimulate demand - as the enemy of what they stand for. But they are wrong. For in a world where there is often not enough demand to go around, the case for free markets is a hard case to make. ...
The right perspective is to realize how very much good free markets and globalization have done; the point is to preserve those gains. One cannot defend globalization merely by repeating free-market mantras as economy after economy crashes. If we want to see more nations making the transition from abject poverty to the hope of a decent life, we had better find answers to the problems of depression economics. ...
I don't like the idea that countries will need to interfere in markets - to limit the free market in order to save it. But it is hard to see how anyone who has been paying attention can still insist that nothing of the kind needs to be done, that financial markets will always reward virtue and punish only vice.
One of the most important obstacles to sensible action, however, is prejudice -by which I mean the adherence of too many influential people to orthodox views that are no longer relevant to our changed world. ...
This brings us to the deepest sense in which depression economics has returned. The quintessential economic sentence is supposed to be 'There is no free lunch'; it says that there are limited resources; to have more of one thing you must accept less of another. Depression economics, however, is the study of situations where there is a free lunch, if we can figure out how to get our hands on it, because there are unemployed resources that could be put to work.
In 1930, John Maynard Keynes wrote that 'we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand'. The true scarcity in his world - and ours - was therefore not of resources, or even virtue, but understanding.
Originally published, 6.20.99

Then, as now, he points to inflation as the answer to a liquidity trap:

So what should we be doing differently? ... Japan, having fallen in its liquidity trap - unable to recover by means of conventional monetary policy, because even a zero interest rate is not low enough - and having exhausted its ability to spend its way out with budget deficits, must now radically expand its money supply. It must convince savers and investors that its current deflation will turn into sustained, though modest, inflation. Once the Japanese make up their mind to do this, the results will startle them. ... There is no economic evidence suggesting that inflation at the ... 4 per cent rate I believe Japan should target, does any noticeable harm; and the things advanced countries need to do to counter depression economics do not involve any compromise of the commitment to free markets. ...

Thursday, August 18, 2011

"Defending the Dollar"

David Glasner:

Defending the Dollar, Uneasy Money: After administering a pro-forma slap on the wrist to Texas Governor Rick Perry for saying that it would be treasonous for Fed Chairman Bernanke to “print more money between now and the election,” The Wall Street Journal in today’s lead editorial heaps praise on the governor for taking a stand in favor of “sound money.” First there was Governor Palin, and now comes Governor Perry to defend the cause of sound money against a Fed Chairman who, in the view of the Journal editorial page, is conducting a massive money-printing operation that is debasing the dollar.

Well, let’s take a look at Mr. Bernanke’s record of currency debasement. The Bureau of Labor Statistics announced the latest reading (for July 2011) of the consumer price index (CPI); it stood at 225.922. Thirty-six months ago, in July 2008, the index stood at 219.133. So over that entire three-year period, the CPI rose by a whopping 3.1%. That is not an annual rate, that it the total increase over three years, so the average annual inflation rate over the whole period was less than 1%. The last time that the CPI rose by as little as 3% over any 36-month period was 1958-61. It is noteworthy that during the administration of Ronald Reagan — a kind of golden age, in the Journal‘s view, of free-market capitalism, low taxes, and sound money — there was no 36-month period in which the CPI increased by less than 8.97%, or about 3 times as fast as the CPI has risen during the quantitative-easing, money-printing, dollar-debasing orgy just presided over by Chairman Bernanke. Here is a graph showing the moving 36-month change in the CPI from 1950 to 2011. If you can identify which planet the editorial writers for The Wall Street Journal are living on, you deserve a prize. ...

“Mr. Perry,” the Journal continues, “seems to appreciate that the Federal Reserve can’t conjure prosperity from the monetary printing presses.” A huge insight to be sure. But the Journal is oblivious to the possibility that there are circumstances in which monetary stimulus in the form of rising prices and the expectation of rising prices could be necessary to overcome persistent and debilitating entrepreneurial pessimism about future demand. How else can one explain the steady decline in real (inflation-adjusted) interest rates over the past six months? On February 10 the yield on the 10-year TIPS bond was 1.39%; today the yield has dropped below zero. For the Journal to attribute the growing pessimism to the regulatory burden and high taxes, as it reflexively does, is simply laughable now that Congressional Republicans have succeeded in preserving the Bush tax cuts, preventing any new revenue-raising measures, and blocking any new regulations that were not already in place 6 months ago. ...

Wednesday, August 17, 2011

Richard Green: I am a Big Fan of Stein's work

Richard Green says I should support Jeremy Stein's appointment to the FOMC (this also gives me a chance to note that Richard Clarida has removed himself from consideration):

Jeremy Stein for Fed Governor, by Richard Green: Mark Thoma writes that the administration is considering nominating Richard Clarida and Jeremy Stein for the Federal Reserver Board. He cites an encouraging Clarida speech, but writes, "I know less about Stein, so I'll withhold judgment for the moment."

Personally, I am a big fan of Stein's work. The shortest way to explain why is to list the titles of his five most cited papers:

  • Herd Behavior and Investment
  • A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets
  • Rick Management: Coordinating Investment and Financing Policies
  • Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies
  • Internal Capital Markets and the Competition for Corporate Resources.
Stein has spent his career trying to figure out how capital markets really work instead of pledging fealty to models that don't work very well. I can't think of a better intellectual qualification for a Federal Reserve Board member.

I have done a bit of reading since, and I agree.

Thinking of the Fed's recent commitment to keep interest rates low though mid-2013, the membership rotates among the regional Feds every January. Will changes in the composition of the committee make any difference? If you look at the composition of the FOMC next year (it changes every January), not much will change. Presently the regional bank representation is (ignoring New York since it doesn't change, the D, N, SH, and H designations stand for dove, neutral, soft-hawk, and hawk, and are taken from here):

Chicago - Evans (D)
Philadelphia - Plosser (H)
Dallas - Fisher (H)
Minneapolis - Kocherlakota (SH)

Come January it will change to:

Cleveland - Pianalto (N)
Richmond - Lacker (H)
Atlanta - Lockhart (SH)
San Francisco - Williams (D)

Most of these are a wash:

Williams for Evans (D for D)
Lacker for Fisher (H for H)
Lockhart for Kocherlakota (SH for SH)
Pianalto for Plosser (N for H)

Pianalto for Plosser should tilt the Committee a bit toward easing, but for the most part the hawkishness/dovishness of the FOMC won't change all that much. Thus, if the committee is going to change noticeably any time soon, it will have to come from new appointments rather than the rotation of the regional Fed presidents. But with new appointments all but blocked, especially those that would lean toward dovishness, that's unlikely.

Tuesday, August 16, 2011

The Not Ready for Prime-Time Players

Steve Benen:

Republican presidential candidate Rick Perry raised a few eyebrows yesterday with borderline-violent rhetoric about the Federal Reserve and Ben Bernanke. “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas,” the Texas governor said. “Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion.”

The comments have drawn bipartisan criticism, but as of this morning, the Perry campaign isn’t backing down.

A spokesman for Mr. Perry said Tuesday the governor “got passionate” in his remarks about the Federal Reserve, but he did not disavow the comments.

“He is passionate about getting federal finances under control,” the spokesman, Ray Sullivan, said in an interview here. “They shouldn’t print more money, they should cut spending and move much more rapidly to a balanced budget.”

Apparently he thinks the Fed has the ability to cut spending and balance the budget. What a clown.

Friday, August 12, 2011

Clarida on Monetary and Fiscal Policy

This is from an old post (March 2009, Clarida and DeLong on Fiscal Policy). It should give you a bit of perspective on potential Fed Governor Richard Clarida's views on monetary and fiscal policy:

A lot of bucks, but how much bang?, by Richard Clarida, Vox EU: “We have involved ourselves in a colossal muddle, having blundered in control of a delicate machine, the workings of which we do not understand” - John Maynard Keynes, “The Great Slump of 1930”, published December 1930.

I recently had the privilege of participating on a panel that was part of the Russia Forum, an annual conference held in Moscow that brings together market makers, policymakers, and academic experts... The topic assigned to our panel, not surprisingly, was the global financial crisis – causes, consequences, and policy responses. Although each speaker had his own, unique perspective, a cohesive, urgent theme did emerge, or so it seemed to me...

That theme suggests the title I’ve chosen for this column; there are, at last, a ‘lot of bucks’ now committed by policymakers to address the global recession and the global financial crisis, but there is real doubt about how much ‘bang’ we can expect from these bucks.

In the US, President Obama has just signed a nearly 800 billion dollar stimulus package and the Fed has cut the Federal Funds rate to zero. Monetary policy in the rest of the G7, while lagging behind the US, will follow the US lead and soon come close to zero. (In the case of the ECB, the policy rate may end up at 1%, but the effective interbank rate has been trading well below the official policy rate in recent weeks so a policy rate of 1% could translate into an effective interbank rate of nearly zero). Likewise for fiscal deficits – they are rising globally and headed higher, propelled by a combination of discretionary actions and automatic stabilisers.

To date, however, these traditional policies have been insufficient for the scale and scope of the task. Recall that the Obama stimulus package is actually the second such US effort in the last 12 months. The 2008 edition was deemed to be a failure because a big chunk of the rebate checks were saved or used to pay down debt and not spent. The Obama package includes tax cuts and credits that will provide a boost to disposable income, but how much of these will be spent rather than saved or used to pay down debt? The package also includes a substantial increase in infrastructure spending, as well as transfers to the states, but the infrastructure spending is back-loaded to 2010 and later, and the transfers to states will most likely just enable states to maintain public employment, not expand it appreciably.

Bucks without bang

What is the source of this concern that the US fiscal package will not deliver a lot of ‘bang’ for the ‘bucks’ committed? Because of the severe damage to the system of credit intermediation through banks and securitisation, policy multipliers are likely to be disappointingly small compared with historical estimates of their importance. Recall the Econ 101 idea of the Keynesian multiplier – the impact traditional macro policies are ‘multiplied’ by boosting private consumption by households and capital investment by firms as they receive income from the initial round of stimulus. It important to remember why and how policy multipliers actually come about. Policy multipliers are greater than 1 to the extent the direct impact of the policy on GDP is multiplied as households and companies increase their spending from the increased income flow they earn from the debt-financed purchase of goods and services sold to meet the demand from the initial round of stimulus.

Historically, multipliers on government spending are estimated to be in the range of 1.5 to 2, while multipliers for tax cuts can be much smaller, say 0.5 to 1. But these estimates are from periods when households could – and did – use tax cuts as a down payment on a car or to cover the closing costs on a mortgage refinance. For example, in 2001, the economy was in recession, but households took advantage of zero-rate financing promotions – as well as ready access to home equity withdrawal from mortgage refinancings – to lever up their tax cut checks to buy cars and boost overall consumption. With the credit markets impaired, tax cuts and income earned from government spending on goods and services will not be leveraged by the financial system to nearly such an extent, resulting in (much) smaller multipliers.

There is a second reason while the bang of the fiscal package will likely lag behind the bucks. Even if the global financial system soon restores some semblance of order and function, the collapse in global equity and housing market values has so impaired household wealth that private consumption (which represents 60% to 70% of GDP in G7 countries) is likely to lag – not lead – economic growth for some time, as households rebuild their balance sheets the old-fashioned way – by boosting their saving rates. Just in 2008 alone, I estimate that the net worth of US households fell by some 10 trillion dollars, with much of this concentrated in older demographic groups who, in our defined contribution world, must now be focused on building back up their wealth to finance retirement, which is not that far away. This means more saving, less consumption, and smaller multipliers. ...

Will the Fed pull it off?

So where does this leave us? A LOT is riding on the efforts of the Fed and other central banks to stabilise the financial system and restore the flow of credit.

Officials recognising these challenges are now seriously considering “non-traditional” policies that combine monetary and fiscal elements. Cutting rates to (near) zero has not been a mistake, but it has been ineffective – really the most striking example of ‘pushing on a string’ I have witnessed in my lifetime. The reason, again, is the impaired credit intermediation system. The private securitisation channel, which at its peak was intermediating nearly 50% of household credit in the US, has been destroyed. Banks are hunkering down in the bunker, hoarding capital as a cushion against massive losses yet to be recognised on the trillions of dollars of ‘legacy’ assets that they have been unable or unwilling to sell at the deep discount required to attract private investors. For this reason, the Fed and Bank of England – with many other central banks likely to follow suit in some form or fashion – are filling the vacuum by directly lending to the private sector. The Fed aims to purchase 600 billion dollars worth of mortgage-backed and agency securities this year and, via the soon to be launched Term Asset-Backed Securities Loan Facility (TALF), to finance without recourse up to one trillion dollars worth of private purchases of credit cards, auto loans, and student loans. Since last fall, the Fed has also been supporting the commercial paper market via the Commercial Paper Funding Facility (CPFF).

Altogether, between the MBS, CPFF, and TALF programs, the Fed is committing nearly 2 trillion dollars of financing to the private sector. While these sums may be necessary to prevent an outright economic collapse that extends and deepens into 2011 and beyond, it is not clear to me that they are sufficient to turn the economy around so that it returns to robust growth. Moreover, based on the Fed’s just released economic forecast and Chairman Bernanke’s recent testimony to the Senate Banking committee, the Fed is also not convinced that these policies are sufficient to turn the economy around. On 24 February, knowing that an 800 billion stimulus had passed, that the Fed has committed nearly 2 trillion dollars of lending to the private sector, and that the Treasury’s Public Private Investment Fund will aim to support up to one trillion dollars of private purchases of bank legacy assets, Chairman Ben Bernanke said,

If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability – and only if that is the case, in my view – there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,

As I said in my remarks at the conference, I think of myself as an optimist, and that outlook on life has served me well. However, the last nine months have severely tested that mindset, at least as it pertains to my professional endeavours. But old habits are hard to break, so I am casting aside the contrary evidence and putting my ‘bucks’ on the Fed. But it is a close call.

Jeremy Stein and Richard Clarida Identified as Potential Nominees to Fed

Some news:

The Obama administration has identified two economists, one Democrat and one Republican, for two empty seats on the seven-member Federal Reserve Board, according to several people familiar with administration deliberations.
The two are Jeremy Stein, a Harvard University specialist in finance, and Richard Clarida, an executive vice president at money manager Pimco and professor of economics and international affairs at Columbia University.
Mr. Stein did a stint in the White House at the beginning of Barack Obama's presidency. Mr. Clarida was a Treasury official in the early years of the George W. Bush administration.
The administration coalesced around the two names a few months ago, hoping that pairing a Republican with a Democrat would smooth the way for Senate confirmation. But the White House has yet to nominate either formally and could change course depending on the political environment and the individuals' circumstances.
Although the two men have different political views, both are well-credentialed economists who have done scholarly work on central banking and would bolster the economic expertise on the Fed board. Only two of the five current Fed governors are Ph.D. economists, Mr. Bernanke and Vice Chairwoman Janet Yellen.

More here and here. Clarida is a good choice. I know less about Stein, so I'll withhold judgment for the moment.

What Was Kocherlakota Thinking When He Dissented on Monetary Policy?

Narayana Kocherlakota makes it clear that the rate at which the recovery is proceeding is just fine with him. No more accommodation from the Fed is necessary given that "Since November, inflation has risen and unemployment has fallen."

But he doesn't acknowledge that the November date is cherry-picked to some extent. Since January -- just two months from when he starts his measurement -- unemployment has actually risen. He's happy with that? As for inflation -- the worry that is stopping him from endorsing a more aggressive policy -- using his preferred time period from last November until now, core PCE has risen from 1.0% to 1.3%. And it didn't move at all between May and June, it was 1.3% in both months. Uh oh, hyperinflation! Assuming a target of 2.0%, at this rate the Fed will reach it's inflation target in about a year and a half. Sounds kind of like the guidance they issued (and there is a good argument that the Fed should overshoot its target in the short-run). Perhaps lag effects can explain his response, if we tighten now we may not feel it until a year later, but that doesn't seem to be his argument:

In its August 9 meeting, the Committee changed this “extended period” language to say instead that it “currently anticipates economic conditions … are likely to warrant extraordinarily low levels of the federal funds rate through mid-2013.” This statement is designed to let the public know that the fed funds rate is likely to stay between 0 and 25 basis points over the next two years, not just over the next three to six months. Hence, the new language is intended to provide more monetary accommodation than before.
I dissented from this change in language because the evolution of macroeconomic data did not reflect a need to make monetary policy more accommodative than in November 2010. In particular, personal consumption expenditure (PCE) inflation rose notably in the first half of 2011, whether or not one includes food and energy. At the same time, while unemployment does remain disturbingly high, it has fallen since November. I can summarize my reasoning as follows. I believe that in November, the Committee judiciously chose a level of accommodation that was well calibrated for the prevailing economic conditions. Since November, inflation has risen and unemployment has fallen. I do not believe that providing more accommodation—easing monetary policy—is the appropriate response to these changes in the economy.

Again, "well-calibrated" should include both the direction and pace of change. Even if the direction is correct, is he satisfied with the pace of change for employment? I realize he thinks we will have to tighten in 3-6 months, but it's hard to see how a data-based projection takes you to this outcome (even more so if you believe, as I do, that the risks are asymmetric, i.e. that unemployment is more costly than inflation).

Finally, this is not a rock solid commitment from the Fed. This is their view of the most likely path for the federal funds rate, they have not said this is what they will do independent of how the data evolve. All they have said is that economic conditions are likely to warrant this outcome. The dissenters seem to believe that another outcome is more likely, the view is that economic conditions will force the Fed into a different posture -- you know, that high inflation and rapid recovery we've been seeing to date -- in as soon as 3-6 months. Anything is possible, but again, it's hard to see how recent data point to this outcome.

Update: See Matt Rognlie: Macroeconomics in Action (I've made this point several times in the past, and should have mentioned it here as well).

Update: Here's the view from the right.

Wednesday, August 10, 2011

Fed Watch: Weak Medicine

Tim Duy:

Weak Medicine, by Tim Duy: The Federal Reserve pronounced on the state of the economy, and the assessment wasn't pretty. I think this was pretty much the only good news:

However, business investment in equipment and software continues to expand.

We'll see if that holds up given the downdraft in the economy. Speaking of that downdraft, the growth outlook pushes back the return to full employment:

The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.

And that hawkish inflation story is falling apart:

The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further.

In response to these clear and present dangers to the economy, policymakers offered this:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

Not exactly shock and awe. And this takes some of the fun out of Fed watching. What will become of us if the Fed starts telling everyone the policy path for the next two years? I imagine we will preoccupy ourselves with this:

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

We can do more, but we won't. And why not? I think the answer was back up in the first paragraph:

Longer-term inflation expectations have remained stable.

The story from the Treasury rally is more of a low growth than a deflation story. In what world would anyone foresee that real 5 year yields would be negative, real 10 year yields would be zero, and the real 30 year yield just 1.06 percent? If this really represents annual potential growth over the long run, the next few decades are going to be no fun at all.

Now, I think it is perfectly reasonable to argue that low growth will eventually work its way into substantially lower inflation expectations, and it would be better to get ahead of that curve. The Fed doesn't see it that way. They will need to see inflation expectation numbers turn more solidly south to bring out another round of QE3. I think that takes some additional weakness on top of what we are currently experiencing.

As far as the expectation of near zero rates for two years, is this weak or strong medicine? My initial reaction was similar Paul Krugman's:

The Fed didn’t announce a new policy. And despite what some press reports said, it didn’t even commit to keeping rates low; all it did was say that if the economy stays weak, rates will stay low — well, duh...

The Fed did not actually promise to keep rates low (whether market participants caught that nuance is another matter). They only said that based on what they see now, they would anticipate zero rates for another two years. And so what? We were going to figure that out sooner than later. The expected date of the first rate hike of the cycle has been repeatedly pushed back "another six months." And, sure, with mere words the Fed can flatten the near term portion of the yield curve to nearly zero, but there wasn't a lot of room to play around there to begin with.

Still, upon reflection, I see some additional upside from this psuedo-commitment. In effect, the FOMC publicly marginalized the hawks. You know who I am taking about:

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

Awfully convenient to have a block of three dissenters - the names "Larry, Moe, and Curly" come to mind. But I digress. One complaint over the past two years is that Fedspeak turns prematurely hawkish. The instant one good month of data rolls through the door, the more hawkish policymakers rush to let market participants know the end of easy money is near, talk that induces a tightening as agents hedge their dovish bets. Now we know not to be distracted by such talk, that while the bar to QE3 might be high, so too is the bar to actually raising rates. In other words, while not a promise, the Fed's outlook works to entrench expectations against any misunderstandings caused by Fed hawks.

Bottom Line: All in all, this is pretty weak medicine given the condition of the patient. I would have preferred to see an open-ended commitment to asset purchases - buying up anything not nailed to the floor at a rate of $10 or $15 billion a week until achieving the dual mandate is in clear sight. But policymakers, on average tend to think they have relatively weak ammunition to stimulate growth. Their tools are more effective against deflation. And until the former turns into the latter, expect the Fed to do little more than modifications of the basic zero interest rate / hold balance sheet constant policy combination.

Tuesday, August 09, 2011

The Fed Says Rates Likely to Remain Low Through Mid-2013

Here's my reaction to today's the FOMC meeting:

The Fed Says Rates Likely to Remain Low Through Mid-2013

"For once, I'd like to see the Fed get out in front of the problem, and with the recent emergent signs of weakness on so many fronts, now would have been a great time for the Fed to show it can do more than look in the rear view mirror."

Monday, August 08, 2011

Fed Watch: The Unpleasantness Continues

Tim Duy:

The Unpleasantness Continues, by Tim Duy: Lots of moving pieces tonight as financial centers around the world prepare for the impact of the S&P downgrade of US debt and the ongoing Eurozone debt crisis. The list:

ECB Finally Ready to Come to the Table. The ECB is signaling they are prepared to buy up massive quantities of Italian and Spanish debt, hoping to put a firewall around the European debt crisis. Of course, this isn’t the first firewall European leaders have set, to no avail. Perhaps this time will be different. Paul Krugman argues, I think correctly, that at least for Italy the issue is seemingly a liquidity crisis, not an insolvency crisis. The ECB could effectively act as a lender of last resort in such a case, and bring about stability with only minor fiscal adjustment. My concern is that if this was just a liquidity crisis, then why did the ECB posture that significant fiscal adjustments were necessary? Just to look tough? As to whether or not the ECB is actually prepared to follow through with big bond purchases, I refer you to Yves Smith:

My readers of European press tell me that the signals this weekend was that the ECB wants to nibble only and is trying to prevent panic sales. If this reading is correct, this is a variant on the Paulson “bazooka” strategy of July 2008 with Fannie and Freddie, that if the markets knew he had a bazooka in his pocket, he would not have to use it. We know how that one turned out.

The G7 Communiqué. The G7 finances ministers and central bankers met over the weekend and more or less confirmed their commitment to fiscal austerity:

We are committed to addressing the tensions stemming from the current challenges on our fiscal deficits, debt and growth, and welcome the decisive actions taken in the US and Europe. The US has adopted reforms that will deliver substantial deficit reduction over the medium term. In Europe, the Euro area Summit decided on July 21 a comprehensive package to tackle the situation in Greece and other countries facing financial tensions, notably through the flexibilisation of the EFSF. We are now focused on the quick and full implementation of the agreements achieved. We welcome the statement of France and Germany to that effect. We also welcome the statement of the Governing Council of the ECB.

Whether the US has adopted a credible medium term plan for fiscal reform is debatable, even more so given ongoing economic weakness likely to be exacerbated by near-term fiscal austerity. What the US needs is near-term stimulus and long-term consolidation, or at least a political system capable of producing this.

Regarding the rapid implementation of the EFSF, I think this means the someone in Europe is going to have to cut their vacation short and actually get on this before the end of the month. A key paragraph:

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth.

I think this gives the Fed cover to move this morning; more later. I like this part:

These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability. No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation.

On one hand, nothing warrants the pressure on Spain and Italy – just a liquidity crisis. On the other hand, they welcome additional policy measures. Less reassuring, has the feel of a solvency problem. Honestly, I think I would be more confident if the ECB had just stepped up to the plate and not demanded a quid pro quo. Finally:

The Euro Area Leaders have stated clearly that the involvement of the private sector in Greece is an extraordinary measure due to unique circumstances that will not be applied to any other member states of the euro area.

This is a clear line in the sand. Expect more fiscal austerity.

The Federal Reserve. As I argued last week, the usual guides to monetary policy, a combination of Fedspeak and data flow, are not conducive to a near-term policy shift. An overriding factor, however, would be financial crisis, and the G7 statement seems to raise the current circumstances to crisis level. This should give the Fed a green light to act. I still think the best option is to come in before the market opens and announce they are buying $100 billion of Treasuries. Just get ahead of this. The problem is that so many Fed policymakers have come out seemingly dead set against any additional bond purchases that action just a day before the next FOMC meeting seems like a big leap. Still, a financial crisis is a good time for a big leap.

The S&P Downgrade. Lot’s of speculation on the competence of S&P. They obviously messed up on the math. And let’s not forget the role they played during the financial crisis – aren’t any mortgage backed assets investment grade? They are if you want to keep earning your fees. But Ezra Klein and Felix Salmon argue that the circus of US politics warrants a debt downgrade. After all, a small but apparently vocal contingent thinks the debt-ceiling is no big deal, and is actually willing to press the button to prove their point.

Should the downgrade have significant economic consequences? I fear the answer is yes. First, if you believe confidence is important, that confidence has surely been shaken, as evidenced by wild ride of financial markets. Second, the political response could be a full-court press for more fiscal austerity. Finally, we don’t completely know the knock-off effects on the rest of the financial system. From the Wall Street Journal:

The downgrade late Friday had implications for a range of entities with links to the U.S. government or holdings of its debt, running the gamut from mortgage giants Fannie Mae and Freddie Mac to large insurers to securities clearinghouses—not to mention rates on consumer loans such as mortgages that are linked to Treasury yields.

The risk for all these borrowers is that the downgrade to double-A-plus, even though by just one of the three major rating firms, could result in slightly higher interest rates. Those costs might be small for each borrower, but in total could essentially mean a tightening of credit in the country at a time when a weak economy can ill afford higher rates.

The world needs more safe assets. The safest asset just became a little bit less safe. That can’t be good. The sad part is that there really shouldn’t be any doubt the US can and will repay its debt in full. Any way you cut it, this is a self-inflicted wound.

Good luck today.

Saturday, August 06, 2011

Fed Watch: Jobs Report and the Fed

Tim Duy:

Jobs Report and the Fed, by Tim Duy: The jobs report was somewhat better than expectations. Admittedly, this isn't saying much. But it was "good" enough to give the Fed pause before rushing into a fresh round of easing.

The headline NFP gain of 117k jobs was a combination of a not-terrible 154k gain in the private sector and a 37k loss on the public side of the ledger. Overall, simply a sideways movement. From the perspective of policymakers, however, the numbers will suggest that recession fears are overblown. And the 10 cent gain in hourly wages will suggest to some FOMC members that a renewal of deflation fears are also equally overblown.

It is true that, as Calculated Risk notes, the survey period was before agents turned cautious as the debt farce deepened. But, then again, the Fed would simply argue they need to see how much of that caution is quickly reversed.

Now, they could turn their attention the the household survey, and note that both labor force participation rates and the employment to population ratio continue to decline. But they could attribute these effects to largely structural causes, and as such beyond their purview. This too would also argue against any significant change in policy.

The implied inflation expectations from the TIPS market is 193bp and 225bp at the 5 and 10 year horizons, respectively. Still well above last summer's lows. The Fed has repeatedly argued they can't do anything about growth, but can fight deflation. But this doesn't appear to be a strong deflationary signal. This too argues against significantly policy shifts.

Financial market chaos argues for a shift in policy, but traditionally the Fed has resisted until the impact on actual economic activity becomes more evident. Again, an argument against looser policy.

On net, and with the benefit of the labor report in our back pocket, I think Neil Irwin at the Washington Post is most likely correct:

The Fed is holding its regular meeting on monetary policy next week, and leaders of the central bank will surely discuss the weakening outlook, whether they should do anything in response and what such a response might consist of. Their public statement following the meeting will likely reflect the worsening outlook for the economy, but they appear inclined not to make any policy changes until more evidence has become available and there has been more time to weigh it.

They will offer the possibility of further action, but none will be forthcoming next week. Now, all that said, I think the Fed should get ahead of this one - failure to do so has not yielded positive results in the past. But what the Fed should do and will do are two different things.

Friday, August 05, 2011

Fed Watch: That. Was. Unpleasant.

Tim Duy:

That. Was. Unpleasant., by Tim Duy: The rapidity with which confidence can shift is nothing short of a wonder of nature. I am not sure there was any terribly new news today. The evidence the US economy is weakening has been mounting for weeks. That equities had not sold off yet was something of a testament to the underlying profit situation.

But now fear grips financial market participants as the rush to cash or cash equivalents accelerated. A rush to judgment on the US economy? Felix Salmon tries to paint a positive picture:

Firstly, this is not necessarily a Bad Thing. If you’re saving for retirement, stocks are cheaper now, and your 401(k) contribution goes further than it did a few weeks or months ago. That’s good.

Secondly, if there ever were serious doubts about the USA’s creditworthiness, they’re gone now. The 10-year bond is yielding less than 2.5%: there are no worries in evidence there.

Put those two things together, and you can even be quite happy about today’s sell-off. If you’re a debtor rather than a saver, then falling interest rates are good for you. If you want to buy a house, then falling mortgage rates — not to mention falling home prices — are also good news. And if you want to invest in some wonderful future income stream, then money’s cheap right now to do so.

This seems to me to be a point in the recovery where you do not want the 10-year Treasury plunging to 2.41 percent. Felix offers a bit more pessimism:

Still, the future of the global economy is very uncertain, and southern Europe in particular is still far from any kind of sustainable resolution. The US economy has no particular exposure to Greece — but Italy is another matter entirely. This is a global sell-off, with European markets down just as much as those in the US; Asia’s sure to follow suit when it opens. Now that the Fed has stopped dropping dollar bills on the US economy, it’s hard to see where confidence and optimism are going to come from in the coming months.

Yes, will the Fed come to the rescue? Ryan Avent:

The good news is this: the Fed can't help but act. On Tuesday, I worried that the Fed would stand pat at its meeting next week, leaving the economy to dip into recession before it finally reacted in late August or following its September meeting. That no longer seems like the most likely outcome to me; events are moving too fast. Ben Bernanke may not announce a new policy next week, but I believe he will hint at new Fed easing—potentially at new purchases, but perhaps also at other available tools. The drop in inflation expectations should force the Fed's hand.

Inflation expectations are coming down, with the 5 year TIPS measure less than 2 percent but the 10 year TIPS measure is still 2.23 percent (down just 4bp from yesterday). Looking at the past week, I think Avent is on the right track – the Fed should be ready to get ahead of this mess, and next week is an opportune time. That said, the Fed has tended to be late in the game throughout the past few years. You have a lot of policymakers that need to fundamentally shift their intellectual framework to come to terms with a rapid shift in policy. And they could easily point to the 10 year implied inflation expectation and say it need to fall further before we will act. Same with the 5 year implied inflation expectation – it was bouncing along near 1.2 percent by late August last year.

In other words, it took considerably greater worries on the deflation front to prod the Fed into action last year.

In my view, Avent’s policy prescription is correct. For goodness sake, get ahead of this thing. Does another $200 billion on the balance sheet really matter that much? But the history of the last few years it this: They get to the right solution, but it takes some time. Now, one would think they learned some lessons in the last few years, and would tighten up the timeline. At the same time, though, one would have thought they learned their lesson from last years ill-timed turn toward hawkishness. Yet, they once again eagerly walked into that track this year as well.

The slow learning curve on Constitution Ave. argues against action next week. The reality of the world argued for action last month. Go figure.

Of course, the slowest learning curves are in Europe. Via the Wall Street Journal:

The euro zone’s inflation outlook has remained largely unchanged since the European Central Bank‘s July policy meeting, ECB President Jean Claude Trichet said Thursday, noting that he would not rule out further rate increases despite the ECB broadening its efforts to support fragile financial markets.

Speaking in a television interview with Dow Jones Newswires, Trichet said “our judgment is very much the same as in the previous meeting a month ago. We consider that we’re still in a situation where the risks are more on the upside… and that we will have to monitor the situation very closely.”

It speaks for itself. With policymakers across the Atlantic seemingly oblivious to their own dire situation, the fear gripping financial markets is completely understandable.

Bottom Line: The market nosedive does not yet guarantee Fed action in the near future. History has shown the Fed tends to react with a lag. They should have learned better by now, but if they had learned anything, they would not have pushed forward with hawkish rhetoric earlier this year. Arguably, they will hold firm, let the markets think they are out of the game and further bid down implied inflation expectations, and then, once the damage is done, up the level of stimulus. Terrible way to run an economy, I know. Still, it would be remiss to declare anything is certain before the employment report is released. A downside surprise could promt the Fed into more rapid action. I am now entirely speechless on the European situation – with Trichet's ongoing hawkish stance, it has truly devolved into one of those slow-motion train wrecks that one only sees in the movies.

Thursday, August 04, 2011

Fed Watch: On The Edge. Again.

Tim Duy:

On The Edge. Again., by Tim Duy: Market participants turned their attention away from Washington politics to the actual economy, and didn’t like what they saw. Incoming data has too many hints of recession to leave anyone optimistic about the second half. And while corporate profits have held up despite weak growth, it is difficult to see how they could retain recent gains in an outright recession.
Moreover, the reality of the budget deal is starting to set in. What the economy needed was near-term stimulus and long-term consolidation. What Washington delivered was just consolidation, both near and long-term. Now market participants are scratching their heads around three basic questions: Is recession imminent? How deep would it be? When will Washington come to the rescue?
The story I take away from the data is this: The US economy quickly lost any momentum developed in the back half of 2010 as the impact of higher commodity prices rippled through the economy. To be sure, this was compounded by the impact of the Japanese disruption, but that episode should have had little impact. The disruption was expected to be short-lived, and largely has been.
The commodity shock left a deeper mark on the economy. Not only did it directly impact households via higher energy prices, but I sense that firms where eager to try to push through higher prices. I also think one can argue that firms where goaded into higher prices by certain Fed officials who fanned the flames of inflation fears. The combination was that real consumption spending hit a wall:
And once again we return to the story of a new normal – not only is consumer spending at a lower trend line, but a lower growth rate as well:

Continue reading "Fed Watch: On The Edge. Again." »

Monday, August 01, 2011

Fed Watch: On Pins and Needles

The second of two from Tim Duy:

On Pins and Needles, by Tim Duy: Here we are, one month into the second half. Expectations, or, perhaps more accurately, blind hope, is that the back half of 2011 is better than the first half. We can only hope this is true. The revised GDP data reveal the US economy flirted with recession in the first six months of the year, raising the real concern that we are at stall speed. We need those confidence fairies sooner than later – because it looks like fiscal and monetary policymakers are still on the sidelines. Worse, in the case of the former, near, medium, and long-term policy are all looking contractionary at the moment.

Will the economy tumble into recession, or simply continue to limp along? Bets are all over the place at this point. Optimists are looking for a stronger second half as the temporary factors (Japan, oil price shock, etc) fade, giving a boost to at least one sector, autos. Karl Smith sees room for optimism in the manufacturing survey data – we will see the ISM number this morning for further insight. Rebecca Wilder, however, sees weakness in the high frequency data, although the most recent initial claims numbers fell below 400k. That said, Brad DeLong noted unusual seasonal effects in past Julys, and 2011 could be the same. Bloomberg sees trouble signs in container shipping rates:

Plunging rates for chartering container vessels that carry sneakers, furniture and flat-screen TVs may signal a U.S. consumer slowdown and losses for shipping lines in what is traditionally their busiest time of the year.

Fees for hiring vessels have fallen 9.3 percent since the end of April, according to the Howe Robinson Container Index, which tracks charter rates for a range of vessels. Last year, the index surged 56 percent in the period, as lines added ships on demand from U.S. and European retailers restocking for the back-to-school and holiday shopping periods.

“The troubling part is that charter rates are falling in the peak season,” said Johnson Leung head of regional transport at Jefferies Group Inc. in Hong Kong. “Sentiment among consumers and retailers isn’t very strong.”

I think you can tell a story of growth in the 2.0 to 2.5 percent range in the second half of this year, consistent with the low-end of consensus. Weak, weak, weak relative to the depth the recession – too weak to push down unemployment rates, perhaps too weak to prevent joblessness from increasing. As far as faster growth is concerned, I am still held up by the issue that the last two expansions were tied up in massive asset bubbles. What will provide that wealth-effect source of demand this time around? What will take its place? It certainly isn’t fiscal stimulus. If not, then what?

Moreover, while all eyes where on the debt-ceiling debate, the European debt crisis continues essentially unabated. So while the US economy is dragging itself into the second half at stall speed, it faces the certain shock of fiscal contraction and the increasingly likely shock emanating from Europe.

Where is the Federal Reserve in the midst of this turmoil? Out of sight. Well, not entirely, San Francisco Fed John Williams offered conditional support:

Looking ahead, we at the Fed will keep a very close eye on incoming data and adjust our policy as needed to work towards our two policy goals. If the recovery stalls and inflation remains low or deflationary pressures reemerge, then we may need to keep our very stimulatory policies in place for quite some time or even increase stimulus. On the other hand, assuming growth picks up and inflation doesn’t fall too low, then at some point we’ll need to start gradually removing stimulus.

We need to see both low growth – in the second half of the year, the first is irrelevant – and a reversal of recent inflation trends. Note the GDP revisions where not kind on that front:

Chicago Federal Reserve President Charles Evans would be willing to push for additional stimulus, again, dependent on the third quarter growth numbers – see the Wall Street Journal. Still, he would be more likely to ease even in the face of recent inflation trends, as he sees those as largely transitory. Note the same article highlights the opposite view of Philadelphia Fed President Charles Plosser. He expects stronger growth, and is looking to tighten policy ASAP.

Richmond Federal Reserve President Jeffrey Lacker sees more easing as simply inflationary:

This circumstantial evidence suggests that the additional monetary stimulus initiated last November raised inflation and did little to improve real growth. Last year, raising inflation was a desirable policy objective, but that clearly is not the case today. Given current inflation trends, additional monetary stimulus at this juncture seems likely to raise inflation to undesirably high levels and do little to spur real growth.

I suspect Federal Reserve Chairman Ben Bernanke is not far from this outlook as well. And, finally, we also have the wisdom of St. Louis Federal Reserve President James Bullard:

Now, “you’ve got rising inflation, and headline inflation is pretty high compared to a year ago. It could even go even higher,” Bullard said, noting “in that case you have be very circumspect” about doing more to help the economy, even in the face of anemic growth.

Sounds like a no vote to me.

Bottom Line: Pins and needles time for the US economy. The general expectation is for a stronger second half – but how much stronger? Seems like a lot of swords are still hanging over our heads to expect much more than anemic growth. That said, monetary policymakers expect something better and won’t budge either way until the tea leaves become clearer. And even if growth surprises on the downside, the inflation issue remains. Just can’t see monetary policy shifting in such an environment. The growth/inflation nexus needs to make a clean break one way or the other to prompt Fed action. For market participants, the mix of growth, inflation and policy is in something of a perverse sweet spot. Consider that corporate profits have held strong – revised upward even – helping sustain equity markets. Not sure that this should change in the absence of outright recession. Indeed, Wall Street is ready to ignore weak data, instead expected to rally hard this morning on the news that a debt-ceiling solution is at hand. Meanwhile, the Fed is effectively sidelined by weak growth, keeping interest rates low and freeing investors from imminent tightening fears. Impending fiscal contraction only locks in that outlook. And inflation is sufficiently high such that the Fed won’t loosen policy. No need to fret about that for the time being, and instead just enjoy the ride.

Wednesday, July 27, 2011

Fed Watch: Is Structural Change the Primary Challenge?

Tim Duy:

Is Structural Change the Primary Challenge?, by Tim Duy: Given that thoughts of high structural unemployment continue to emerge in Fed thinking, the topic bears ongoing scrutiny. Especially so for me personally, as I have long seen the need for structural shifts that address the US current account deficit - but should such adjustments require persistently high unemployment rates? Some affirmation of my general story comes via David Altig, who recently posted this chart:


Note the shift in relative growth patterns – less consumption, more investment, and net exports at least a less negative drag. This seems consistent with a shift away from the externally supported pattern of household consumption so evident in the past decade. And in discussing the general disappointment with the strength of the recovery, Altig says:

The undeniable (and relevant) human toll aside, the current recovery seems so disappointing because we expect the pace of the recovery to bear some relationship to the depth of the downturn. That expectation, in turn, comes from a view of the world in which potential output proceeds in a more or less linear fashion, up and to the right. But what if that view is wrong and our potential is a sequence of more or less permanent "jumps" up and down, some of which are small and some of which are big?

The implication is that perhaps we are closer to potential output than is widely believed. Now, before you roll your eyes, as I am inclined to do, note the CBO estimate of potential output is not the only estimate. Menzie Chinn reminds us of the variety of estimates of potential output, some of which suggest that, at the moment, the output gap is actually positive.

Why might we believe that potential output has suffered some sizable, negative downward shock? Altig did not provide an explanation, but one can find the same idea in the most recent FOMC minutes:

Continue reading "Fed Watch: Is Structural Change the Primary Challenge?" »

Friday, July 15, 2011

The Fed's Exit Strategy

Thursday, July 14, 2011

Seasonal Adjustment and New Unemployment Insurance Claims

Brad DeLong makes a good point about interpreting this morning's news that new claims for unemployment insurance fell a bit to 405,000 (though last week's number was revised upward):

Economagic Economic Chart Dispenser

New Unemployment Insurance Claims, by Brad DeLong: In both July 2009 and July 2010 the BLS's seasonal adjustment algorithm overestimated the extent of the seasonal jump in new unemployment insurance claims in July. Thus both in 2009 and 2010 the seasonally-adjusted series "saw" a July fall in unemployment insurance claims that was not really there.

Is the same thing happening this year? Perhaps. Thus I am not as pleased with this week's decline in seasonally-adjusted UI claims as I would be normally...

Leaving the microphone in Brad's hands, in another post he notes that:

worrying about deficit reduction right now stops us from worrying about things we could do something about--like high unemployment, idle capacity, slow growth, and crumbling infrastructure.

But instead of doing anything about it, the Fed watches and waits -- by Bernanke's own admission -- and hope's that, unlike all the other times it watched and waited to see if things got better and they didn't, this time is different (Bernanke said today that "We are uncertain about the near-term developments in the economy. We’d like to see if, in fact, the economy does pick up, as we are projecting."). And Congress is all but hopeless -- they'll be lucky if they don't wreck the economy over the debt ceiling, let alone take steps to improve it.

Wednesday, July 13, 2011

Fed Watch: A Nod to QE3?

Tim Duy interprets the remarks of Ben Bernanke in his appearance today before the Financial Services Committee, and notes that he hasn't change his position on QE3 as much as many people seem to think:

A Nod to QE3?, by Tim Duy: Financial markets warmly embraced a perceived opening by Federal Reserve Chairman Ben Bernanke, jumping sharply on news that QE3 was still on the table.

But QE3 was never off the table to begin with. It was simply that the bar to QE3 was very, very high. And I have to agree with Calculated Risk; I don’t see that Bernanke lowered it any today. The key sentence from the Congressional testimony:

On the one hand, the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.

Note the two conditions – persistent economic weakness coupled with deflation risks. The latter was a focus when the Fed initiated QE2, with the lack of such risks guaranteeing the Fed would cease asset purchases at the end of June. Bernanke made clear the focus on deflation in his most recent press conference.

Are we seeing signs that such deflationary fears are emerging? Not yet, at least not based upon the kinds of market and survey based indicators the Fed is watching:


I would be looking for inflation expectations to plunge well below 200bp to trigger Fed action, like we saw last fall. Nor is it evident in the actual inflation data:


Absent a jarring negative shock, it seems difficult to believe the Fed could forge a consensus to ease further given the recent inflation path. Without a clear risk of deflation, it seems any additional asset purchases (or other easing efforts) would not make it through the FOMC.

Of course such a risk could not emerge quickly – the debt ceiling charades and the European debt crisis stand out as big tail risk events. And it's not really hard to tell a story that more action would be necessary under either scenario. But it shouldn't be a surprise that the Fed would be ready to step in and support financial markets if such events occur.

And don’t forget that Bernanke made clear another story:

On the other hand, the economy could evolve in a way that would warrant a move toward less-accommodative policy.

He doesn't lay down any specific data markers for tightening. In short, policy could tighten, could loosen. They are stuck on hold, waiting and watching the evolution of the data. But absent deflation risks, easing policy further seems very, very unlikely.

Bottom Line: Looking for more from the Fed? Then look to conditions that sharply raise the risk of deflation. And note that the FOMC minutes suggest the Fed is not really looking in this direction, instead focused on the commodity-induced inflation shock passing through the economy.

Fed Watch: A Divided FOMC

Tim Duy:

A Divided FOMC, by Tim Duy: The FOMC minutes were simply fascinating. The discussion of the economic situation was markedly downbeat, even before the latest employment report, yet the final outcome of the meeting – the FOMC statement and Federal Reserve Chairman Ben Bernanke’s subsequent press conference – seemed to clearly indicate that, barring an outright return to the threat of deflation, the Fed saw its job as done. How can we reconcile these two positions? Presumably the faction leaning more toward additional easing is relatively small, while the majority believes either they have already gone too far or that further policy is ineffectual. Bernanke seemed to place himself in the latter category during the press conference. Is that really where he stands? This apparent divergence of views on the FOMC will bring extra attention to Bernanke’s testimony today on Capitol Hill.

Begin with the economic situation as seen from Constitution Ave. A host of “temporary factors” are weighing on the economy:

… including the global supply chain disruptions in the wake of the Japanese earthquake, the unusually severe weather in some parts of the United States, a drop in defense spending, and the effects of increases in oil and other commodity prices this year on household purchasing power and spending.

Still, better times are on the horizon:

Participants expected that the expansion would gain strength as the influence of these temporary factors waned.

I wouldn’t sigh too loudly just yet. It is reasonable to believe that some of these impacts are indeed temporary. For example, Bloomberg reports the Bank of Japan see good progress toward normalizing production conditions:

“Japan’s economic activity is picking up with an easing of the supply-side constraints caused by the earthquake disaster,” the central bank said in a statement. Increasing output has resulted in an “upturn” in exports, and household and business sentiment has improved, it said.

Toyota and Honda said last month they plan to add thousands of workers in Japan as they increase production. Toyota, the world’s largest automaker, said domestic plants were running at 90 percent of planned levels in June, up from 50 percent in April and May, when output was depressed by a shortage of parts from suppliers.

That said, as Bernanke earlier explained, temporary factors are not all that are in play:

Nonetheless, most participants judged that the pace of the economic recovery was likely to be somewhat slower over coming quarters than they had projected in April.

Why the downgrade? The list is long:

This judgment reflected the persistent weakness in the housing market, the ongoing efforts by some households to reduce debt burdens, the recent sluggish growth of income and consumption, the fiscal contraction at all levels of government, and the effects of uncertainty regarding the economic outlook and future tax and regulatory policies on the willingness of firms to hire and invest.

As if this is not enough, the risks are all downside risks:

Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and declining prices in the housing sector, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in peripheral Europe were to deteriorate further.

Lions and tigers and bears, oh my. Then comes the disappointing jobs numbers:

Meeting participants generally noted that the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. The recent deterioration in labor market conditions was a particular concern for FOMC participants because the prospects for job growth were seen as an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending.

Note that this was before the most recent employment report. The situation has only deteriorated further. Indeed, the sharp downturn in employment growth is something of a mystery if the primary factors weighing on the economy, primarily the Japanese tsunami, are widely believed to be only temporary. Firms should be willing and able to look through such disruptions. Simply a heightened sense of caution as the memory of the recession still lingers? Or are the back-to-back weak employment reports indicating a more permanent downward shock to growth, perhaps a cascading effect from the commodity price shock that will not be easily relieved unless the shock reverses itself.

Additional risks to the outlook were seen in the European debt crisis and the possibility the US debt ceiling may not be raised (I sure hope Calculated Risk is correct on this one). Given the general downbeat tenor of the discussion, it is tough to see how they did not open the door further for additional easing. Why not? Policy is held hostage to inflation fears:

Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time.

On the other side were those that argued there were no indications inflation expectations were becoming unanchored, nor would this be likely when labor costs were subdued. Then comes the paragraph that truly reveals the divergence within the FOMC:

Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy.

The group suggesting the need for additional stimulus appears to be relatively small. A more significant group looks at recent data and concludes we overestimated the amount of slack in the system (despite meager wage gains). An apparently nontrivial contingent sees structural issues driving potential output lower, even if only temporarily. And then there are those that are not confident that policy has much impact at this juncture – which implies either do nothing or the next thing they do has to be really, really big. And I doubt there is much support on the FOMC for something really big.

And note that although the group open to additional stimulus caught the attention of the press, it appears they too would wait until it becomes clear that both labor markets remain weak and inflation returns to low levels. I would add that Bernanke raised the stakes further – inflation expectations need to threaten to become unanchored on the downside, a real fear of deflation like last fall. He seems to believe that additional policy would be ineffectual at boosting growth further, and should be reserved for moderating financial disruptions and maintaining inflation expectations. It should be interesting if today he reiterates his point that in the absence of deflation, the tradeoffs of additional policy are not very attractive. If he recants this view, it would signal that he is moving toward additional policy sooner than later. I don't expect such a change.

So what’s the bottom line here? On one hand, the “watch and wait” mode could be viewed as understandable given the multitude of temporary factors in play. That said, temporary factors aside, the overall tenor of the meetings appears to have been very depressing. There is a clear sense the economy is firing on only a handful of cylinders, yet FOMC members cannot completely explain why. And perhaps more importantly, it appears members are operating without consistent theoretical or empirical frameworks. They all seem to be looking at the same set of data through very different lenses. There is no agreement that policy has been effective or ineffective. There is no agreement if inflation risks are high or low. There is no agreement if structural impediments are real or imagined. Given the lack of agreement, it is difficult to see how policy does anything but remain in a holding pattern until a clearer picture emerges. Good news for those worried the Fed would soon tighten. Ongoing weak job reports practically guarantees the Fed will not step on the breaks. Bad news for those looking for more. Until the inflation fears shift back to deflation fears, there looks to remain strong resistance to additional asset purchases.

Monday, July 11, 2011

Paul Krugman: No, We Can’t? Or Won’t?

Excuses, excuses:

No, We Can’t? Or Won’t?, by Paul Krugman, Commentary, NY Times: ...The ... United States economy has been stuck in a rut for a year and a half. Yet a destructive passivity has overtaken our discourse. Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems..., that we should focus on the long run instead.
This gets things exactly wrong. ... Our failure to create jobs is a choice, not a necessity — a choice rationalized by an ever-shifting set of excuses.
Excuse No. 1: Just around the corner, there’s a rainbow in the sky.
Remember “green shoots”? Remember the “summer of recovery”? Policy makers keep declaring that the economy is on the mend — and ... these delusions of recovery have been an excuse for doing nothing as the jobs crisis festers.
Excuse No. 2: Fear the bond market.
Two years ago The Wall Street Journal declared that interest rates on United States debt would soon soar unless Washington stopped trying to fight the economic slump. Ever since, warnings about the imminent attack of the “bond vigilantes” have been used to attack any spending on job creation.
But basic economics said that rates would stay low as long as the economy was depressed — and basic economics was right. ...
Excuse No. 3: It’s the workers’ fault.
Unemployment soared during the financial crisis and its aftermath. So it seems bizarre to argue that the real problem lies with the workers — that the millions of Americans who were working four years ago ... somehow lack the skills the economy needs...: high unemployment is “structural,” they say, and requires long-term solutions (which means, in practice, doing nothing).
Well, if there really was a mismatch..., workers who do have the right skills ... should be getting big wage increases. They aren’t. ...
Excuse No. 4: We tried to stimulate the economy, and it didn’t work.
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
Think about it: Where are the big public works projects? Where are the armies of government workers? There are actually half a million fewer government employees now than there were when Mr. Obama took office. ... This ... wasn’t the kind of job-creation program we could and should have had. ...
It’s also worth noting that in another area where government could make a big difference — help for troubled homeowners — almost nothing has been done. ...
Listening to what supposedly serious people say about the economy, you’d think the problem was “no, we can’t.” But the reality is “no, we won’t.” And every pundit who reinforces that destructive passivity is part of the problem.

Fall Into the Gap Forever?

Here are three graphs showing the gaps in output, consumption, and employment that have opened up since the recession:

Real GDP

Gap2 Real Consumption

Gap3 Employment

In all three cases, we appear to be growing along a lower growth path than before. The question is whether we are stuck on these lower growth paths forever. Will we ever recover the old growth path, in full or in part? That is, how much of the change in the GDP growth path is permanent, and how much is temporary?

This is important because the level of employment is a function of the level of output. If we stay on the lower growth path, then we will have a permanent gap in employment -- most of the 14+ million unemployed will have little hope of finding work. We can share the jobs that exist, something like that, but we won't ever recover the jobs that were lost.

However, graphs like the next one point to temporary changes as the dominant feature of output fluctuations. Sometimes the deviations from trend are highly persistent, as in the Great Depression, but eventually we recover. The trend has not varied much for over 100 years. It does vary slightly over time, but the variance in the red line is small relative to the overall variance in output:


But as Brad DeLong notes:

I ... find the picture impressive. But the U.S. is exceptional. Other countries do not show the same pattern: for example, the United Kingdom never recovered to trend after its post-World War I recession.
And past performance is no guarantee of future results...

So it's not 100% certain that we will bounce back to the long-run trend. This time could be different (Brad shows that Britain has had permanent shocks).

The argument that variation in GDP, consumption, employment, and other macroeconomic variables is due to permanent shifts in the trend rather than cyclical variation around the trend is precisely the argument used by Real Business Cycle theorists and adherents to the classical school more generally to undermine the case for countercyclical monetary and fiscal policy. The more of the variation in output that can be explained by variation in trend (i.e. by supply-shocks), the less that is left over to be explained by aggregate demand shocks. With less variation caused by demand, there is less need for demand stabilization policies.

(This is also what is at issue in the structural versus cyclical unemployment debate. The more that the variation in unemployment is attributed to structural change, and hence to variation in trend, the less that is left over to be attributed to cyclical factors. With less cyclical variation, the case for policy is weakened.)

Now, none of the above implies that the argument that some of the variation in output is due to variation in the trend is wrong (see here for a summary of the debate). I believe that some of the variation in output is, in fact, due to permanent changes in the trend rate of output. The trend is not a perfectly straight line. The question is the size of the variation in trend relative to the size of the variation due to demand shocks (a question that has not been very decisively answered in the empirical literature, e.g. see the early work on this by Stock and Watson, and Blanchard and Quah). My read of the evidence is that the amount of variation in trend relative to cycle is nowhere near large enough to undermine the case that demand shocks are important components of aggregate fluctuations.

The point I want to make is that the "it's all explained by a new normal" story adopts the conservative point of view that variation in output is mostly due to supply shocks rather than fluctuation in demand. In this case, there's little room for monetary or fiscal policy to help. However, there are good theoretical, empirical, and -- if you are into such things -- ideological reasons to be wary of making the "it's the new normal" or, equivalently, the "shocks are mostly permanent" argument. The persistence of the trend in output is evident in the graph above, and while this time may, in fact, be different, those making the argument -- some of whom are on the left -- should be fully aware of the conservative viewpoint this argument embraces. The argument that we are on a permanently lower growth path is an argument that there's nothing we can do, nothing we need do, and nothing we should do (except, perhaps, measures such as sharing the jobs we have more broadly). This is the new normal and you may as well get used to it.

My view is different. I believe we will eventually recover to a new growth path that is near, but a bit lower than the old one. The recovery will be slow, but we will get there eventually. How long it takes depends, in part, upon how aggressively we attack the problem with monetary and fiscal policy measures ( or how much we make things worse with mistakes in either area such as premature deficit reduction or interest rate hikes).

 There is plenty of evidence in the historical record to suggest it's possible to largely recover from the recession, and I am not ready to accept the conclusion that we must resign ourselves to a growth path so far below the historical norm. If it eventually turns out that we are on such a disheartening long-run path and there's no way to change it, so be it, but I'm not ready to give up just yet.

Friday, July 08, 2011

Fed Watch: Grim

Tim Duy:

The employment report polishes off what was already a depressing week. The turn of events in the budget negotiations was deeply distressing. It just seemed like it should be impossible to imagine that budget cutting is the order of the day when unemployment is over 9%, 10-year Treasuries hover near 3%, and a Democrat is in the White House. Yet possible it is.

The extent to which our leadership seems determined to follow in the path of the Japanese is absolutely stunning. My impression of the last two decades is that Japanese policymakers were never able to keep their eyes on the weak economy, instead always eager to turn their attention back to "normalizing" policy – raising interest rates, raising taxes, cutting spending. Our leadership suffers from the same obsession.

The employment report should be a wake up call. A slap in the face. A bucket of cold water poured over your head. But it won’t. I suspect it will be seen as further evidence that stimulus is pointless, that austerity is the only solution.

Weakness spread far and wide throughout the report. No way to put lipstick on this pig. As others have noted, the labor force fell, the participation rate fell, the employment to population ratio fell, the number of employed plummeted, and the number of unemployed climbed. Private nonfarm payrolls gains a paltry 57k, and the drag from government cutbacks pulled the overall jobs gain to just 18k. Far short of the numbers needed to even hold unemployment steady.

And wages fell. Just a penny an hour, to be sure. But that penny is meaningful given the desperate fears of inflation that appeared to take hold on Constitution Ave. Without sharply rising wages, those fears are simply unfounded. This was the lesson of the post-1984 period. Why monetary policymakers are fixated on the pre-1984 period is a mystery.

What I noticed was the number of short-term unemployed:


A sharp rise in the number of people thrown into unemployment is definitely a red flag. The overall data picture is not pointing at recession yet, but this number reeks of something bad.

We can only hope some of the downward pressure on growth is relieved as the tsunami related disruptions fade and, more importantly in my mind, the sharp rise in oil prices has been arrested, at least for the moment. But even as these restraints lift, what remains? Oil prices have not plummeted like in 2008 to provide a big positive boost to real spending. And interest rates are no longer falling to provide and opportunity for a refinancing boom. So at best we return to trend growth, maybe a little above? Trend growth that was never sufficient in the first place?

Moreover, we still face significant headwinds in the second half of the year. The Europeans are determined to avoid resolution in their ongoing debt crisis. The ECB is determined to raise interest rates. And Congress and the White House are determined to pursue a path of fiscal austerity.

Bottom Line: Simply a weak report – unbelievably weak given the “recovery” is two years old. Weak enough – especially given falling wages – that it should prompt Bernanke & Co. to revisit their commitment to end large scale asset purchases. The next round of Fedspeak will be very interesting. Watch closely for the focus on “temporary” factors - code for watch and wait. At this juncture, they are still out of the game. I think the Fed will need to see another quarter of data before they begin to take seriously the possibility that they once again erred with a premature policy shift.

Sunday, July 03, 2011

The You're On Your Ownership Society

Richmond Federal Reserve president Jeffrey Lacker says the Fed should forget about the unemployed and focus on inflation:

Fed’s Lacker: Central Bank Needs to Focus on Inflation, Not Jobs, WSJ: The Federal Reserve should focus on keeping prices under control, leaving the government to try to boost the U.S. economy and jobs, Richmond Federal Reserve Bank President Jeffrey Lacker said in an interview Friday.
Though frustrated by a recovery that continues to be slow and choppy two years after the recession ended, Lacker said further monetary stimulus by the Fed would likely show up “almost entirely” in inflation, which is already too high. ...
[T]he Fed official urged President Barack Obama and Congress to come up with a credible long-term plan to cut the budget deficit without worrying too much about the short-term effects on growth.

The Fed is worried about inflation, Congress is worried about the deficit, but who is worried about the unemployed? I don't mean worried in the sense of acknowledging it's a problem and saying empathetic things -- oh those poor unemployed, too bad for them -- I mean worried enough to try to do something about it.

Saturday, July 02, 2011

Why the Wealthy Need the Welfare State

We have forgotten what it was like before the welfare state (I prefer the term social insurance state), and why it was put into place:

What history teaches us about the welfare state, by Francois Furstenberg, Commentary, Washington Post: In the wake of the economic crash, which has led to soaring budget deficits, Democrats and Republicans are negotiating “to move forward to trillions of spending cuts,”... unprecedented reductions in the size of the welfare state... Lost in this debate is an appreciation of the historical origins of the American welfare state — long before FDR and the New Deal, after another epochal financial crash.
Much like our time, the Gilded Age was an era of economic booms and busts. None was greater than the financial crisis that began in September 1873... For 65 straight months, the U.S. economy shrank — the longest such stretch in U.S. history. America’s industrial base ground to a near halt... Until the 1930s, it would be known as the Great Depression. ...
As demand collapsed, businesses slashed payrolls and reduced wages, and a ruinous period of deflation began. By 1879, wholesale prices had declined 30 percent. The consequences were catastrophic for the nation’s many debtors and set off a vicious economic cycle.
Neither political party offered genuine solutions. ... With laissez-faire ideas dominant and the political system in stasis, economic decline persisted. The collapse in tax revenue only strengthened calls for fiscal retrenchment. Government at all levels cut spending. Congress returned the country to the gold standard...: “hard money” policies that favored Eastern financiers over indebted farmers and workers.
With neither major party responding to the crisis, new insurgent movements arose: antimonopoly coalitions, reform parties and labor candidates all began to attract support. ... The continued economic misery for the many, juxtaposed against fabulous wealth for the few, generated intense hostility to great fortunes. Workers, suffering the most without a welfare state, responded with ever-greater militancy.
The labor struggles of the age were as epic as the fortunes of the tycoons: the Molly Maguires of the Pennsylvania coal fields; the great railroad strike of 1877 that nearly paralyzed the nation; the Haymarket affair of 1886, in which a bomb killed eight people in a Chicago demonstration; the Homestead strike of 1892, probably the most violent labor conflict in American history. But these were just the most famous episodes...: Between 1881 and 1890, there were 9,668 strikes and lockouts... State and federal militias were repeatedly called out to quash labor unrest. ...
Wealthy Americans began to fear for the stability of the social order. What force, the wealthy asked in desperation, might mitigate the social chaos and misery, and mute what one public official called “the antagonism between rich and poor”? ...
Today, new fortunes have been accumulated that rival those of the Gilded Age. Some of that wealth, possessed by people like Charles G. Koch and David H. Koch or Peter G. Peterson, has been used to promote cuts to social spending. Before ...  dismantling of the welfare state, however, they might think harder about the reasons such policies were put in place.
The Gilded Age plutocrats who first acceded to a social welfare system and state regulations did not do so from the goodness of their hearts. They did so because the alternatives seemed so much more terrifying.

Though it doesn't fit precisely, I keep thinking of the ultimatum game. When the distribution of gains crosses some threshold of unfairness, people become willing to sacrifice in order to make a larger point. For example, in a strike they are willing to impose costs on themselves in order to impose even larger costs on someone else and hopefully bring about desired change.

I don't know how close we are to the boiling point, the point where people become willing to go on strike, sabotage production, etc., etc. in protest over intolerable levels of inequality in the distribution of the nation's output. But I fear we are closer to that point than we think, and attempts to dismantle the welfare state will make the tipping point come sooner rather than later.

Friday, July 01, 2011

Austerity Can Wait

I have a comment at the Financial Times:

Austerity can Wait

It's at the end of the Gavyn Davies article.

Thursday, June 30, 2011

The End of QE2: Did It Work? What Will Happen Next?

At MoneyWatch:

The End of QE2: Did It Work? What Will Happen Next?

[This borrows from an op-ed in the local paper: Interest rates not the only way the Fed boosts economy, by Tim Duy and Mark Thoma.]

Wednesday, June 29, 2011

Feldstein: What’s Happening to the US Economy?

Martin Feldstein sounds worried:

What’s Happening to the US Economy?, by Martin Feldstein, Commentary, Project Syndicate: The American economy has recently slowed dramatically, and the probability of another economic downturn increases with each new round of data. ...
Monetary and fiscal policies cannot be expected to turn this situation around. The US Federal Reserve will maintain its policy of keeping the overnight interest rate at near zero; but, given a fear of asset-price bubbles, it will not reverse its decision to end its policy of buying Treasury bonds – so-called “quantitative easing” – at the end of June.
Moreover, fiscal policy will actually be contractionary in the months ahead. The fiscal-stimulus program enacted in 2009 is coming to an end, with stimulus spending declining from $400 billion in 2010 to only $137 billion this year. And negotiations are under way to cut spending more and raise taxes in order to reduce further the fiscal deficits projected for 2011 and later years.
So the near-term outlook for the US economy is weak at best. Fundamental policy changes will probably have to wait until after the presidential and congressional elections in November 2012.

Sarah Raskin is also worried, and seems to be one of the few Federal Reserve Board willing to "underscore" the employment part of the dual mandate (though I think Feldstein's right about further easing, that won't happen unless the outlook darkens considerably, and even then there's no certainty the Fed would take action):

Fed’s Raskin Paints Grim Picture of Recovery, by Luca Di Leo, Real-Time Economics: Federal Reserve Board governor Sarah Raskin Wednesday painted a grim picture of the U.S. economy and signaled support for the central bank’s easy-money policies aimed at boosting jobs.

In a speech to the New America Foundation, Raskin said the jobs market is actually in worse shape than what’s indicated by the headline 9.1% unemployment rate. ...Raskin told the audience “we should pause to underscore the promotion-of-maximum-employment imperative of the Federal Reserve’s dual mandate.” ...

Though statistics show that about 13.9 million Americans were out of work in May, an additional 8.5 million workers had to settle for part-time jobs or were forced to cut back on their work hours, Raskin said.

“It is necessary for the strength of our nation’s recovery that low- and moderate-income Americans be able to more fully participate in the economy,” the Fed official said. ...

Monday, June 27, 2011

"No Pain, No Gain?"

In this Slate column from 1999, Paul Krugman discusses (and dismisses) the "pain is good" economic argument from the 1920s, and then says "one hears exactly the same argument now." Twelve years later, not much has changed.

This also buttresses an argument I've made recently. Some people argue that the problem with the economy is mostly structural rather than cyclical, and that monetary and fiscal policy can do little to help. I disagree on both counts. I think most of the problem we face today is cyclical, not structural, and to the extent we do face a structural problem it's still important to institute "short-run palliatives" that allow us to "keep the work force employed":

No Pain, No Gain?, by Paul Krugman, Slate, Jan. 15, 1999: Once upon a time there was a densely populated island nation, which, despite its lack of natural resources, had managed through hard work and ingenuity to build itself into one of the world's major industrial powers. But there came a time when the magic stopped working. A brief, overheated boom was followed by a slump that lingered for most of a decade. A country whose name had once been a byword for economic prowess instead became a symbol of faded glory.
Inevitably, a dispute raged over the causes of and cures for the nation's malaise. Many observers attributed the economy's decline to deep structural factors--institutions that failed to adapt to a changing world, missed opportunities to capitalize on new technologies, and general rigidity and lack of flexibility. But a few dissented. While conceding these factors were at work, they insisted that much of the slump had far shallower roots--that it was the avoidable consequence of an excessively conservative monetary policy, one preoccupied with conventional standards of soundness when what the economy really needed was to roll the printing presses.
Needless to say, the "inflationists" were dismissed by mainstream opinion. Adopting their proposals, argued central bankers and finance ministry officials, would undermine confidence and hence worsen the slump. And even if inflationary policies were to give the economy a false flush of artificial health, they would be counterproductive in the long run because they would relax the pressure for fundamental reform. Better to take the bitter medicine now--to let unemployment rise, to force companies to purge themselves of redundant capacity--than to postpone the day of reckoning.
OK, OK, I've used this writing trick before. The previous paragraphs could describe the current debate about Japan. (I myself am, of course, the most notorious advocate of inflation as a cure for Japan's slump.) But they could also describe Great Britain in the 1920s--a point brought home to me by my vacation reading: the second volume of Robert Skidelsky's biography of John Maynard Keynes, which covers the crucial period from 1920 to 1937. (The volume's title, incidentally, is John Maynard Keynes: The Economist as Savior.)
Skidelsky's book, believe it or not, is actually quite absorbing: Although he was an economist, Keynes led an interesting life--though, to tell the truth, what I personally found myself envying was the way he managed to change the world without having to visit quite so much of it. (Imagine being a prominent economist without once experiencing jet lag, or never taking a business trip where you spent more time getting to and from your destination than you spent at it.) And anyone with an interest in the history of economic thought will find the tale of how Keynes gradually, painfully arrived at his ideas--and of how his emerging vision clashed with rival schools of thought--fascinating. (Click here for an example.)
But the part of Skidelsky's book that really resonates with current events concerns the great debate over British monetary policy in the 1920s. Like the United States, Britain experienced an inflationary boom, fed by real estate speculation in particular, immediately following World War I. In both countries this boom was followed by a nasty recession. But whereas the United States soon recovered and experienced a decade of roaring prosperity before the coming of the Great Depression, Britain's slump never really ended. Unemployment, which had averaged something like 4 percent before the war, stubbornly remained above 10 percent. There is an obvious parallel with modern Japan, whose "bubble economy" of the late 1980s burst eight years ago and has never bounced back.
Almost everyone who thought about it agreed that Britain's long-run relative decline as an economic power had much to do with structural weaknesses: an overreliance on traditional industries such as coal and cotton, a class-ridden educational system that still tried to produce gentlemen rather than engineers and managers, a business culture that had failed to make the transition from the family firm to the modern corporation. (Keynes, never one to mince words, wrote that "[t]he hereditary principle in the transmission of wealth and the control of business is the reason why the leadership of the Capitalist cause is weak and stupid. It is too much dominated by third-generation men.") Similarly, everyone who thinks about it agrees that modern Japan has deep structural problems: a failure to move out of traditional heavy industry, an educational system that stresses obedience rather than initiative, a business system that insulates big company managers from market reality.
But need structural problems of this kind lead to high unemployment, as opposed to slow growth? Is recession the price of inefficiency? Keynes didn't think so then, and those of us who think along related lines don't think so now. Recessions, we claim, can and should be fought with short-run palliatives; by all means let us work on our structural problems, but meanwhile let us also keep the work force employed by printing enough money to keep consumers and investors spending.
One objection to that proposal is that it will directly do more harm than good. In the 1920s the great and the good believed that an essential precondition for British recovery was a return to the prewar gold standard--at the prewar parity, that is, making a pound worth $4.86. It was believed that this goal was worth achieving even if it required a substantial fall in wages and prices--that is, general deflation. To ratify the depreciation of the pound that had taken place since 1914 in order to avoid that deflation was clearly irresponsible.
In modern times, of course, it would, on the contrary, seem irresponsible to advocate deflation in the name of a historical monetary benchmark (though Hong Kong is currently following a de facto policy of deflation in order to defend the fixed exchange rate between its currency and the U.S. dollar). But orthodoxy continues to prevail against the logic of economic analysis. In the case of Japan, there is a compelling intellectual case for a recovery strategy based on the deliberate creation of "managed inflation." But the great and the good know that price stability is essential and that inflation is always a bad thing.
What really struck me in Skidelsky's account, however, was the extent to which conventional opinion in the 1920s viewed high unemployment as a good thing, a sign that excesses were being corrected and discipline restored--so that even a successful attempt to reflate the economy would be a mistake. And one hears exactly the same argument now. As one ordinarily sensible Japanese economist said to me, "Your proposal would just allow those guys to keep on doing the same old things, just when the recession is finally bringing about change."
In short, in Japan today--and perhaps in the United States tomorrow--behind many of the arguments about why we can't monetize our way out of a recession lies the belief that pain is good, that it builds a stronger economy. Well, let Keynes have the last word: "It is a grave criticism of our way of managing our economic affairs, that this should seem to anyone like a reasonable proposal."

Thursday, June 23, 2011

Fed Watch: FOMC Reaction

Tim Duy reacts to the FOMC meeting:

FOMC Reaction, by Tim Duy: The two-day FOMC meeting ended largely as expected, with the Fed reaffirming the current policy stance. If you were looking for signs that QE3 is on the horizon, you were sorely disappointed. If anything, the FOMC statement shifted in a slightly hawkish direction, setting the stage for the next policy move to be a tightening. The Fed is trying to make it as straightforward as possible – in the absence of clear and convincing evidence that deflation is again a threat, they have nothing else to offer.

The statement itself made clear the Fed interprets much of the current data flow as reflecting temporary factors, either the impact of higher commodity prices or the disaster in Japan. Interestingly, though, temporary factors alone are not sufficient to explain the slowdown, as the 2012 GDP forecast was downgraded. Federal Reserve Chairman Ben Bernanke admitted this during his subsequent press conference. In response to a request for the forecast he brought to the meeting, he suggested that he was on the low side of expectations:

[The] “slowdown is at least partly temporary….can’t explain the entire slowdown…Growth at least in the near term might be a little bit less than we anticipate.”

Still, despite the slowdown, the Fed removed the “employ its policy tools as necessary to support the economic recovery” language, presumably because they have no intention of providing any additional support. Moreover, inflation trends are no longer “subdued.” Instead, they see a “subdued outlook for inflation,” another signal that they are not thinking about easing, but instead restraining themselves from tightening now.

As Mark Thoma notes, Bernanke made clear that the shift away from deflation concerns effectively ends the possibility of another dose of quantitative easing. So what happened to the Bernanke of a decade ago, when he chastised the Bank of Japan for inaction? Brad DeLong laments:

Those of us Democrats who were happy when Barack Obama reappointed Ben Bernanke as Fed Chair thought that we were getting the Ben Bernanke we knew--the student of the Great Depression and of Japan's Lost Decade dedicated to doing whatever was necessary to stabilize the time path of nominal GDP, up to and including dropping bales of money out of helicopters.

Whatever happened to him?

My first thought is that we forgot or overlooked the fact that Bernanke is a child of the Bush Administration, which should have been a red flag that he was not all that he was thought to be. My second thought is that I don’t see Bernanke as terribly out of line with the current Administration itself. Third, Bernanke made clear in his response to a Japanese reporter that he sees himself as exactly the Bernanke of a decade ago. His comments then meant that:

“…a determined central bank can always do something about deflation.”

Like inflation, deflation is a monetary phenomenon, and, as such is within the control of the monetary authority. He acted on that belief last fall with the Fed’s second large-scale asset program – a policy that had more to do with eliminating deflationary expectations than the path of growth. Those deflationary concerns have now been replaced by the more traditional inflationary concerns. To be sure, the growth forecast leaves much to be desired, and the unemployment outlook should arguably be seen as a crisis. But – and I think this is key – the Fed believes that they have little traction over growth at this juncture. Thus, additional policy yields no improvement on the employment outlook, but potentially adds to an already uncomfortable inflation tradeoff.

Simply put, from the Fed’s point of view, the balance of risks is clear. And that means we should expect nothing more from Constitution Ave.

Despite the clear direction from Bernanke, Bill Gross of PIMCO doubled-down on his failed bet that this statement would hint at QE3. Via Reuters:

Gross, the co-chief investment officer of PIMCO, the world's top bond manager, on Wednesday said on Twitter: "Next Jackson Hole in August will likely hint at QE3 / interest rate caps."

Consider the timeline. Today, the FOMC and Bernanke himself only further distanced themselves from another dose of easing in this cycle. That means he need a full 180 degree turn by August, less than two months away. Consider too that we would need a deflation threat to create such a turnaround. But, even if commodity prices stabilize, or even decline, the pass-through from previous price increases is still likely to be working its way through the core data. And it defies belief that, given the current attitude among FOMC members, they would entertain the thought of deflation with such inflationary pressure in the pipeline, even if you believe it to be temporary pressure.

Moreover, any commodity price declines are likely to provide a boost to growth. Moreover, so too will an easing of Japanese related supply issues. Which means a reasonable chance that growth looks stronger in comparison to recent weakness. Not terrific, mind you, but the level is unimportant. What is important is simply that growth does not deteriorate, and instead improves, however modestly.

All of this argues against Gross’s outlook. Which means you need a vastly contrarian actual outcome, and it needs to fall into place quickly. That outcome, as far as I can see, is some combination of a shift to deflation concerns, a dramatic downward shift in the 2012 growth forecasts, or massive financial contagion from the European crisis (best guess on this is that Europe kicks this can down the road for a few months anyway).

Which, in sum, means to need to ask yourself this question if you are going to jump into the Bill Gross camp: “Do you feel lucky, punk?” It seems like an awful lot needs to go wrong in the next few weeks to get QE3 at Jackson Hole. I am not saying that it can’t go wrong, and if it does I will happily give credit to Gross for his wisdom and insight. That said, the time horizon is remarkably short, and will shrink rapidly, to generate the kind of change of heart at the Fed necessary to prod officials into another round of easing. It would seem that financial crisis is the only event that could prompt such a shift in just two months.

Bottom Line: The Fed believes they are done easing, and policymakers now look toward tightening. I know, I know – they have said this before, which is reason enough to take their tough talk with a grain of salt. But the shift in the inflation outlook looks very much to represent the high water mark for policy. The data will need to dramatically deteriorate to shift the Fed’s focus away from tightening.

Wednesday, June 22, 2011

The Fed's Monetary Policy Meeting: Policy Stays on Hold

Here's my reaction to the Fed's press release from the FOMC meeting that ended today:

The Fed's Monetary Policy Meeting: Policy Stays on Hold

The statement was expected, but not at all what I wanted to hear.

I just added some comments on Bernanke's press conference.

Update on Bernanke's Press Conference: Bernanke all but ruled out QE3. In response to a question about whether the Fed is considering further easing, Bernanke noted that this is a committee decision, it's not his to make alone, but he gave two main reasons why the Fed is reluctant to pursue additional asset purchases. First, when the Fed decided to put QE2 in place, there were substantial worries about deflation. Thus, the Fed was missing both elements of its dual mandate by a wide margin, and further easing would help to increase inflation and stimulate output. Now, however, although the output gap is still large, the Fed is starting to see signs of inflation. Bernanke stated that most people underestimate the negative impact inflation can have on growth and employment, and this indicates the Fed will not be willing to increase the risks that inflation will become a problem.

The other reason he gave for being wary of further easing is that the Fed is starting to increases in wages. Thus, the Fed is worried about an emerging wage-price spiral, and it is determined to stop this from happening. A wage-price spiral was a big problem in the 1970s and the beginning of the 1980s, and memories of this episode make the Fed unlikely to do anything that might cause it to happen again.

In the past, Bernanke has also stated that the Fed is in unfamiliar territory with the inflated balance sheet from QE1 and QE2, and that creates a lot of uncertainty about how much inflation risk the Fed has created. This also works against further easing.

Finally, in his presentation of the Committee's forecasts of where the economy is headed, Bernanke noted that most committee members expect relatively strong output growth next year, and that is another reason why the committee is thinking more about when to begin tightening than it is about further easing.

There were many questions about this, i.e. when the Fed might begin tightening policy, but Bernanke was very careful not to tip his hand. He said it will depend on how the recovery progresses, but as noted above most Committee members expect relatively strong growth next year.

If the economy weakens considerably, anything is possible, but there's no indication at this time that the Fed has any inclination toward further easing.

One more thing. As I've said a couple of times recently, I think it's a mistake for the Fed to look past the current slowdown in the recovery (it should ask itself how often it has had to downgrade its forecasts in the past). This is a critical point in the recovery, and if the Fed makes the wrong choice, it could make things worse than they need to be. I didn't expect to hear news of further easing at this meeting, but I did hope to hear a bit more willingness to consider it.

Tuesday, June 21, 2011

The Fed's Monetary Policy Meeting

At MoneyWatch, I have a discussion of:

The Fed's Monetary Policy Meeting: Will Policy Change?

The meeting starts today and ends on Wednesday.

Monday, June 20, 2011

The Fed is the Only Hope Left. That Worries Me.

This just posted:

How the Fed Could Set Off a New Recession

I'm getting more and more worried about a double dip.

Thursday, June 16, 2011

Video: Brad DeLong versus Jim Grant on the Need for QE3

Fed Watch: Fed on the Sidelines

Tim Duy:

Fed on the Sidelines, by Tim Duy: The FOMC’s two-day meeting next week is expected to be something of a nonevent. Caught between a deteriorating growth outlook and higher inflation numbers, it is widely expected that policymakers stand pat. A consensus view from the Wall Street Journal:

With job gains potentially slowing, housing prices sliding and consumers spending cautiously, officials don't want to tighten financial conditions. This means they will maintain short-term interest rates near zero and keep the central bank's $2.6 trillion of securities holdings from shrinking. At the same time, because inflation has picked up, they're reluctant to embrace new initiatives aimed at boosting growth.

On the growth side, the critical issue is that policymakers believe the second quarter drag is an artifact of temporary factors that will soon fade. Of course, this was the story last quarter as well, but they seem content to ignore the possibility that a string of temporary shortfalls looks suspiciously permanent. Indeed, arguably the only thing temporary about this recovery was the one quarter acceleration at the end of the 2010.

Regardless of GDP downgrades, policymakers positioned themselves to turn a blind eye on growth, keeping focused instead on inflation. And they are seeing what they were looking for. Core-CPI gained 0.3% in May, likely sending shivers down the spines of hawkishly inclined FOMC members. This was predictable – the gains in headline-inflation were certain to translate into a temporary rise in the core numbers, which would lead the Fed to downplay the growth slowdown. Moreover, once the obvious threat of deflation was off the table, so too was the motivation for another round of large-scale asset purchases. In the absence of a downward spiral in 2012 growth forecasts, obvious reemergence of deflation concerns, or a Europe-precipitated crisis on Wall Street, it seems the Fed is content to move to the sidelines.

That said, speculation the Fed is poised for more hangs over financial market participants. The latest such speculation comes from PIMCOs Bill Gross, who appears to be covering himself after his ill-timed call to go bearish on US Treasuries. Via Reuters:

The world's largest bond fund manager said on Twitter late Tuesday: "QE3 likely to take form of 'extended period' language or interest rate caps on 2-3-year Treasuries."

Gross, the co-chief investment officer of PIMCO, the world's top bond manager, also said on Twitter: "Next week's Fed statement will likely stress 'extended period of time' language or even a period of interest rate caps."

Now, the extended period language is considered a given so I don’t see much room to stress it further. Instead, I see some room to back away from it. Recall the language itself:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

I think the reference to “subdued inflation trends” could be questioned in light of actual inflation trends. Which opens up the possibility for a statement that leans a little more hawkish than expectations. Not my primary scenario, but one worth thinking about.

As to Gross’ second speculation, that QE3 could come as a cap on 2-3 year rates, I very much doubt it will happen, certainly not next week. While, as Reuters noted, this idea was floated by then Governor Ben Bernanke in 2002, it would mean an open ended commitment to purchasing those securities, and I can’t see anyone on the FOMC with the stomach for that kind of commitment. This group looks for nothing more than to avoid commitment, trying to unwind policy as soon as possible. I don’t see them ready to propose.

Moreover, how much traction does the Fed really have in this region of the yield curve? The two and three year rates stood at 38 and 70 basis points today. These assets are already barely distinguishable from cash; dragging them down another 20bp will have little impact at the longer end. Bernanke already stated the tradeoffs for additional action are not attractive. I would have to agree if the most they are looking for is a handful of basis points; the policy would have little impact and thus only add to the belief that QE2 has done little if anything to lift the economy.

No, I think you have to move further out on the yield curve to get some traction, and I think the Fed knows this. The numbers to get traction simply make additional easing a bridge too far. Joe Gagnon,currently at the Peterson Institute, formerly of the Fed, and formerly my supervisor at Treasury, provides some scope via Rortybomb:

While QE2 had good effects, it was too timid. A QE3 needs to be bigger than QE2 — you want to signal a larger amount. A trillion dollars sounds like a big number, but it isn’t like a trillion dollar tax cut. All it is is a swap of two different assets. Buying one kind, selling another.

Bottom Line: Both monetary and fiscal policy suffer from the same impediment – the numbers needed to be effective, in both the size of the Fed’ balance sheet and the magnitude of the federal deficit, are so big that policymakers view them as potentially destabilizing, while the magnitude to which they might be willing to commit would leave them open to criticism that their policies are failures. The obvious fallback position is to embrace the devil you know, which in this case is an economy simply limping along.

Tuesday, June 14, 2011

Bernanke: Raise the Debt Ceiling

One more at MoneyWatch:

Bernanke: Raise the Debt Ceiling

It's a reaction to Bernanke's speech today discussing both budget deficits and the debt ceiling.

Sunday, June 12, 2011

How to Avoid a Lost Decade

Larry Summers tries to stop the austerity movement from undermining the recovery:

How to avoid our own lost decade, by Larry Summers, Commentary, FT: Even with the 2008-2009 policy effort that successfully prevented financial collapse, the US is now half way to a lost economic decade. ...
That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all but self-evident... When demand is constraining an economy, there is little to be gained from increasing potential supply. ...
What, then, is to be done? This is no time for ... traditional political agendas. ... The fiscal debate must accept that the greatest threat to our creditworthiness is a sustained period of slow growth. Discussions about medium-term austerity need to be coupled with a focus on near-term growth. ... Substantial withdrawal of fiscal stimulus at the end of 2011 would be premature. Stimulus should be continued and indeed expanded by providing the payroll tax cut to employers as well as employees. ...
At the same time we should recognize that it is a false economy to defer infrastructure maintenance and replacement, and take advantage of a moment when 10 year interest rates are below 3 per cent and construction unemployment approaches 20 per cent to expand infrastructure investment.
It is far too soon for financial policy to shift towards preventing ... possible inflation, and away from assuring adequate demand. ... Policy in other dimensions should be informed by the shortage of demand... The Obama administration is doing important work in promoting export growth by modernizing export controls, promoting US products abroad, and reaching and enforcing trade agreements. Much more could be done...
We averted Depression in 2008/2009 by acting decisively. Now we can avert a lost decade by recognizing economic reality.

Saturday, June 11, 2011

Fed Flies Rainbow Flag

Being gay "undermines the American economy"? That's beyond stupid:

Rainbow Flag Goes Up; Letters Flow In, by Sabrina Tavernise, NY Times: The Federal Reserve Bank of Richmond ran a rainbow flag up its flagpole last week and has been hearing about it ever since. ... The bank unfurled the flag on June 1, at the request of a group of gay and lesbian employees in honor of gay pride month.
One day later, Bob Marshall, a Republican in the House of Delegates and an outspoken opponent on gay rights issues, was moved to write a letter to the bank’s president... Gay and lesbian “behavior,” he wrote, “undermines the American economy, shortens lives, adds significantly to illness, increases health costs, promotes venereal diseases,” among other things.
That prompted a series of outraged rejoinders...
Jim Strader, a spokesman for the bank, said the bank had fielded hundreds of phone calls and as many e-mails about the flag. The flag, he said, symbolizes “values of being open and inclusive,” and shows that the bank is “a place that doesn’t discriminate.” ...
One of the most popular arguments by the flag’s opponents was that the bank is a government institution and so should not be displaying a flag that promotes a cause. And now that they are, the argument goes, they have an obligation to other causes.
“We hope there would be an even hand played when a Christian requests the Christian flag in September during Christian Heritage month,” said Victoria Cobb, president of the Family Foundation, a conservative advocacy group.
Mr. Strader’s response is that the bank is in fact privately owned, as are all regional Federal Reserves, and that it considers requests by employees — this was the first one — but not the general public. ...

Friday, June 10, 2011

Fed Watch: More on the Effectiveness of Fed Policy

One more from Tim Duy:

More on the Effectiveness of Fed Policy, by Tim Duy: Kathleen Madigan at the Wall Street Journal on Wednesday:

Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire….

….Fed policy’s main lever for growth is to prompt people to borrow money. But after the financial implosion, businesses and consumers have little appetite for credit. Indeed, as boomers approach retirement, the U.S. household sector needs to borrow less and save more

Kathleen Madigan on Thursday:

April’s news on trade was quite good, and U.S. manufacturers can thank the Federal Reserve. But improving growth falls far short of solving all the economy’s problems, especially with job growth…

…the Fed has made a mighty contribution to this situation. “By dramatically increasing the supply of U.S. dollars under its [quantitative easing] programs, the Fed has effectively (and perhaps explicitly) been engaged in a weak dollar policy,” says Millan Mulraine, chief macro strategist at TD Securities. “When combined with the recovery in global demand, the weak dollar has contributed significantly to the enhanced competitiveness of U.S. exports.”

So there is nothing the Fed can do to stimulate the economy on Wednesday, but on Thursday we learn there is another channel by which monetary policy operates, exchange rates. Madigan still insists there is no way for stronger demand to turn into job growth:

That’s because, in order to be price competitive on global markets, U.S. exporters can’t rely solely on a cheaper dollar. They have to reduce the cost of labor going into production….

….Even with rising foreign demand, the increase in output won’t be followed with a corresponding addition of jobs. Exporters will hire a smaller increase in high-skilled workers who can run high-efficiency machinery or understand complex processing systems.

Here again is the idea that rising productivity is a bad thing. Not sure why, as productivity growth has supported rising living standards for something like hundreds of years. The challenge in the current environment is that we are not meeting accelerating productivity growth simply with a sufficient increase in demand. And that is something policymakers should be able to address.

That said, Madigan starts to get closer:

Such proficiency will command better pay — but bigger wages will be covered by the worker’s better productivity.

I really don’t understand what reason for the “but.” Higher productivity should generate higher real wages. Madigan finishes:

High value-added jobs are the type the U.S. needs to maintain its standard of living while competing in world. But the actual number of new hires may not make much of a dent in the unemployment rate.

If some workers have better jobs, and more to spend, doesn’t this then create demand for additional labor in lower productivity growth sectors?

I sense Madigan wants to tell supply and demand side stories at the same time – and the story gets muddled, as can often happen when, graphically, we start shifting two curves at once. I think it is fair to simply say that productivity growth moves the target for demand growth to accomplish the goal of closing the output gap. This does not mean that policy is powerless or that productivity growth is bad. It simply means that demand needs to accelerate at a faster pace to adequately address the unemployment problem.

Thursday, June 09, 2011

Grep Ip: Read This Speech, Then Sell the Dollar

Greg Ip at The Economist:

Read this speech, then sell the dollar, The Economist: Ben Bernanke's speech on Tuesday got all the attention, but the speech later that day by Bill Dudley, head of the New York Fed, is more intriguing. In it he analyses the macroeconomic origins of the global imbalances that precipitated the crisis and prescribes the policy path forward....
In a nutshell, Mr Dudley tells us that aggressively easy monetary policy is essential to both the cyclical recovery and to a structural rebalancing of the American economy away from consumption and toward exports. This process will go more smoothly for everyone if emerging market economies (EMEs) cooperate and let their exchange rates appreciate (i.e. let the dollar fall), but absent such cooperation, don’t expect the Fed to change course. ...
EMEs have complained loudly that easy American monetary policy has fueled destabilizing flows of capital into their economies, driving their currencies up and the dollar down. That, Mr Dudley (uncharacteristically for the Fed) admits  “is at least possible” but then, in effect, tells them to deal with it...
Not surprisingly, Mr Dudley would like the EMEs and the rich world to cooperatively “move toward arrangements that put us on a mutually sustainable path”. This, obviously, means the EMEs allowing the dollar to fall further against their currencies. Mr Dudley does not, however, answer the question on everyone’s mind. Given the economy’s latest soft patch, is the Fed prepared to force the issue with more QE? ...
It may not matter. As William Pesek over at Bloomberg observes, Asian currencies are already reacting as if QE3 is on its way;... it is ... possible that Fed is getting its way with words, such as Mr Dudley’s speech, as much as with actions.

Fed Watch: Output Has Not Fully Recovered

Tim Duy:

Output Has Not Fully Recovered, by Tim Duy: Kathleen Madigan at the Wall Street Journal claims:

In a speech given Tuesday, the chairman discussed the aggregate hours of production workers, which had fallen by nearly 10% from the beginning of the recent recession through October 2009. “Although hours of work have increased during the expansion,” he said, “this measure still remains about 6 1/2% below its pre-recession level.” In other words, labor markets are nowhere near where they were before the financial collapse and recession.

Output, on the other hand, is fully recovered. Real gross domestic product — which at its worst had shrunk 4.1% — surpassed its 2007 peak at the end of 2010 and expanded further in the first quarter of 2011.

True, output has surpassed its previous peak, but this in no way should be the measure by which we determine if output has fully recovered. Full output recovery would require that activity return to potential output, and by that measure, output recovery remains little more than a fantasy:


See also Mark Thoma's link to Justin Wolfers. Madigan continues:

The gap between output and jobs is why the economy is in an expansion cycle by economists’ standards — but it doesn’t feel even close to recovery mode for the average consumer.

No, because if the economy were in fact fully recovered, unemployment rates would be at normal levels. Again, just because output regains its previous peak does not mean the economy has recovered. More:

Output has surged ahead of labor because of strong productivity. Robust productivity gains are good for profits and inflation outlook, but bad for workers and consumer spending.

This shouldn’t be true – higher productivity is absolutely not supposed to be bad for workers. It is supposed to allow for higher real wages, higher standards of living. But when aggregate demand falls short of that necessary to compensate for productivity growth, the economy remains mired in persistent disinflationary state, with high levels of unemployment. To solve this, something needs to boost aggregate demand. Not the Federal Reserve, claims Madigan:

Although the Fed is tasked with promoting full employment, there isn’t much the central bank can do at this point to push private businesses to hire.

It’s not that policymakers have no appetite for a third round of quantitative easing. It’s that another round probably isn’t going to help.

The Fed is not powerless, even at this juncture. Arguably, they have not even attempted to ease in line with that required to boost activity further. As Jim Hamilton points out, the numbers involved in QE2 should have been expected to have only a modest impact. The Fed could also raise inflation expectations. And I have always felt the Fed’s repeated insistence that their actions were only temporary helps ensure their policy will be less effectual than would otherwise be the case. Why should banks expand lending when they know the Fed is only going to mop up excess reserves and jerk up the short end of the yield curve the first chance they get?

That the Fed chooses to not take a more aggressive stance should not be confused with the inability to offer additional economic support. And by no means should we trick ourselves into believing that output is fully recovered.

The graph in the article essentially draws a horizontal line through the 2007 peak in the graph shown above:


Notice that if you allow for a trend, output has not fully recovered --Tim's point -- and the employment problem is even worse than this graph makes it seem.

Wednesday, June 08, 2011

Fed Watch: Clear Message from the Fed

Tim Duy:

Fed Watch: Clear Message from the Fed, by Tim Duy: We received a pretty clear message yesterday – if you are looking for additional monetary stimulus, you need to find a new hobby. Not going to happen. Yes, we know we have said this before, but this time we are serious.

Fed officials simply believe the weakness in the first and second quarters of this year is largely transitory, the impact of commodity prices and tsunami-related supply disruptions. In other words, nothing to see here, move along. The Wall Street Journal had the story time and time again today. Chicago Federal Reserve President Charles Evans, on his growth downgrade:

So I’ve taken some steam off the underlying sustainable rate that we were looking at and we’re pushing that growth out into the second half of this year. But we’re still of the mind that these are relatively transitory phenomena, that the recovery is still going to be continuing to take place and build.

Atlanta Federal Reserve President Dennis Lockhart:

The regional Fed president, who is not a voting member of the monetary policy-setting Federal Open Market Committee, added Tuesday that he is “frustrated” with the pace of economic recovery.

Still, the string of disappointing economic data “is no reason to panic” as “recoveries rarely play out smoothly.”

In fact, given the litany of unforeseen events–ranging from the Japanese earthquake and Middle East conflict to the weak domestic housing market–Lockhart said the U.S. economy has shown “pretty impressive resilience.”

And Federal Reserve Chairman Ben Bernanke:

U.S. economic growth so far this year looks to have been somewhat slower than expected. Aggregate output increased at only 1.8 percent at an annual rate in the first quarter, and supply chain disruptions associated with the earthquake and tsunami in Japan are hampering economic activity this quarter. A number of indicators also suggest some loss of momentum in the labor market in recent weeks. We are, of course, monitoring these developments. That said, with the effects of the Japanese disaster on manufacturing output likely to dissipate in coming months, and with some moderation in gasoline prices in prospect, growth seems likely to pick up somewhat in the second half of the year.

Did they make it clear enough? DON’T PANIC! It is all under control. Interestingly, Bernanke further suggests that not only will they do no more, no more can be done:

The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea. Still, the Federal Reserve’s actions in recent years have doubtless helped stabilize the financial system, ease credit and financial conditions, guard against deflation, and promote economic recovery. All of this has been accomplished, I should note, at no net cost to the federal budget or to the U.S. taxpayer.

The last line should erase any doubt the Federal Reserve is now under the sway of political pressure. Note also Bernanke’s long defense of the Fed on the issue of commodity prices – clearly he is getting grief on this point. Would he even be willing to chance that he is wrong?

But not only is monetary policy out of the question at this juncture, he also argues that fiscal policy should be off the table as well:

The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

Bernanke sees the threat posed by excessive short-term fiscal consolidation, but offers no suggestion that perhaps more short-term stimulus is still needed – that to close the output gap, fiscal authorities need to move more spending from the future to the present. But given the expansion of the balance sheet, I think Federal Reserve officials fear this road, as it creates the impression of deficit monetization. So, no stimulus, monetary or fiscal.

Finally, Dallas Federal Reserve President Richard Fisher noted:

The central banker noted consumers and firms are still traumatized by the economic and financial difficulties of recent years, and that’s part of why growth levels are still struggling. But he does expect activity to pick up: “The next half of the year will have better growth than we’ve seen recently,” Fisher said. “It’s not going to be robust” and he expects to see a “jerky motion” to activity.

The description of a recovery that is jerky and lacking robustness brings to mind something Greg Ip said last week:

Still, I was recently reminded by someone who lived through Japan’s lost decade that America is qualitatively, if not quantitatively, following the same script. That means we will often think robust, above-trend growth has begun, only to see it snuffed out by the inexorable post-bubble deleveraging. Japan offers another sobering lesson: its policy flexibility was heavily circumscribed by politics. Bail-outs, deficits and quantitative easing were no more popular in Japan than in America today. Japanese officials are far too polite to say “I told you so.” But they could.

And it is worth noting that while we think about “a lost decade” over the next ten years, the past ten years was already a lost decade for many:



Bottom Line: Federal Reserve officials accept the economy at face value – growth is slower than they would like, unemployment higher than they would like, but policymakers, fiscal and monetary, believe they are pretty much out of bullets. Unless the economy slips badly, don’t expect any more from us. Which leaves the rest of us hoping – against hope, if recent history is any guide – that the economy regains its footing in the second half of the year.

Tuesday, June 07, 2011

Bernanke: Sharp Fiscal Consolidation Focused on the Very Near Term Could be Self-Defeating

Let's hope Congress listens (many of us have called for this -- a credible deficit reduction plan for the future, but patience, or better yet more stimulus, while the economy recovers). From Bernanke's speech:

Developments in the public sector also help determine the pace of recovery. Here, too, the picture is one of relative weakness. Fiscally constrained state and local governments continue to cut spending and employment. Moreover, the impetus provided to the growth of final demand by federal fiscal policies continues to wane.
The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory. But, on the other hand, a sharp fiscal consolidation focused on the very near term could be self-defeating if it were to undercut the still-fragile recovery. The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk. At the same time, establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates and increased consumer and business confidence.

What to Listen for in Bernanke's Speech

Bernanke is scheduled to give a speech today:

What to Listen for in Bernanke's Speech

Six things.

FRBSF: Economics Instruction and the Brave New World of Monetary Policy

John Williams explains why "the Fed has moved away from targeting the monetary aggregates in conducting monetary policy" (this is the first part of a much longer explanation of recent changes in monetary policy):

Economics Instruction and the Brave New World of Monetary Policy, by John Williams, Economic Letter, FRBSF: ...The first major difference between monetary policy today and policy of a generation or so ago is that our decisions have had less and less to do with monetary aggregates, such as M1. This reflects the fact that payments technology has changed so dramatically over the past 50 years. In the 1950s, when June Cleaver went to buy groceries, she probably paid with cash or perhaps a check. If her purse was empty, she had to get to the bank before it closed at three o’clock, wait in line for the next available teller, and then withdraw enough cash to last until her next bank visit. These simple facts of life determined the monetary theories of that day. They even shaped the definition of M1, which has a nostalgic 1950s simplicity about it.
For example, M1, the most liquid measure of money, is defined as cash and coin, traveler’s checks, demand deposits, and similar bank balances. These include the measures of money that June Cleaver used for her transactions every day. In terms of understanding how much cash June wanted to hold, the Baumol-Tobin theory of money demand might apply. In that theory, households calculate how many times to go to the bank to withdraw cash and how much cash to take out based on two things: the inconvenience cost of each trip to the bank and the household’s typical monthly shopping needs.
Let’s now fast-forward 50 years. Instead of driving to the bank and waiting in line, many of us do most of our banking online or at ATMs. And purchases today can be made using a dizzying array of payment options, including credit cards, debit cards, gift cards, and PayPal, to name just a few. Debit cards and PayPal have many similarities to traditional checking accounts and can be fitted into traditional monetary theories. But credit cards present a much greater challenge. Credit card balances are nowhere to be found in the monetary aggregates, even though they make up a large fraction of total U.S. transactions. If you or I drained our bank accounts, we could still shop until we dropped by running up our credit card balances.
How do 1950s theories of cash and checks apply in a world in which you and I can instantly take out a loan of several thousand dollars with the swipe of a card at the cash register? When Milton Friedman first advocated slow and stable growth of the money supply, he didn’t write a word about credit cards, checkable brokerage accounts, or checkable home equity loan accounts. In the 1950s, these innovations hadn’t been invented or existed only in the most rudimentary form.
Let’s take a closer look at the classic quantity theory of money: MV = PY. It becomes very tenuous when traditional measures of M make up a smaller and smaller fraction of the value of transactions. For example, the velocity of M1 was around three or four in the 1950s. Now it is about eight—and that’s down from a peak of about 10½ a few years ago. Today’s economy uses cash and checking accounts much more efficiently (see Goldfeld 1976).
There have been a number of attempts to find a broader measure of “money” that has a stable relationship with nominal spending—that is, a constant velocity. These include M2 and variants of M2 that incorporate the latest financial innovations (see Small and Porter 1989 and Duca 1995). But, despite repeated efforts, like the mythical city of El Dorado, this ideal measure of money has proven elusive. It is precisely because of the volatility of velocity (V) that the Fed has moved away from targeting the monetary aggregates in conducting monetary policy. Instead, for the past few decades, the Fed has targeted short-term interest rates, in particular the federal funds rate and the interest rate on bank reserves. By targeting these rates directly, the Fed bypasses the uncertain and unpredictable link between money and the economy. Other major central banks target short-term interest rates as well. ...

Monday, June 06, 2011

Fed Watch: Circling the Drain

Tim Duy has lost some of the optimism he had earlier in the year (hope he's enjoying himself):

Circling the Drain, by Tim Duy: It is beginning to look like the economy is circling the drain. To be sure, I hate to make too much of one report, but the May employment report comes at the end of a series of bad reports stretching back to nearly the beginning of the year. There looked to be solid hope the recovery was on a better track as 2010 drew to a close, and that momentum appeared to carry through into January. But then we hit a wall.

What wall? Theories abound. Temporary weather and tsnumai induced disruptions for one, but we should be trying to look through such short term events. The crisis in Europe, although to be honest I don’t think this is having much of an impact on the decision making of the average US citizen or firm. I tend to think the rise in commodity prices, particularly oil, was the primary culprit, as consumer spending faltered and businesses struggle to pass increasing costs onto consumers. But what it really comes down to is that we have only had one good quarter in this recovery, and that simply was not enough to provide sufficient resilience to the sheer number of shocks the economy has weathered this year.

And let’s face it, even with that one good quarter, forecasters were still looking forward to a protracted recovery. That, however, did not stop the policy environment from turning remarkably contractionary. The debate in Washington quickly turned to how quickly to cut the deficit, how quickly to withdraw monetary stimulus. All with the goal of assuaging the invisible bond vigilantes, who have apparently been helping drive the 10 year Treasury yields back down to 3%. The turn toward contractionary policy - and monetary policy arguably turned contractionary when Fed policymakers questioned the wisdom of continuing QE2 - is surely one of the shocks that hit the economy.

Will the Fed respond with anything more?

Continue reading "Fed Watch: Circling the Drain" »

Sunday, June 05, 2011

When a Nobel Prize Isn’t Enough

Peter Diamond fights back with some parting shots:

When a Nobel Prize Isn’t Enough, by Peter Diamond, Commentary, NY Times: Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be?
The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though...: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy. ...
The leading opponent to my appointment, Richard C. Shelby of Alabama, the ranking Republican on the committee, has questioned the relevance of my expertise. “Does Dr. Diamond have any experience in conducting monetary policy? No,” he said in March. “His academic work has been on pensions and labor market theory.”
But understanding the labor market ... is critical to devising an effective monetary policy. ... The Fed has to properly assess the nature of that unemployment... If much of the unemployment is related to the business cycle — caused by a lack of adequate demand — the Fed can act to reduce it without touching off inflation. If instead the unemployment is primarily structural — caused by mismatches between the skills that companies need and the skills that workers have — aggressive Fed action to reduce it could be misguided.
In my Nobel acceptance speech..., I discussed in detail the patterns of hiring in the American economy, and concluded that structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy...
Senator Shelby also questioned my qualifications, asking: “Does Dr. Diamond have any experience in crisis management? No.” ... My experience analyzing the properties of capital markets and how economic risks are and should be shared is directly relevant for designing policies to reduce the risk of future banking crises.
Instead of going to the Fed, however, I will go about my congenial professional existence as a professor at M.I.T.,... and I will take advantage of some of the many opportunities that come to a Nobel laureate. So don’t worry about me.
But we should all worry about how distorted the confirmation process has become, and how little understanding of monetary policy there is among some of those responsible for its Congressional oversight. We need to preserve the independence of the Fed from efforts to politicize monetary policy and to limit the Fed’s ability to regulate financial firms. ...
Skilled analytical thinking should not be drowned out by mistaken, ideologically driven views... I had hoped to bring some of my own expertise and experience to the Fed. Now I hope someone else can.

Diamond should have been appointed. It's clear he's qualified, and there's no excuse for leaving the Fed short-handed while we are trying to battle the worst crisis in recent memory. In any case, Obama needs to get the open positions on the Fed filled as soon as possible.

Friday, June 03, 2011

Paul Krugman: The Mistake of 2010

Will we continue to repeat the mistakes of the past?

The Mistake of 2010, by Paul Krugman, Commentary, NY Times: Earlier this week, the Federal Reserve Bank of New York published a blog post about the “mistake of 1937,” the premature fiscal and monetary pullback that ... prolonged the Great Depression. As Gauti Eggertsson ... points out, economic conditions today — with output growing, some prices rising, but unemployment still very high — bear a strong resemblance to those in 1936-37. So are modern policy makers going to make the same mistake?
Mr. Eggertsson says no, that economists now know better. But I disagree. In fact, in important ways we have already repeated the mistake of 1937. Call it the mistake of 2010: a “pivot” away from jobs to other concerns, whose wrongheadedness has been highlighted by recent economic data. ...
Back when the original 2009 Obama stimulus was enacted, some of us warned that it was both too small and too short-lived. ... By the beginning of 2010, it was already obvious that these concerns had been justified. Yet somehow ... it became conventional wisdom that the deficit, not unemployment , was Public Enemy No. 1...
So, here we are, in the middle of 2011. How are things going?
Well, the bond vigilantes continue to exist only in the deficit hawks’ imagination. ... And the news has, indeed, been bad. As the stimulus has faded out, so have hopes of strong economic recovery. ... So, as I said, we have already repeated a version of the mistake of 1937, withdrawing fiscal support much too early and perpetuating high unemployment.
Yet worse things may soon happen.
On the fiscal side, Republicans are demanding immediate spending cuts as the price of raising the debt limit and avoiding a U.S. default. If this blackmail succeeds, it will put a further drag on an already weak economy.
Meanwhile, a loud chorus is demanding that the Fed ... raise interest rates to head off an alleged inflationary threat. As the New York Fed article points out,... underlying inflation remains low. ...
So the mistake of 2010 may yet be followed by an even bigger mistake. Even if that doesn’t happen, however, the fact is that the policy response to the crisis was and remains vastly inadequate.
Those who refuse to learn from history are condemned to repeat it; we did, and we are. What we’re experiencing may not be a full replay of the Great Depression, but that’s little consolation for the millions of American families suffering from a slump that just goes on and on.