One Reason QE2 Might Work Better than it "Should"

"The Seven Deadly Ingredients to the Coming US Hyperinflation" .

If you think it's just wingnuts saying this stuff, you'd be wrong. First off, lot's of people do watch Glenn Beck and Fox News, which are reporting that the sky is falling. Secondly, this shit is also in the NY Times, the Wall Street Journal, it's everywhere. Inflation expectations have changed.

Does the Fed do any robo-polling on inflation? They should... If they do, I suspect they just sent expectations skyward. Sure, you can also look at bond yields...

What do Conservative Economics think of QE2?

Besides the atrocious letter in the WSJ against QE2, I do wonder what the other conservative economists think about it. What does N dot Greg Mankiw think, for example? Nary a word on his blog. It will be interesting to see how many line up with crazies...

Newsflash: Europe in Trouble!

See this .

For all the talk about how this shows that the Euro was ill-advised, I tend to think the real problem is that Jean-Claude Trichet is an idiot, and that's the whole of it.

Europe still hasn't even lowered their key interest rate to zero. Just like Bernanke here, the ECB has continually "guessed wrong" and had monetary policy which is, in retrospect (as it was in real time), clearly too tight. Even now the key rate isn't even zero. One novel way they may help to avoid an Irish default is to lower their key interest rates! Had they done this two years ago, there may not have been any solvency problem in the first place.

It's hard to know why exactly officials from Berlin to Tokyo have been so enraged over QE2, but one thing it suggests that these are people who don't know which way is up.

"Summers Cast as Dysfunctional Force"

Read it here.

Revelations are that he opposed the Volcker rule, second that he nixed the jobs tax credit, and third that he strong-armed the EPA into not treating coal ash as a hazardous waste.

Surprising he didn't just suggest sending the non-hazardous coal ash to third-world countries, which are inefficiently under-polluted given that their meager incomes make it impossible for them to be able to put high dollar-values on not living near toxic waste.

How long before Larry-I'll-let-you-know-Ken Lay-if-anything-helpful-for-Enron-crosses-my-Treasury-desk-Summers picks up more "adviser" fees from the financial or coal industries?

In any case, the article says nothing about Summers' role in the three big economic policy mistakes of this administration: 1. The small stimulus, 2. Reappointing Ben Bernanke, 3. The fateful (by which I mean stupid) decision to wait for nearly two years on an FOMC appointment, when the rest of the FOMC is stocked with crazies. I would guess the reason is that the people who are dishing on Summers now don't realize these were mistakes, or else they too were on the dumb side of these horrific lapses in judgment which have helped to make Obama the great failed hope of our generation.

Yes, yes, we "got" health care, but still, a once-in-a-lifetime opportunity has been squandered, and Larry Summers is a key villain. As much as I've got it in for Summers, though, I'd have to say Harry Reid/the White House's political people probably deserve as much if not more blame. They clearly should have just worked to pass the best policies, not to senselessly go after bi-partisan compromises. They could have pushed through as much as they wanted, for no one cares about Senate "process", instead they settled for a few (important) but watered-down bills. They did a lot, but given that we had a once in a lifetime majority given to us by Lehman/Palin, it wasn't enough. And thanks mostly to Summers, that majority is now history.

The Battle to Come...

Check this out.

Dallas Fed President Richard Fisher, Minneapolis Fed President Narayana Kocherlakota and Philadelphia Fed President Charles Plosser have all questioned further monetary easing, and all three will be voters next year.

While three votes fall well short of a majority on the 12-vote Federal Open Market Committee, they could pose a big challenge to Bernanke's leadership. A Fed chairman has not faced three dissenting votes since November 1992.

"It matters because it's visible," Meltzer said. "We know that Fisher and Plosser and several others are unhappy with the policy, but it's a different thing when it comes out."

Fed policies supported by a strongly split vote could be seen as more tentative and to have less staying power than policies that get the full backing of the FOMC, he said.

You take a Republican GOP refusing to raise the debt ceiling, and then you add in Fed feet-dragging due to the likes of embarrassments like Plosser, and you don't get a pretty picture...

Economists for Firing Larry Summers are back!

We've been busy. Doing what? Trying desperately, and, as it turns out, in vain, to limit the damage in the midterms caused by Summers and Bernanke's mismanagement of the economy. (Can't win em' all...) The midterms were largely a referendum on how solid a grasp on economics principles Summers and Bernanke have. Have they really been "hitting the bulls-eye" as Alan Blinder is wont to say? The midterm results and unemployment rate would seem to suggest otherwise...

I'll have to give major props to Bernanke for doing $600 billion more in QE, although I'm not sure I understand why he waited until after the midterms. He wanted to appear non-political, but if he felt the economy needed a boost and held off in the interest of appearing "non-political", then the end result is that he hurt the incumbents and helped the GOP. The way to be non-political would have been to do what he felt was right for the economy regardless of the election.

In any case, at least Bernanke did more than I thought he would do, and apparently it also surprised currency traders given their reaction. And, given the adjustments in prices we've already seen, I think it is clear that QE helps. $600 billion is probably not enough, let's just hope Bernanke shows a willingness to adjust the amount when new data comes in -- a flexibility neither he or Summers has displayed so far. For it was clear 17 months ago that we needed more QE, and would have been much preferable for him to start out with an additional $200 billion then, and then up it by $400 billion if it had no effect, and then continue to adjust either upwards or downwards based on data. Instead his strategy was to do a bunch of QE almost two years ago and then essentially do nothing for the next 22 months, even though every month's data released all painted the same picture of the economy.

One of the most bothersome aspects of this is how the media continues to report on it -- it's Bernanke's "big gamble". Even the New York Times refers to QE2 as being "risky". It's just hard to see what planet these people are on. With no more QE, the most likely scenario is that we have continued high unemployment. In other words, no QE seems incredibly risky. With QE, the worst case scenario is that it isn't big enough and doesn't do anything -- the status quo. Clearly, this wouldn't represent any additional risk from the QE. It's hard to even guess at what the "risk" perceived by the NY Times is. Most likely they fear a scenario in which inflation somehow gets out of control, even in the context of slow growth and 9.6% unemployment. Trouble is, if this happens, it would most likely be accompanied by a robust economic recovery and falling unemployment, and could be met by a simple reversal of the QE and multiple interest rate hikes. In other words, this is precisely what we're hoping for -- getting out of the liquidity trap.

The real "risk" as I see it is that we'll continue to have a few more months of slow job growth and low inflation, and Bernanke will wait another 9-12 months before he makes any adjustment to the size of the QE. Then, perhaps he'll do a bit more 8 months of disappointing/marginally decent results later, in the interests of being non-political, wait until after the Presidential election of 2012 before doing anything further, while unemployment is still hovers above 8%...

Frustrating times...

Blog Name Change... Suggestions?

1. Economists for Firing Ben Bernanke

2. Economists for Giving Narayana Kocherlachota a noogie

3. Economists for Drawing and Quartering the FOMC (and then having them hanged)

other ideas?

Too Busy To Write Anything Substantive, but...

Awesome! Summers out!

Notice...

Posting will probably be very light, or nonexistent, for the next few months.

Rant against liberals who rant that Obama is a centrist...

Recently, there's been a lot of liberal rage against Obama

So, I've long been critical of the Obama administration's economic policy, but there is one thing to know -- first off, there aren't actually all that many liberal economists, and even fewer with the stature to be Presidential advisers. Yes, there's Stiglitz and Krugman, and Brad DeLong, but, to my knowledge, none of them came down on the right side of Bernanke's fateful reconfirmation. Obama's choice to go with a team including Romer, Summers, Geithner, Austan Goolsbee, and Peter Orszag was a choice for Democratic economists with some sharp (or very!) sharp CVs (plus Jared Bernstein...). (How many of us have got "tenured at Harvard in our mid-20s" on our resumes?) Obama himself is not an economist and couldn't possibly have known about the Dark Ages economics has sadly fallen into the past few decades... And Summers published some extremely populist Op-Eds in 2009, rants about Bush Administration tax cuts and inequality, the kind of thing no liberal would have any qualms about, with an explicit eye toward appealing to candidate Obama.

I think that says Summers thinks Obama is a liberal. And I think it also makes it a touch more difficult to blame Obama for what were the key mistakes -- the reappointing of Ben Bernanke (which was supported by both DeLong and Krugman), the feet-draggging on the FOMC appointments, and the small stimulus. Obama deferred to the "experts". The experts turned out to be medeival priests on the key issues, even though these are not low-IQ, unqualified people. Then there's health care -- Obama did not give Summers control over health care, and the constraint on getting a more liberal health care bill came in the Senate, not from the White House.

Point is there just aren't that many doors President Obama could have knocked on to get competent advice on all three of these issues. And there are very, very few economists over the age of 35 who are ever worth listening to. More liberals need to get Economics Ph.D.'s instead of Anthropology or History Ph.D.'s if they want to shape policy (that's why I switched from Poly Sci/Law to econ), and we need to have more liberals who've got "Goldman Sachs VP" on their resume as well...

Boehner calls for Summers' resignation

House Minority Leader John Boehner (R-Ohio) will call Tuesday for the mass firing of the Obama administration’s economic team, including Treasury Secretary Timothy Geithner and White House adviser Larry Summers, arguing that November’s midterm elections are shaping up as a referendum on sustained unemployment across the nation and saying the “writing is on the wall.”

Sucks he's basically right. That Boehner himself was also on the wrong side of all the recent economic policy debates hardly matters. Obama was elected to put the economy in order. He hasn't done that. He pushed through a stimulus which was too small, waited 16 months on an FOMC appointment, and made a stupid decision to reappoint Bernanke.

And, hate to say it, but had McCain been elected, the Republicans would have pushed through a massive stimulus containing the mother-of-all tax cuts. Republican opposition to the stimulus was largely because it was in their self-interest to oppose it (and, oppose everything obama did). Had the Democrats been in the opposition, there wouldn't have been nearly as much opposition to the stimulus. Add to that, the right-wingers on the Fed would likely have been less hawkish over the past 18 months of what I would term "very strange" Fed policy. Combine all of this, and it's not at all clear that the economy would be worse off with a President McCain at the helm.

The mid-terms are basically a referendum on Geithner, Summers, and Bernanke. These guys were simply not up to the task, and so Boehner is right to attack them.

Tim Geithner is Behind the Curve...

Alex Tabarrok and other econ bloggers (Economists for Firing Larry Summers were not invited) spent the afternoon at the Treasury, firing questions at Timothy Geithner.

Tabarrok describes Geithner's view of the Fed: "There was a recognition that the Fed could do “dramatic” things but a sense that the theory here was uncertain and untested."

I wouldn't really describe a cut in the discount rate, a 25 basis point cut in the Federal Funds rate, an elimination of interest paid on excess reserves, or another $400 billion in QE to be "dramatic", "untested", or "uncertain". On the other hand, doing nothing to hit your inflation target in the wake of a financial crisis has been tested by Japan for 17 years running and repeatedly been shown not to work.

Oh, Timmy Chimeny, Tim tim, tim teroo. We've got Tim Geithner and he says (to the unemployed) eff you! javascript:void(0)

(This was Man U.'s Tim Howard chant for those that didn't get the reference...)

How strange is too strange?

After reading Tim Duy's latest, I'm just reminded how weird Fed policy has been.

Consider that in 2004, when inflation was at 3.3%, the Fed was fine to leave the Federal Funds rate at 1%. 3.3% inflation wasn't seen as anything sinister during President Bush's reelection run. Now, however, with the CPI having increased so far this year by .2%, for an annual rate of less than .4%, we're suddenly in dire risk of hyperinflation? Isn't this just a bit too strange?

Either the Fed is as stupid as I suspect they are, or they are very competent but hopelessly in the tank for the Republican Party. How else does one explain the above?

Also, consider that in 2004, unemployment topped out at 5.8% (in March, declining thereafter). Compare that with 9.5% today. This Fed brings new meaning to the phrase 'regime switching'.

Statistics in the Hands of Idjiots...

Matt Yglesias asks "What is it about the economy?" that impacts election outcomes, and links "Enik Rising", an interesting blog by a political scientist, who finds that income growth matters but that unemployment does not matter for mid-term election outcomes.

Having done a powerpoint slide on this issue once, I can say that this issue is actually trickier than it looks. His mistakes are three: First, he looks at change in house seats as the variable he's trying to explain. So, it would make sense to include "how many house seats the president's party holds" as a control variable. Second problem is that the Democrats usually lose about 8-12 seats in midterm elections simply because the share of young people, women, and minorities all decline during mid-term elections. Of course, young people, women, and minorities all turned out at record rates in 2008, but will sit out the midterms. (Good news for Dems is that they will be back in 2012... There is a lot of habit persistence in voting behavior, but it's really specific to the type of election.) But I digress. Third issue is that there are just too few data points here, and US politics has changed too much since 1912 to gain much by expanding the series. One thing the author could do is include Presidential election years, and that would help. Also, that the Bush 02 year is a chief counterexample to the "unemployment doesn't matter" is quite telling. Obviously, 2002 was an election dominated by 9/11. The Republican gain/loss was also helped out by the fact that they only started off with a slight majority, and that Republicans traditionally do well in midterms. Control for those two things and the Republican performance in 2002 loses a bit of its luster... But there's no way, really to control for 9/11 since it was a one-time event. Which means someone needs to write a careful international paper. And when they do, my guess is that they'll find that a change in unemployment matters a lot.

After all this criticism, however, I agree with part of the bottom line, that GDP growth matters more than unemployment. Why? The big reason why the economy matters has to do, I'm convinced, not with the actions of laid-off workers but with how the media covers the economy, the president, and the federal deficit. The deficit gets covered like it's a huge scandal, and it always comes across as though the President and Congress have been reckless with the nation's finances, even though the truth is that running smaller deficits would have been much more reckless. Since GDP and the stock market rebound before unemployment, of course, this means that GDP growth is a better indicator, because media types care much more about their stock portfolios and bottom-line GDP growth than they do unemployment, which is simply a remote statistic to them.

Liquidity Trap Blogging...

On the effects of an oil price shock.

Matt Yglesias worries about the consequences of an Israel-Iran war, and concludes that, if things are bad now, just wait until we've got inflation to worry about! Except, if we have an oil price shock now, we'd be freed from our liquidity trap. This is the counter-intuitive logic whereby everything that is normally "bad" -- i.e., inflationary -- now helps the economy by reducing real interest rates. The only way an oil shock would hurt is if the Fed overreacts, and raises interest rates prematurely to head off inflation before it comes. This is more than a remote possibility, of course, but an oil price shock would at least get us back to the situation where the Fed can simply cut the federal funds rate when it wants to stimulate the economy rather than play word games with the "extended period" language.

A Rough Comment on Levitt...

Here

This comment makes three observations about Donohue and Levitt’s paper on abortion and crime (Quarterly Journal of Economics 119(1) (2001), 249–275). First, there is a coding mistake in the concluding regressions, which identify abortion’s effect on crime by comparing the experiences of different age cohorts within the same state and year. Second, correcting this error and using a more appropriate per capita specification for the crime variable generates much weaker results. Third, earlier tests in the paper, which exploit cross-state rather than withinstate variation, are not robust to allowing for differential state trends based on statewide crime rates that predate the period when abortion could have had a causal effect on crime.

Although this may look like "shocking" revelations to some, if you take essentially any major result in economics over the past 30-40 years and dig around with their data, you're quite likely to discover that the central finding is fraudulent.

Awesome NYT Fed Coverage...

The New York Times is supposed to be liberal. And yet, here they are cherrypicking quotes from conservative economists:

While that action could be helpful, it carries some risk, said Christopher L. House, an economics professor at the University of Michigan.

“If they were to simultaneously lower the rate to zero while leaving $1 trillion in reserves in the banking system, they would have a lot of reason to worry about inflation,” he said.

Of course, this logic holds if the federal funds rate is at .25. If the Fed is expecting inflation of .9% over the next year, then why should a 25 basis point cut get us to uncontrollable inflation? More likely it would shift us toward inflation of 1 or 1.1%. That's clearly some magical thinking that a 25 basis point cut, alone, would take inflation from .9% to, say, 3.4%, much less that it would happen so suddenly that the Fed would be unable to keep a lid on inflation via repeated rate increases. Did the NYT quote anyone on the other side? Anyone who thought the Fed is not doing enough? NO.

NYT, you suck!

I e-mailed "professor" Christopher L. House to explain himself, because the NYT really makes him sound like a complete idiot... No response yet.

Laffer Curve, Piled On...

Dylan Mathews surveyed a bunch of economists to find out where the peak of the laffer curve is.

Trouble is, there is no "the peak". The peak will depend on what the past rates are and other cultural factors, and in general will be different at all times and places. If a marginal tax rate moves from 70% to 50%, people will behave quite differently than if it the rate had just moved from 30% to 50%. And Greg Mankiw also made a good point, that the short-term and long-term effects can be different. Of course, what he doesn't realize is that this can go in both directions... I.e., if we declare all income over $20 million to be taxed at 99%, I think we'd all agree that Exxon Mobil will stop paying it's CEO more than that, and Phil Mickelson would do fewer sponsorships. Hence, we'd be on the wrong side of the laffer curve. But Exxon Mobil will still have a full-time CEO, and if Phil Mickelson does fewer sponsorships, then Lee Westwood or Jim Furyk will do more. Exxon will probably share more of its profits with its shareholders or other employees. In short, nothing less necessarily gets produced, yet revenues in the short run are increased. In the long run, however, this reduction in inequality would likely increase the growth rate...

I'm not saying to tax all income over $20 million at 99%, but currently we tax it at just 35%. The point is that it's very possible to be on the wrong side of the laffer curve but on the right side of maximizing economic growth.

Traders Need to read their EFFLS

From the NYT:

On top of those reports, Tuesday’s decision by the Fed to begin buying at least $10 billion a month in new Treasury securities caught some traders off-guard.

They shoulda been reading their EFFLS, and they'd have known in advance that's what the Fed was going to do...

Also, interestingly, the NYT has changed its story. Yesterday, the "surprise" announcement by the Fed led to a market rally, today yesterday's QE has caused the market to drop a lot by inciting economic fears. Hard to believe both are true. Nevertheless, I can see where both stories are coming from. It's a good thing the Fed isn't shrinking its balance sheet. But keeping its balance sheet the same size does nothing to stimulate the economy...

Predictions for tomorrow's FOMC meeting

I predict that the Fed will actually announce that it will reinvest some of the proceeds from the prior MBS investments as they come due, so there will be no net-tightening. What's more, that the Fed will see this as a major policy shift, but in reality it is far too little and it will do nothing.

However, I also see the economy getting better. Only, very, very slowly. Slowly enough that the Democrats will still get whacked this fall...

UPDATE: I hate it when I'm right!

Miscellany...

Keith Hennessy has a very interesting post on the different roles of White House economic advisers... One reason health care turned out so well for the Dems was probably that the NEC, and Larry Summers, was not in charge of it.

Matt Yglesias continues to push the Benjamin Friedman thesis, without mention the caveat which I think is the most important. That recessions tend to badly damage the party in power and help the party out of power. If the party out of power is an anti-foreigner, conservative party, then they will be emboldened. If the party out of power is led by Franklin D. Roosevelt or Barack Obama, then the anti-foreigner/race based stuff will never come into play.

Matt doesn't really provide any good explanation for why the Great Depression or the crisis of 2008 didn't result in more zenophobia (in the 2008 case, this didn't come until after Obama was sworn in). He says "Many expected racial tension during the 2008 presidential campaign, but it barely materialized." That's because the nation shifted toward Barack Obama and Nancy Pelosi and away from bankers and old conservative white guys. During the Great Depression, he says it didn't happen because 1934-1937 was the fastest period of economic growth America has ever experienced. I think this is wrong though. 1934-1937 was also a fast period of growth in Germany, what was the difference? The difference was that, in the US, the Republican Party was thoroughly discredited by the Great Depression, and the alternative, the Democrats, were much less zenophobic and against the free market orthodoxy, which meant that the nation subsequently became less zenophobic and more anti-laissez faire as the Democrats took control of government.