What's the Fed Thinking?

Via Ryan Avent, here is Ezra Klein.

The Federal Reserve on Monday proposed allowing banks to set up the equivalent of certificates of deposit at the central bank, a move that would help the Fed mop up money pumped into the economy and prevent inflation from taking off later.

Under the proposal, the Fed would offer "term deposits" that would pay interest. Doing so would provide banks with another incentive to park their money at the Fed, rather than having it flow back into the economy.

The proposal comes as no surprise. Federal Reserve Chairman Ben S. Bernanke and other Fed officials have repeatedly said the creation of "term deposits" -- essentially the equivalent of CDs for banks -- would be one of several tools the Fed could use to drain money from the economy when the time is right.

Not a good sign. On the other hand, at least Summers has Fannie and Freddie continuing to pump mo' money into the economy...

Hunt on Summers

His heart is in the right place (attacking administration economists), but his points are mostly all wrong. There is this gem, however:

“If you came up with 10 words to describe Larry, coordination and collaboration would not be two,” says one person requesting anonymity who has worked with Summers extensively and admires his intellectual force.

What I didn't like about the article is Hunt's assertion that Summer's isn't good at public communication. As I've mentioned, Summers is actually great to have on TV b/c he's relatively quick-witted, and is an old, white alpha-male who looks and talks like a conservative. Hence, he is likely to be popular with other middle-aged white males -- a demographic which Democrats very much need to appeal to. He's correct that Geithner isn't great on TV, at least the times I've seen him. Geithner is too obviously beta male -- he talks too fast, makes nervous movements, looks nervous, etc...

What Obama should have done is made Larry Summers the CEA Chair, only not listen to him much (like he is w/ C. Romer), but have Stiglitz working as a top behind-the-scenes adviser as someone who makes policy but doesn't have a fancy job title or appear on Sunday talk shows.

What's also annoying about the Hunt piece is that he cannot correctly identify any of the admins economic blunders:

"The vaunted economic team is faulted for poor coordination, drawing even the president’s ire, and an inability to convey an overarching policy."

As Brad DeLong points out, Hunt doesn't really offer any evidence of this.

The administration's three main economic policy errors are: 1) Pushing a stimulus which was too small, 2) Re-appointing Ben Bernanke, 3) being too soft on the banks/softpedaling financial regs/not doing something more comprehensive on executive/financial industry pay while it would have been easy to do so.

Brad also mentions Obama has yet to make appointments for two vacant Fed governorships... that's really dropping the ball given how critical it is for the Democratic Party that we not have unemployment above 9% next November... It would be nice to see someone like Joe Gagnon in there! I actually suspect that Bernanke is likely to be quite impressionable, and that if two solid, strong-minded economists were appointed who pushed for more QE, Bernanke might well consider it.

Debate on Anonymity...

I'm called a "marixist".

This is apropos of mainstream economists -- if someone is to the left of Larry Summers, they must be "Marxist". Completely does not compute for them how anyone could be so crazy...

My sense is that if one writes a conservative or mainstream blog, blogging could be a really advantageous asset on the job market and I think it should be. As in all things, however, there is a payoff to hitting the cultural median sweetspot. That's just not going to happen here. I'm perfectly aware I'm only going to ruffle feathers by saying what I actually think in front of typical economists... If my actual thoughts were conservative, this wouldn't be a problem.

Summers on the Wonders of the American Financial System

Via Krugman:

Let me quote from a speech that Lawrence Summers, then deputy Treasury secretary (and now the Obama administration’s top economist), gave in 1999. “If you ask why the American financial system succeeds,” he said, “at least my reading of the history would be that there is no innovation more important than that of generally accepted accounting principles: it means that every investor gets to see information presented on a comparable basis; that there is discipline on company managements in the way they report and monitor their activities.” And he went on to declare that there is “an ongoing process that really is what makes our capital market work and work as stably as it does.”

So here’s what Mr. Summers — and, to be fair, just about everyone in a policy-making position at the time — believed in 1999: America has honest corporate accounting; this lets investors make good decisions, and also forces management to behave responsibly; and the result is a stable, well-functioning financial system.

Reminds me of when he arrogantly told a Korean envoy asking for help in getting American bank to roll over their short-term loans to Korea during the Asian Financial Crisis that "In America, we don't tell our banks what to do."

UPDATE: A commenter writes: "In America, banks tell the government what to do!"

Grad Econ Syllabi

Hoisted from the comments:

I guess you would categorize me as a market fundamentalist. So if you were designing a course for grad econ, what would you put on the syllabus to counter the priors of the market fundamentalists such as myself?

The goal of the first year in Econ PhDs is to train students to "solve mathematical models". My revolutionary idea is to shift the focus to "learning about economics". Mathematical models should be included only to the extent that they inform about economics -- not just taught for their own sake. And there is far too little reading and too little writing. And waaay too little big-idea readings. So the first thing is that I would make my students read and write about "big-idea" readings. What you assign depends on which course you were teaching. My opinion is that the Micro sequence contained far too few insights from psychology/economic psychology/behavioral economics/anthropology. Grad Micro should be much more like taking a Grad Psychology course than it is, and should also be much more real-world policy oriented. (As it is, it develops the same skills one would acquire taking a Math Department Analysis course -- unfortunately these skills alone cannot make one a good economist)... I would probably assign books such as "Influence" and other psych books to round out the more purely econ-related materials, but I'd have to think more carefully about what I'd put on the syllabus since Micro isn't my field...

For first semester Grad Macro, which usually encompasses Growth, I would include Economic History/big picture development stuff. I would assign Landes. Perhaps three of Diamond's books. Kamarck. Clark. Crosby. Blustein. Every phd should have to wrestle with Stiglitz 'globalization and its discontents', whether you like it or not. Sachs' development papers get high billing. I would include a bit on the history of economic thought, and especially much more on the long history of laissez faire ideology, perhaps including the adoption of laissez faire policies during the Irish potato famine -- including something like Thomas Gallagher's "Paddy's Lament", and include a reading on the repeal of the reform of the Poor Laws in 19th century britain, which was influenced by Malthusian thought... I would also do short features on critiques of mainstream economics, such as those penned by Krugman, the Larry Summers' smackdown of RBC (and his Bernanke smackdown), and also include a short bit on the Anthropological critique of mainstream economics. I also think it's a complete mistake that the Great Depression is never mentioned, even in passing, in the core training of economists. I would probably put this stuff in the 2nd semester Macro/Money course, and include readings by Friedman, Temin, etc., and Minsky should enter the conversation at some point... Any honest conservative economist would have to admit that market fundamentalism was the chief reason why the Great Crash of 1929 turned into the Great Depression.

This post is not complete in any way, and I'm leaving dozens of great readings out, but basically, the goal should be to train independent thinkers who can become effective policymakers, not proof-memorizers and fast-algebra do-ers.

UPDATE: It goes without saying that all economists should have read Thorstein Veblen, both his historical and modern day stuff (hat tip to commenter Jonathan)... I find it more than a bit strange that Veblen's behavioral insights are not incorporated into the core training of economists at all. Here is Thorstein Veblen in the QJE (1898):

M.G. de Lapouge recently said, "Anthropology is destined to revolutionise the political and the social sciences as radically as bacteriology has revolutionised the science of medicine."(*1) Nope, hasn't happened yet.

And reading Veblen is always a good way to increase one's vocabulary...

My Predictions from February

I wrote this back on February 18th:

"the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would rise to 8.5 to 8.8 percent and that inflation would remain under greater pressure."

Those numbers are, of course, pure fantasy. I'll bet anyone the economy will contract by more than 1.3 percent, and that the unemployment rate will be higher than 8.8%. I'd be willing to give out 10:1 odds unemployment is higher than 8.5% at the end of the year... I guess the Fed can't say things are going to fall off a cliff, but it also loses credibility...

The 1.3 percent GDP contraction number, in retrospect, looks about right while the Fed was clearly way off on unemployment. The question I have is why the Fed, after getting worse unemployment numbers than it had ever imagined, did not change course and provide more really large stimuli...

The Case For the Millionaires Surtax

Greg Mankiw links a former student courageously trying to protect the rights of Millionares not to pay more taxes here.

Here's the thing -- there are no reputable studies on the elasticity of the effect of tax changes on total taxes collected, and there's no logical reason that that number should necessarily, a priori, be less than one.

Here's why: in 2007, there were 495,000 tax returns filed for millionaires. That means a significant fraction were corporate CEOs, CFOs, finance people, and professional athletes/best-selling textbook authors/TV celebs.

Peyton Manning makes about $30 million a year -- let's explore his potential behavioral responses to changes in taxes. Let's raise Peyton's taxes by 10%. Under the logic of Alan Liard, Greg Mankiw's student, and under the logic that all economists know to be the truth, people respond to incentives. Peyton Manning is a person, so he responds to this tax hike by working 6% less, and decides now he's going to sit for the Colts playoff games since he makes less money per game, and he enjoys watching Tom Brady play in the playoffs more than being there himself. Doesn't really sound likely, does it?

Of course, Peyton Manning is going to play 16 NFL games and the playoffs even if you raise his taxes considerably. The same is true of a wide variety of other professions -- corporate execs usually have two choices, they can choose to work or not work -- there are no part-time CFO jobs, and it's probably tough to be a "part-time" hedge-fund manager as well... So, let's say Greg the textbook publisher or Chuck the hedge-fund manager decides, due to higher taxes, that they are just going to retire. In that case, the government loses 100% of the taxes Chuck or Greg would have paid! The multiplier is -10!!!

Except, according to logic which is totally obvious to a pre-schooler, if Greg the textbook author doesn't sell textbooks, then Thorstein the textbook publisher will. If Peyton the quarterback doesn't play in the playoffs or appear in Gatorade commercials, then Tom the quarterback will. If the CEO of Anthem, who routinely makes $40 million, quits due to high taxes, Anthem will pay the next CEO extravagantly. If Chuck the hedgefund manager doesn't manage Peyton's money, then Emilio the hedgefund manager will manage Tom's money...

So, in this case, microeconomists might derive an elasticity of -1 (a 1 percentage increase in the tax rate reduces tax collections by 1% if 10% of the rich decide not to work at all), while the true Macro elasticity would be closer to 1.

Note that this logic does not apply to everyone, but it is likely to apply to the vast majority of those who make more than 1 million dollars per year, and Greg Mankiw's students are completely oblivious to this kind of perfectly obvious logic...

Of course, another thing higher taxes might change is how much someone might try to cheat in order not to pay taxes -- well, if this is the case, then what we really need is to beef up the IRS.

The third thing it also might change is the pay that CEOs get. For example, if the top tax bracket were 99%, for all income over $5 million, tax opponents always describe this case as having the effect that people will just stop working after they get to $5 million. That's just not an option for the likes of Peyton Manning, however. What Peyton Manning (or any corporate CEO in the same position) would likely do is settle for just $5 million a year, since all income after that goes to the state. Then, once you get a Republican in office, and they cut that 99% top bracket from $5 million-plus to $25 million plus, Peyton Manning will renegotiate his salary up to $25 million, even though he's still playing 16 NFL games a year...

So, in this case, tax rates down implies total taxes collected from Peyton Manning up but total "production" from Peyton unchanged, but worsening inequality for the economy and less taxes paid for someone else. So, we'd need to look at whether the consumption spending of people like Tiger Woods, CEOs with their corporate jets, and investment bankers is better for long-run economic growth than the spending of the poor, who spend a large chunk of their disposable income on things such as education and health care...

This is essentially what has happened in the US, and that is why you shouldn't believe it when economists tell you we shouldn't tax millionaires.

But then, you might object, *nobody* would have an incentive to become CEO if their salaries are capped around $1 million (if I was designing a tax system, I would probably not go over 50% on taxes before $3-4 million, but I would make Peyton Manning's marginal rate closer to 70%...)

Well, I once took a poll of the students in my TA section. I asked them who they would rather date -- someone w/ a bachelor's degree who works 40 hours/week, makes $40,000 per year and pays no taxes, or someone w/ an MBA who makes $80,000, works 80 hours/week, and pays $30,000 in taxes.

Most of the girls said they'd go for the person w/ the MBA, even though, per hour, the 40 hours/week job would be more, b/c the MBA has a prestigious graduate degree, is ambitious, and makes a whopping $10,000 more overall. (I had them assume that the above were peak salaries...) I also asked them if they would take a promotion from the $40,000 job to the $80,000 job, even though it's much more work, and, after tax, a pay cut per hour, and again, most wanted to go for the higher-priced job.

The study I'd really like to see is if, since the early 1980s, as wages on Wall Street have gotten out of control, what has happened to the average age of retirement at firms such as Goldman Sachs. "Standard theory" of course does not even predict whether the income or substitution effect dominates, but I suspect that there are quite a few I-bankers on Wall Street who do not exactly love their jobs or working 100 hours a week, and will just retire once they've put away $10 million in the bank. Tax them more and that just delays retirement. And to the extent higher taxes preclude the possibility of putting away $10 million for your average I-banker and talent shifts out of finance (or NFL quarterbacking), I fail to see how this is such a bad thing for society...

Put another way, suppose the CEO of Anthem made $4 million rather than $40 million due to high tax rates on multi-million dollar incomes (which we do not currently have). While in the micro context, this would greatly reduce the government's revenue, in this case, Anthem would have higher profits, or could afford to pay it's other workers more, could cut prices to gain more market share, or might even be able to deny fewer claims. In other words, it wouldn't make the whole pie smaller, it would just make it more equally distributed. And, to the extent that the Anthem CEO no longer flies around in a private Jet, owns 6 houses, and drinks $1000 bottles of wine, redistributive taxes would quite likely make the pie bigger...

UPDATE: An email and commenter pointed out that the question I asked the students in my class was reinforcing cultural norms and stereotypes and came off as sexist. They are correct and I apologize. I had not properly edited my own post however -- when I framed the question in class, I did it in a much, much more pc way -- asking everyone how much each individual would want to make/work, and also asked the question about the spouse in a completely gender-neutral way, and also asked a variety of other questions, with all questions asked to both guys and girls (I edited my post to reflect this). The guys tended to prefer spouses who worked and made less. The girls also tended to want to make and work less -- confirming what microeconomists have already found about how the female labor supply is more sensitive to marginal tax rates than it is for men. And yes, these are due to sexist cultural norms.

Answering the Comments

In response to my post criticizing Romer's take on why Africa is poor below, commenter "Anonymous" writes:

Why couldn't they just buy agriculture on the world market and produce something else? A little comparative advantage. The reason is that Romer is right, they lack the necessary institutions to make use of all the first worlds technological innovations.

The legal institutions and cultural norms of the third world are what hold them down. Not agricultural tech and not their geography.

I was a bit flippant in my response -- but the main point is that if you go to really poor countries today, it is impossible not to notice obvious low human capital deficiencies in the populace, such as those stemming from poor nutrition. If you didn't have enough to eat growing up, your parents also probably did not have the resources to give you a proper education, and you are not likely to be as productive, even working on an assembly line, as someone from a rich country who always had enough to eat and has had enough schooling to at least be able to read, write, and do simple arithmetic.

The point is you need an agricultural revolution first. OK, Britain didn't have that before the IR, but Britain did have really high death rates and low birth rates, and later, access to American grain, which all had the same effect as an Agricultural Revolution...

And poor countries do import lots of grain from temperate countries, but if you are a desperately poor country with nutrition issues, it's not so easy to produce enough manufactures to feed yourselves on Kobe beef, French cheeses, and Omaha steaks...

Un-Believable...

From the Wapo article everyone is talking about today:

The hands-off approach also was a matter of philosophy. Rather than scrutinize banks directly, the Fed decided to push them to appoint internal risk managers who imposed their own checks and balances. Regulators focused on watching the watchmen. Bernanke's predecessor, Alan Greenspan, said that banking was becoming too complicated for regulators to keep up. As he put it bluntly in 1994, self-regulation was increasingly necessary "largely because government regulators cannot do that job."

In a meeting with economists, Bernanke apparently dismissed claims that the housing crisis was in a bubble. Krugman writes that this new news has led him to think worse of his old department head.

However, here at "Economists for Firing Larry Summers" we never had such a rosy opinion of the Fed Chair in the first place...

Also, I'll weigh in on Krugman's claim that Obama "was always centrist". My view is rather that, on social issues, or things such as health care, he wanted to be as liberal as possible. On financial crisis issues, I suspect it's rather the case that he wasn't sure what the proper course of action was, and so took the opinion of the most alpha-malish liberal economist from Harvard he could find, assuming, that, if you're tenured at Harvard at 28 you must be on top of things. Obama could hardly have known about how worthless many leading Harvard economists are...

Moral Support...

Jonathan Schwarz links Greg Mankiw telling me I'm a coward for my anonymity, then cites "A Doubter's Companion" by John Ralston Saul: "In short, the people who cry loudest for a level playing field fall into two categories: those who own the goalposts and fools." Which category is Greg Mankiw in?

And then concludes:

The horrifying reality is that Greg Mankiw may actually believe that there's no reason for an economics graduate student to be worried about attaching their name to criticizing Larry Summers (and Greg Mankiw). How can anyone believe money and power have anything to do with what happens in academic economics? The only power that matters is the power of ideas. I mean, how else can you explain the fact that Greg Mankiw has an endowed chair at Harvard, one of the most left-wing institutions on the face of the earth?

Lol -- I've long argued that, by far, the most influential department at Harvard is the Economics Department. And look at how left-wing the Economics Department is -- Greg Mankiw, Robert Barro, Larry Summers (on temporary leave), Martin Feldstein, Edward Glaeser, Andrei Shleifer... Harvard has a large econ department and they aren't all conservatives, but still, overall, Harvard's liberal reputation is undeserved.

You Can't Quit Me...

A fourth (fourth!) e-mail from my new pen pal, N. Gregory Mankiw, who is no doubt happy I've moved on to pointing out that Paul Romer is deeply ignorant about growth and development.

Greg gives me permission to post his e-mails again, and writes: "This will be my last email to you. If at some point in the future, you are interested in open, civil discourse, let me know. --Greg"


Which I find strange given that my first e-mail said:

"Dear Professor Mankiw,

I'm a grad-student economist-blogger concerned about economic policy, and so am asking leading economists to comment publicly on current Fed policy for my blog readers.

Do you think the Fed's current Monetary Policy stance is too tight? Should the Fed adopt an inflation target of around 2.5-3%, and do more Quantitative Easing? The Fed's unemployment forecast for Q4, 2010 is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing you weigh in on this key economic policy question. I would also like to post your response on my blog.

Very Respectfully Submitted,

Thorstein Veblen"

What wasn't civil or respectful in the above? To recap, Greg responded to me by calling me a "coward".

In the future though, Greg, I might not respond so quickly to your emails as I'm finishing up my QJE submission, but I'm sure my blog readers at this point are hoping there is more where this came from and I have no doubt you'll furnish the goods.

Tiger Woods, who still dominates golf because he is a legitimate talent, has lost his position for violating cultural norms about sex. (OK, OK, he might have taken performance-enhancing drugs too, but I don't see how those drugs would have helped his short game -- putting and chipping. And everyone who has ever played golf knows that the short game is 90% of the sport, and that requires a delicate touch and hours of practice.)

Leading academic Macroeconomists never had such talents. Yet, as Matt Yglesias pointed out, because they have made and are making conventional mistakes, we have a Macroeconomist whose mistakes have effected millions of people celebrated on the cover of Time and Tiger, whose mistakes mostly hurt his wife, is now the worst person on the planet.

UPDATE: (edited typos above...)

Paul Romer is Alarmingly Ignorant

Via Econlog, Paul Romer says:

"I would distinguish questions about development from questions about growth. Development is the set of questions around why some people, some nations have very low standards of living compared with others...

What's wrong in many parts of the world is they don't have these institutions, and of the two [kinds], it's much more the market institutions which are fundamentally lacking, because if you think about it, a poor country in sub-Saharan Africa could get enormous benefits from just making use of what's already known in the rest of the world without necessarily contributing to that body of knowledge itself. If they could just put in place institutions that let them essentially freeload, take advantage of what's already known, they could do much better."

Most of the difference between the third and first world is in agricultural technology. So what Paul is saying is why are the Africans and Amazonian Brazilians so stupid that they don't just adopt the latest high-yielding, rust resistant variety of Winter Wheat from Iowa? It must be their institutions, Paul sayeth. Well, of course, their soils are completely unsuitable for wheat developed for Iowa. African pests are completely unlike European or North American pests. What Africans need is a higher yielding variety of Cassava, developed for Africa -- except they can't exactly take that technology from rich countries now, can they?

Somebody hasn't read his Alfred Crosby, his Jared Diamond, his Jeffrey Sachs, his Andrew Kamarck...

Famous Conservative Textbook Author Offers the Economists for Firing Larry Summers some unsolicited advice

I'll honor this famous conservative economist's request to keep his e-mail confidential. Hence, I will just paraphrase it here:

He e-mailed out of genuine, heartfelt concern that we Economists for Firing Larry Summers are spending too much time blogging, and too little time working on our dissertations. He sees no value-added to society whatsoever of having a course which teaches His textbook blogged, nor can think of any reason why spending a few minutes to write a review of His book would be beneficial to anyone, but advises that this time would not be spent "optimally" in the sense that it will not help our careers. You see, he merely e-mailed out of concern for our future job market placement. And, btw, we are shrill and don't show enough deference and respect for older economists, those who ushered in the Golden Era of Macroeconomics (1970-2008) of which He played an important role.

You see, I myself shouldn't blog b/c I spend:
1. An hour blogging
2. 8 hours doing research, and
3. 45 minutes on hold w/ United (of which 30 minutes was thumbing thru the Accidental Theorist, searching for on which page Paul Krugman says wage cuts in a liquidity trap increase employment as Bryan Caplan asserts)
4. 15 minutes jogging
5. Several hours reading news and other blogs...

My response:

Dear Sir,

To write is to think more deeply about any given issue. That's why it is a shame that there is no writing in the first year of PhD programs... Without doubting your sincerity, I think your point is wrong on the merits. And as I learned little in my first year Macro courses (Micro and Metrics were also largely a waste of time), I believe rather strongly that your generation of Macroeconomists need to be taken down a notch (or three), not up.

I accord scholars respect based on their ideas, not their CVs, and I defer to scholars whose work has taught me something. Academia isn't Feudal Japan -- your age and rank don't guarantee you automatic respect nor should it.

On your blog, I see no mention of the Fed's obviously overly-tight policy stance right now. I saw no mention of the Fed's obviously overly-tight policy stance last summer. I saw no mention that the stimulus this spring was too small (you argued against). I am forced to conclude that you are not up to speed. Other economists, such as Joe Gagnon, Ryan Avent, Scott Sumner, Paul Krugman, Brad DeLong and Tyler Cowen have all been out front on this, and yet you demand I show you the same respect accorded them.

Sorry, Harvard man, you haven't earned it.

-TV

The Wages Debate

I comment on this Bryan Caplan post, in which he says that, in a liquidity trap, reducing wages increases Aggregate Demand if labor demand is elastic and that this is what Paul Krugman said back in 1999. I asked where PK says this, am still waiting for a response.

My response was:

"If labor demand is elastic" -- In a steep recession, w/ interest rates at zero?

OK, so prices would tend to fall. We're in a situation w/ nominal interest rates pinned at zero, and we more in a deflationary direction. So real interest rates up. (Caplan considered nothing about interest rates, and seems to have forgotten the the liquidity trap assumption)...

Real interest rates up shifts Aggregate Demand which way?

Sumner then wonders why wages must fall for Spain.

Wages down for small-open economy Spain means Net Exports up. (To an extent, this would mitigate impact of lower wages in US case too.) Spain's prices won't decrease 1 for 1 w/ wages b/c much of Spain's products are purchased elsewhere, so the real interest rate rises less in the Spanish case. However, the rest of Europe has Net Exports down and downward pressure on prices, which means AD is definitely down for the "rest of Europe" and that for Spain it "depends on the elasticities", although likely the net export effect will dominate. Overall, European AD falls (perhaps some crazy elasticities would overturn this...)...

If Spain devalues, it's not the same thing though, and here's why: in Peseta's, products from Germany and France would cost more, spain's own products, at least initially, would have the same price, increasing demand for Spanish goods at the expense of foreign goods, as in the normal case. Before, prices in spain were deflating, but w/ a devalued currency, they are inflating. So now we have Spanish AD unquestionably up. It's still beggar thy neighbor for the rest of Europe, except this increase in Spanish AD from reduction in the real interest rate will increase its demand for products from the rest of Europe. Now AD for the rest of Europe is uncertain, and for Europe inclusive of Spain also uncertain, but more likely up...

I cannot wait until my Mankiw textbook arrives so that I can check my intuition about how the economy operates in a liquidity trap.

Does Greg Mankiw Charge for Book Endorsements?

I just checked out Mankiw's latest post -- he still has nothing about current Monetary policy. What he did have, though, was what looks like a paid advertisement for Steven Landsburg's latest book, the same Steven Landsburg with whom this blog has crossed swords with in the past. What makes me suspect is that Greg Mankiw is a businessman first and academic second. Of course, we'll never know if Mankiw pimps his blog, but from Greg's description of Landsburg's book -- "it is much fun. Reading it is like having dinner and sharing a bottle of claret with a smart, creative, iconoclastic friend." it sure sounds like a bottle of claret wasn't all that Gregory and Steven shared...

Greg Mankiw Responds

Here is an opinion, but not on the topic you asked about:

I have stumbled upon your blog a couple times, and I must say that I am very much put off by it. The blogosphere is fill with too much rude ad hominem rhetoric. Engaging in it under a pen name seems particularly cowardly. I recommend having the courage of your convictions by revealing your name. Otherwise, stop the mean-spiritied attacks on Larry Summers and other economists of note.

Greg

To which I responded:

One unsolicited opinion deserves another:

I have stumbled upon your blog a couple times, and have seen your writings, including a speech you gave as President Bush's CEA Chair, and I must say that I am very put off by it. The world is filled with too many conservative white male economists detached from the real world who give horrifically bad economic advice, sell overpriced and low-quality textbooks, and are accountable to no one. Removing the comment section from your blog seems particularly cowardly, you should be ashamed to charge $178.50 for your textbook, and calling tax cuts for the rich and social security privatization "deficit reduction strategies" in your speech as CEA chair was tantamount to prostitution. I recommend having the courage of your convictions by restoring your comment section, cutting the price of your textbook in half, denouncing the failed positions you took in the Bush Administration, and calling the Fed out on its misguided policies over the past year and a half, which continue to affect millions of people.

Yours,

Thorstein Veblen

P.S. The course I am TA'ing for next quarter will be using your favorite textbook, and so I'm going to blog the course and review your book, which I haven't seen yet. I won't be pulling any punches, but I will also take your advice and refrain from cheap shots. If you wanted to be non-ideological about it, you could actually use my review to make future editions of your text better.

----------------------

What creeps me out is why he wants to know my name? I explained pretty clearly that I'm a grad student blogger. He wouldn't recognize my name anyway. WTF?

Economic Perspectives from Kansas City

Interesting blog here.

Some highlights: "Bernanke made a theoclassical economist, Patrick M. Parkinson, the head of Fed supervision. The future essay will show that this long-time Fed economist has a track record of failure because of his fundamentalist beliefs in the gospel of anti-regulation and resultant naïve beliefs that "sophisticated" market participants are impervious to fraud."

"Theoclassical" economist! That's my new favorite word...

Harvard Swaps so Toxic Even Summers Won't Explain

Here.

I tend to think part of the problem was that Harvard panicked and sold the swaps at the worst possible time -- around the time I was using my student loan money to buy into the market. Also, I'd like to know what Harvard's damage is as of today. The market has recovered quite a bit from this summer, what matters is how Harvard's endowment does in relation to assets as a whole. If Harvard's endowment loses 30% when the market is down 45%, that doesn't strike me as a stupidly risky investment strategy... but if Harvard's endowment was down 30% at a point when the Dow was only down 25%, then it's a bit of a head-scratcher, as college endowments should arguably be a less risky with their investments than young single males 20+ years from retirement...

From the Mailbag...

Andrew Kamarck's "The Tropics and Economic Development" (1976) arrived this afternoon, as did David Landes' "The Unbound Prometheus".

I just finished the Kamarck book -- chalk it up as another book (a.k.a., like the Crosby series) I'm bitter I was never assigned, but had to stumble upon by myself randomly. The knowledge that geography is terribly important for development and why has been around for a long time, but still is not widely taught by economists.

Landes I bought more for the storytelling and anecdotes rather than for believable theories about why some countries are rich and others are poor...

A Question for Macroeconomists...

Is the Fed's Monetary Policy too tight? Should the Fed adopt an inflation target of around 2.5-3%, and do more Quantitative Easing? The Fed's unemployment forecast for Q4, 2010 is 9.3-9.7%, while it expects inflation to be 1.4-1.7%. Is this acceptable? And if so, why/why not? Are the risks of doing too much and too little really symmetric?

I look forward to hearing you weigh in on this key economic policy question.

Very Respectfully Submitted,

Thorstein Veblen



UPDATE: Tyler Cowen was the first to reply to a slightly different question (I emailed him first, and then simplified the question). He, not surprisingly, agrees. It speaks well of him that he would reply.

UPDATE2: Joseph Stiglitz responds (automatic) -- he is out of the office. He'd almost certainly want to see a slightly higher Fed target, but I guess we'll have to wait 'till Monday.

UPDATE3: Greg Mankiw replies: "Who are you, really?" To which I responded that I'm basically just a grad student who's adviser has a huge man-crush on Larry Summers ("Larry Summers is brilliant!"), as does virtually every other white non-Hispanic male economist in America, so this blog is anonymous so as not to screw myself on the job market next year...



The likes of Ryan Avent, Scott Sumner, Joseph Gagnon, Matt Yglesias, Brad DeLong, Paul Krugman, and Tim Duy are all pushing for the Fed to do more. I suspect Menzie Chinn supports this, and Tyler Cowen believes the Fed should do more as well. Calculated Risk is likely supportive. Mark Thoma thinks the Fed can do more, but that the focus should be on more fiscal policy. Fine, but the economists at the Fed should still be receiving a clear message that they are screwing up.

I'm seeing what other economists I can get to comment. I suspect no economists will want to be quoted on an anonymous blog w/ an incendiary title, and in any case are too busy writing and refereeing Very Serious academic papers to make any public pronouncements on Macro policy mistakes which are affecting millions of lives, but I'll at least give them the chance to prove me wrong.

We can then let the facts over the next year declare the winner.

Those who think the Fed should do more can get proved wrong is if hyperinflation breaks out which is so hard to combat that repeated increases in the Federal Funds rate and $1.5 trillion reduction in the Fed's balance sheet aren't enough to forestall massive inflation.

But that just doesn't sound like it's in the cards now, does it?

To make it fair we'll say the point where Fed critics lose is just 4%. (In reality, 4% inflation wouldn't exactly qualify as a Domesday scenario, especially if accompanied by much lower unemployment...) Let me know if you support the Fed and you think this is unfair...

Samuelson on Mankiw

At Calculated Risk .

"The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up ... Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!"
Paul Samuelson, June 2009

Also:

But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.

Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act.

And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good.'

On Summers:

"Well first let me say that I have big admiration for Larry Summers as an economist. However, when he was at MIT as an undergraduate, he never took a course of mine!

But I think he was wise. If he had people could always say, 'well, he's traveling on someone else's steam.' There's a Chinese wall between him and me. Any view he expresses and any view I express -- there might be some overlap, but there's nothing synchronized.

So you're not in touch with him now?

No."

Remember, Larry Summers' hero is Milton Friedman. No surprise that Samuelson and Summers weren't "in touch".

Conservatives on Monetary Policy

We all know Scott Sumner advocates more aggressive Fed Policy, how about other conservative bloggers?

Tyler Cowen e-mails to point out his article in the Times from way back in the first of August (at least, this is the only Cowen Times article I could find on the Fed) -- I had asked him for a blog post on whether Fed policy has been habitually too tight. He backs the Sumner view as well. That was four months ago, of course, so it's hard to extrapolate that with whether he thinks Monetary Policy is clearly too tight right now. We'll have to wait for a blog post.

Although I essentially agree with Cowen's piece in the Times, I'll have to say I disagree w/ both about the magic of setting an "official" inflation target vs. an unofficial target of 2%, in the absence of doing more QE. And I do not think the whole idea that "expectations matter" was this revolutionary idea that nobody had thought of until conservative economists came around in the 1970s -- everyone involved in the 1929 market crash and ensuing depression likely realized that economic variables depend in a big way on what people think is going to happen in the future. Keynes' Animal Spirits are largely about big swings in these expectations. I also doubt Friedman was ignorant of the idea that expectations matter, whether he stressed them or not.

Why might earlier writers not have mentioned expectations? B/c it is obvious that expectation matter. What is less obvious is whether announcing a policy shift in the absence of doing anything is effective. To be fair, Sumner wants more QE as well, and both he and Cowen probably realize that credibility matters, even if Cowen didn't mention it in his article, because it's fairly obvious credibility matters.

Olivier Blanchard, in his textbook, argued that inflation targets, even in the absence of other policy changes, can have major real effects on the economy. He writes that because Japan initiated an inflation target (w/out ever doing much QE, with the little that was done having been quickly reversed), that now economists were bullish on the archipelago that it would beat its deflation and recession. Japan announced an inflation target in 2003. Blanchard was wrong.

Cowen also suggested I read Kling and Caplan -- at some point in the past I'd stopped reading them. Only so many hours in the day. They haven't posted "recently" on the Fed's overly tight posture the past 12 months, but I did see that Bryan Caplan believes that inflation bet Bob Murphy that inflation wouldn't go over 10% sometime in the next six years. That's a smart bet. The only way Bob Murphy wins this is if the price of oil skyrockets. Which is a possibility...

Here Kling argues for balanced budgets in a recession. Crazy.

He also points to a good paper by Hetzel.

I gave up trying to find their views on whether, right now, Fed policy is too tight or not. And so I'll ask them directly.

UPDATE: Tyler posts about why we need a formal inflation target of 2%. I still think that in the absence of more QE, announcing a 2% target formally (vs. informally) is not all that helpful.

Bernanke's Comedy of Errors...

Confirming Ben Bernanke was a horrendous mistake.

Here's the thing -- I think Ben Bernanke is a really nice guy. His heart is basically in the right place. He doesn't wake up each morning like Dick Cheney wanting to screw the poor. But, for a variety of reasons, he is just not up to the job of being Fed Chairman. Part of this has to do with the worthlessness of Academic Macro, the culture from which Bernanke came, the failed job PhD programs do in training their students, and the fact the discipline is still largely psuedo-scientific. Due to this culture, a guy w/ Bernanke's pedigree -- Harvard undergrad, MIT PhD, and very good math skills -- was predestined to be at the top of the field. As I've mentioned before, however, it's very difficult to look at his academic papers and say "this guy is really bright". Here is an example I blogged about before. Another paper of Bernanke's has the dumbest title of all-time: "Is Growth Exogenous: Taking Mankiw, Romer, and Weil Seriously." Why is this dumb? Well, b/c of course growth is not exogenous! That would mean that economic growth just ... happens, comes down to Earth like manna from heaven, and there's nothing anyone can do about it. Incidentally, it's doubly stupid b/c there's no reason to take MRW seriously. It's a simple paper in which the authors simply have no clue what's driving their result, not realizing that low birth rates are proxies for rich countries, and so foolishly find in support of the Solow model, in which lower population growth increases the steady-state capital stock. But I digress. Bernanke also apparently had not heard of the Demographic transition.

Brad DeLong has pointed out four mistakes of Ben Bernanke as Fed Chairman:

* Not supporting Ned Gramlich's push for tighter regulatory oversight of mortgage financing and associated securitizations and derivatives.
* Not moving immediately in early 2008 to nationalize more of the banking system and support asset prices to a greater extent.
* Believing in the late summer of 2008 that the big problem was that the Federal Reserve had pumped too much liquidity into the economy, and believing that a bankruptcy on the part of Lehman Brothers would send a healthy message to bankers that they would not always be bailed out by the government and would send that maessage without having damaging consequences for the economy as a whole.
* Failing to walk down the strategy tree in the fall of 2008 and thus to place a high priority on ensuring that if the government's interventions in financial markets worked to stabilize asset prices and avert depression then the government would profit and would be seen to profit healthily from its interventions.

To which I'd add 4 more mistakes, which really could all be lumped together and are ongoing...
#5. After 12/31/2008, to shrink the Fed's Balance sheet... The Fed's Balance sheet is still below where it was at the end of last year. This corresponds to net tightening in a severe recession.
#6. To wait until March -- March! To start QE in long-term government bonds. As it happens, I was actually under the impression that the Fed had started doing this much sooner. Especially since Bernanke's own academic research suggested that the Fed could influence the economy in a liquidity trap via QE, it did not occur to me that the Fed was not doing this. And then to do only $300 billion of QE... Paul Samuelson argued that Monetary Policy was basically worthless in a liquidity trap. Paul Samuelson was no fool -- to have real effects, QE has to be done on a large scale. $300 billion is only slightly better than nothing. Joe Gagnon has estimated that $2 trillion in QE is roughly equivalent to a 75 basis point cut in normal times, and he may be optimistic.
#7. This summer, the labor market was doing waaay worse than he'd expected the previous winter. And yet, there was no recalibration of Monetary Policy. As the information came in that inflation was still at bay and unemployment was still rising fast, he ... did nothing. And on top of that, he predicted unemployment would not rise to 10%.
#8. Now w/ unemployment at 10%, way worse than he predicted, once again, and with inflation still under control and below target, there is still no re-calibration of monetary policy. The Fed's predictions for Q4, 2010 are unemployment at 9.3-9.7% and inflation at 1.4-1.7%.

Someone please tell me how the risks of doing too much and of doing too little are symmetric?

If the Fed "does too much" and unemployment in one year is at 8.3-8.7%, while inflation is at 2.7%, there is no loss to society whatsoever. If the Fed "does too much" and unemployment in one year is 7.3% and inflation is 3.7%, that is still a tradeoff I would make in a heartbeat. Above 4%, and I would reconsider, but there would be plenty of time between now and 4% inflation in which the Fed could roll its stuff back... And I'm aware that once a inflation starts to increase, the Fed may have to roll it's stuff back quickly, but since the Fed can increase the Fed Funds rate, but cannot cut it, it should be easy to keep inflation under 3%, much less 4%.

On the other hand, if the Fed "does too little", and unemployment in one year is at 10.3-10.7%, and inflation is at .3-.7%, that would be a total f*cking nightmare for millions of people, and the Dems will be bloodied in a landslide. If the numbers get worse, and unemployment rises to 11.3-11.7, that would be a total f*cking nightmare for millions of people, and the Dems will be bloodied in a landslide. Of course, in either of these latter two scenarios, what would happen is so much pressure would build on the Congress, that we would get more stimulus, and at some point, if the economy continues to do badly enough w/ no inflation, Bernanke might recalibrate and do more QE.

The most likely scenario from my vantage is the "boiled frog" scenario, by which the economy continues to get better, albeit slowly, and may even beat unemployment predictions next fall, falling to 8.9% by election day! In this case, of course, there would be no urgent need for more QE, no need for more stimulus, but it would be a total f*cking nightmare for millions of people, and the Dems will be bloodied in a landslide

I'm really starting to wish I had done more, personally, to fight against Bernanke's confirmation. What am I going to tell my children and grandchildren -- that, oh, I didn't fight Bernanke's confirmation b/c I was working on a journal article?

Debate w/ the Ambrosini Critique...

So, one thing that's really been gnawing at me, is this: What on Earth is the Fed thinking? One way to proxy this is to see what conservative economists think.

Let's surf over to Greg Mankiw's blog. Oh, let's see, recently he's had plenty of time to plug for his textbook, but he hasn't got an opinion about the Fed's obviously too contractionary policy, or Ben Bernanke's Comedy of Errors as Fed Chairman.

Let's surf over to the Freakonomics Blog. Go there if you need to buy something for an economist for Christmas, but MIT Grad Levitt has no opinion on the Feds Folly. The Freakonomics boys' are only concerned with plugging for their book.

Marginal Revolution? No opinion. Got all these posts on the minimum wage, which is a total non-issue, but nothing about the Fed. Becker-Posner post about the Fed, but just snippets, and neither think the Fed has been too tight with money.

To see what conservatives are thinking about this (to the extent they are even thinking about this), we have to go to Will over at the Ambrosini Critique, with whom this blog has crossed swords with in the past.

Let's see what Will has to say. His points are three: 1) the price level increases are accelerating (he plots what looks like a CPI inclusive of food/energy), 2) Output is increasing, and 3) And "unemployment is not decreasing".

To which I then point out (posting on his blog), that 1) the dip last month in the unemployment rate was noise -- large revisions in the previous two months data plus perhaps people leaving the workforce, and that to have flat unemployment w/out revisions or other special items you can't count on every month, we'd need employment to grow about 150,000/month, so that we cannot yet say that unemployment is "not increasing". The Ambrosini did not address this point in my response, so I assumed he conceded that unemployment is still increasing (although i added that, due to the SA factor, we're likely to be there in January/February...).

2) I then noted that the Core CPI was flat in November.

The Ambrosini Critique responds: "TV, what data are you looking at? The only “core” number that I see flat is CPI excluding energy and food, not seasonally adjusted (and this is entirely due to decreases in food prices). Otherwise, overall CPI is up, core CPI seasonally adjusted is up and the PPI is way up. Is there a good reason to think that NSA core CPI (or food prices more specifically) is more important than all the others?"

To which I point out that the "CPI excluding energy and food" is the "core CPI" and that the 0.0% change in November is the core CPI SA, not the NSA version. (The NSA version was -.2%, for those interested.)

I also added, incorrectly, that the "PPI, last two months was up a total of .1% if i remember correctly…"

Smelling blood, Ambrosini critiques: "TV, you don’t have to remember anything. PPI is reported on the front page of bls.gov and its up 2.1% over the last two months… 2.1% over two months is over 13% on an annual basis. I’m not sure your position that policy is too tight is supported by the core inflation data."

Ouch! Had by the Ambrosini Critique... Or was I. I check the numbers myself, and I was wrong -- the core PPI numbers the past two months were -.1%! And so I write: "You were nearly right and I was wrong: Core PPI last two months is -.1%.

Core CPI in November: 0.0%.

The PPI swings much more than the CPI, so the core CPI is the far and away the single most important inflation number published. That doesn’t mean we don’t also look at food and energy, or the PPI, but these other numbers bounce all over the place, and so if you want to know if inflation is getting picked up in the system or not, you look at the Core CPI.

The Core CPI was flat in November.

This was below the Fed’s forecast. The Fed’s forecast for next year is for the Core CPI to be between 1.4-1.7%. That’s below the Fed’s own target, which itself is too low."


So, I don't know what conservatives are thinking. It appears they are just confused over which rates are appropriate for policy analysis and how the unemployment numbers are made. But this cannot be Bernanke's issue, can it?

I think it is more that they fear that once the economy turns around, banks will suddenly start lending out their excess reserves, and if they did, we would have really high inflation. The problem with this is that, first, on the other side, we've got 10% unemployment which gives firms bargaining power over workers, which should hold down wage growth. The second issue is that in between having a flat CPI and hyperinflation, there would be months of very high growth, reductions in unemployment, moderate growth in the core CPI, and a spike in long-term interest rates, which are not now predicting much inflation. During these months, the Fed could reign in its QE, raise the Federal Funds rate, slow the recovery and stamp out any inflation. The key is that the Fed needs to get over the hump first, and we are not over the hump. Maybe we'll get lucky and be there in a few months, but the fact is we are not there yet. There is scant sign of inflation starting to take off, and employment is not yet to the point where we will see sustained reductions in the unemployment rate.

This "fear of the coming hyperinflation" has been going on for a year now. During that time, the unemployment rate has gone from 7 to 10% and the core inflation rate has been well-contained.

Bernanke Confirmed

What an awful few days for news. Public option gutted. Bernanke confirmed. Medicare buy-in dead.

Matt Yglesias has it right. Here too.

There is more Bernanke could do. $1 trillion more of QE would certainly lower the value of the dollar and reduce long-term interest rates, and probably also increase asset values generally and improve banks’ balance sheets.

What nobody asked Bernanke was why, if his Fed projects 1.7 inflation for 2010, and unemployment to be 9.3-9.7% at the end of 2010, WTF isn’t he doing more?

And, WTF can’t anyone ask him this? What’s the reasoning?

As best I can tell, there is no good answer. Some say “well, the Fed can’t really do more” but this is false, for reasons I've already hashed out. Others say “hey, inflation will accelerate..” but we’ve been hearing this for nearly a year now, and the Core CPI in November was… unchanged from October. October’s rate was … up .2%. These aren’t hyperinflation numbers. If the core rate had come in at up .3 or .4%, my policy position would be to wait and see what happens next month before advocating much more QE (although I would probably still want a bit more than is being done). But even w/ a negative surprise in the core CPI rate, I don't see the Fed making its position substantially more accomodative. And, since Bernanke's Fed is the one predicting low inflation, he can't really use this excuse now, can he?

Also, if you read Bernanke’s actual academic papers, they range from OK to mediocre to f*cking terrible. His Congressional testimonies aren’t flukes — despite the H on the resume, the guy just isn’t that sharp.

The die is cast. I'm going to put my reputation on the line and predict that the US is in for an unnecessarily long unemployment slump... We may not get back under 5% unemployment until Obama is out of office...

W/love, Thorstein Veblen

Mankiw Takes advantage of Samuelson's passing to sell more textbooks...

Does anyone else think this is in poor taste?

(Scroll down to where he he shows the inscription from Samuelson, who wrote: "For Greg, who made this obsolete.")

How Confused is Alan Blinder?

Here.

First, a small mistake: Blinder says "we've spent less than 30% of the stimulus."

Trouble is, we've already spent more than 30%, but he wasn't off by that much according to this or this, neither of which count "works in progress" as money which has been spent, so it might be more like 34% which has been spent to-date. The stimulus has been a bit slow. And its a good thing there is still a lot left, so Blinder is probably correct that this is a reason for optimism.

What upset me was when Blinder wrote: "And third, the Fed continues to inject more medicine. Not by cutting interest rates, of course. Zero is as low as you can go, and the Fed arrived there a year ago. But "quantitative easing" is still in play. One example is the mortgage-backed securities (MBS) purchase program, which is adding MBS to the Fed's balance sheet and providing vital support to the mortgage market. Yes, the Fed has begun to think about its exit strategy. But that is for the future, not for now."

Except, as I've mentioned before, the rate of QE has been so slow that, on net, the Fed's balance sheet has shrunk since the first of the year. The Fed has already finished its $300 billion purchases of Long-term bonds, and is almost finished w/ its other purchases of MBS and Agency debt. Plus the government is already winding down other programs, so on net, the expansionary posture Blinder sees is an illusion...

BTW, did anyone else see that November's Core CPI was flat? With very little sign of growing inflation, yet high unemployment, more QE is really a straightforward policy response. Overshooting on the side of being too inflationary has very low probability right now, and would not even be all that damaging. Overshooting on the side of doing too little inflicts massive (and unnecessary) pain. Ryan Avent has this exactly right.

Do not confirm Ben Bernanke.

Ed Glaeser on Samuelson

Here.

He writes: "The great appeal of Samuelsonian economics would be its use of mathematics to make sense of the human condition, usually — although not always — with more success than poor, mistaken Malthus."

Trouble is, Malthus wrote in 1800, and Malthus was entirely correct for the world up until 1800. In addition, parts of Africa are quite likely still Malthusian today... For example, 80% of Tanzanians work in agriculture. Between 2005 and 2009, the population of Tanzania increased from 37 to 43 million. With a fixed amount of land and quickly diminishing returns to labor working on land (especially when that labor is not well fed), Tanzania needs 3% per year agricultural productivity growth just to keep its income steady.

Poor, mistaken Ed Glaeser.

Bernanke Person of the Year?

Goldman Sachs Chairman Ben Bernanke a candidate for Time's Person of the Year...

Put in your vote here.

Paul Samuelson, RIP

End of an era.

It's doubly sad given what's become of MIT Econ. There was never any replacement for the likes of Solow and Samuelson. Daron Acemoglu is no Paul Samuelson, and Olivier Blanchard is no Robert Solow.

Acemoglu’s graduate growth textbook is a horrific joke. Blanchard’s undergrad Economic textbook is rife w/ errors, grammatical and factual. Samuelson sweat blood when he wrote his textbook, Blanchard looks to have outsourced the writing of his to India.

NYT: "Summers Predicts Job Growth by Spring"

Mission Accomplished?

Actually, as DeLong has mentioned, the seasonal adjustment factor in unemployment will start turning sharply positive in January, as the post-Christmas economy always sheds jobs. Since millions are already out of work, its not likely that the economy will shed as many jobs as it normally does. So, we'll likely see job growth in January, but only on a SA basis, in which case Summers will look like a prophet.

What is considerably less clear is whether the economy will add jobs at the pace it needs to make a dent in the unemployment numbers anytime soon. Summers should wait until job growth is above 300,000 to declare victory... On this I agree with Mitch McConnell, populist crusader for the downtrodden.

Then there is this: "Asked what the Obama administration would be doing to create jobs, Mr. Summers said, “Every bill is going to be a jobs bill.” The president plans to spend $50 billion on repairing the nation’s infrastructure, and health care reform — the centerpiece of the Obama domestic agenda — too would help he economy by paring away the nation’s deficit, which he described as an $8 trillion shortfall over 10 years that “the Obama administration inherited.” "

But back in July when California and Pennsylvania were paying their workers w/ IOUs while the unemployment rate was the time to make sure our nation's infrastructure wasn't gutted for budget-balancing cuts. $50 billion is too little.

The question is, what are we going to do if, in March, we are adding only 50,000 jobs a month? Will that be good enough to do more of nothing? It certainly won't be good enough for the voters come November, that's for damn sure. And that will be the end of progressive legislation under the Obama presidency. Liberals will get to wait another 20 years for the stars to align as they just did, to yield large Democratic majorities in both the House and Senate.

Summers Research...

Here is Summers latest Econ paper. The line is essentially that we need a tax on consumption...

Whether direct taxes on consumption are a good thing or a bad thing depend very much on the details. Clearly bad goods (marijuana) should be taxed more. Fried-fast foods should be taxed more. Super-sized meals should be taxed more, and I also don't have a problem w/ taxing tobacco and alcohol more. I'm scandalized that I can buy wine for $1.99 in the grocery store, or get a case of beer for $10. Things which are basically fine but which do nothing to alter long-term growth should also be taxed, just to a lesser extent as "bads". Professional sporting events. 2nd homes. Eating out.

The next the government should tax are luxuries -- yachts, boats, expensive wine, sports cars -- things the rich buy.

Anything which deals w/ education/health should not get taxed. Notebooks, paper, computers, newspapers, magazines, pencils, tooth paste, high-speed Internet access...

Secondly, a broad consumption tax would fall more heavily on the poor, so if a VAT was introduced, wage taxes should be reduced even further for low-income people. Poor workers in the US are not in danger of fleeing to the Caribbean for cheaper tax rates, however, so I don't see how "globalization" per se would imply VAT is a good idea unless we replaced rich peoples' income taxes w/ a VAT -- but that is a terrible idea.

If a VAT tried to tax "bads" and not "goods", tried to target the rich and the frivolous, and reduced income taxes for the poor/middle class, I could get behind a VAT. But I suspect that the effect that drives Summers' and conservatives' thinking that a VAT, by lowering wage taxes would increase the amount of work effort or private savings, is much weaker than they suspect. Lower marginal wage taxes would have a slightly larger affect on the amount of income poor people report, however...

Our Man Larry...

I've gotten away from LS blogging, as he's done a good job of remaining in the shadows recently. Noam Scheiber talked to "a senior administration official who says that, 'The reality is that it’s not too hard to find a Wall Street analyst that says a second stimulus basically cancels itself out almost immediately because of the impact at this stage on government financing costs.' "

This makes no sense, of course, as Brad DeLong points out. but it does sound very Larry Summers-esque. $300 billion would make no difference to government financing costs, but it would boost GDP by about 3% over the next year.

Elsewhere, Matt Yglesias tries taking the piss out of Larry Summers-haters and those who say it would be nice if the administration were more liberal. Problem is, he says, is that even if you replaced Larry Summers w/ someone more liberal, they would still have to get things through Ben Nelson/Olympia Snowe/the 60th most liberal member of the Senate. And the 60th most liberal member of our Senate is likely to be a very confused individual.

This doesn't really apply to most of the criticisms I've had of Summers though. Had the administration announced a stimulus package of $975 billion to begin w/, the centrists would have cut it to $900 billion in order to flex their centrist muscles. Starting bigger would have changed the bargaining path. I'm not familiar w/ the inns and outs of the bank reform legislation, but I also suspect that much the same thing happened -- they should have had legislation to move through Congress for the day after the AIG pay scandal. They also should have moved to curb finance industry pay (something reasonable, like higher rates on huge pay packages), and had that move through the Congress the day after the pay scandal. The administration should also have gone for a second stimulus/bailout to the states after it was clear that more was needed. Although, actually, it was always clear that more was needed...

It's not that Larry Summers/the Obama Economic team lives on a different planet, but they probably don't know anyone who's actually been affected by this downturn.

Konczal on Karelis (and Bill Easterly is an Idiot)

Book review here.

I haven't read it yet, but just ordered it based on the review. As there are really a very small numbers of books or papers worth reading which can tell you something interesting about why some countries are rich and why others are poor, I look forward to the book's arrival.

I'm not going to get my hopes up, like I did when I saw this out of Bill Easterly. The title "Was the Wealth of Nations Determined in 1000 B.C.?*" and abstract sound interesting:

"We assemble a dataset on technology adoption in 1000
B.C., 0 A.D., and 1500 A.D. for the predecessors to
today’s nation states. We find that this very old history of
technology adoption is surprisingly significant for today’s
national development outcomes. Although our strongest
results are for 1500 A.D., we find that even technology as
old as 1000 BC is associated with today’s outcomes in
some plausible specifications."

This sounds plausible -- after all, Eurasia certainly led technologically in 1000AD, with Africa 2nd, the Americas 3rd, and Australasia 4th... Today, very few Australasians are even alive, native Americans are sparse in the temperate American countries, and the world is really almost completely dominated by Eurasians. To me, this confirms Diamond. Not to Easterly. He kills the latitude dummy in a growth regression by including variables which: (1) give Europe especially high marks, (2) give a 1 for the rich Neo-Europes and zero otherwise, (3) give a 1 to the poor neo-Europes. Like a complete fool, he then pronounces that: "the association of latitude and current development is not invariably causal and direct." But of course, the reason the latitude dummy is big is b/c of Europe and the Neo-Europes located far from the equator, which he coded as the rich Neo-Europes, apparently not noticing that Canada, the US, Argentina, Uruguay, South Africa, Australia, and New Zealand are all located far away from the equator.

All you need to know about the paper is in the references: Easterly has not read Crosby. He has not read Diamond 1993. You cannot do research in this field if you are ignorant of Alfred Crosby and Jared Diamond's best work. (Or rather, you can still do and publish research only b/c this field is still in the Dark Ages, but you cannot do good work.)

Karelis, don't let me down!

Gagnon's Paper

Is here and it is getting a lot of play.

I very much agree with his sentiments, especially on Japan. He writes: "The Bank of Japan should state more clearly its intention to return inflation to at least 1 percent over the next two years, purchase an additional ¥100 trillion of longer-term debt securities with an average maturity of around 7 years, and commit to a further ¥100 trillion in such purchases in 2011 if core inflation over the next 12 months remains negative."
That's a fistful of yen. Unfortunately, the Japanese Central Bank is far too conventional to do much more than ¥10 trillion. Sad.

The part that makes me upset is that I suspect the financial press in Japan, who sometimes look at academic research and talk to economists, are not getting the message from the economic community that, YES, It's totally obvious that Japan should be printing fistfuls of yen, and that Japanese monetary policy has been terribly misguided now for two decades.

I think a visitor to Chris Sims or Michael Woodford's homepage would be impressed by the sophistication of the models and the abundance of research, but are these monetary titans sophisticated enough to state what is completely obvious to laypeople about Fed or Nichigin monetary policy? That's not clear to me. And, as I've blogged about before, Blanchard simply gets Japan wrong in his undergraduate textbook.

Crazy Bunning

He chews out Bernanke here .

In very populist tones. Problem is, he is upset that Bernanke "bailed out banks," particularly AIG, and "flooded the economy with cheap money."

Suffice to say Senator Bunning is guilty of a few conceptual errors here...

"You are repeating the mistakes of Japan" Bunning says... Of course, Bunning is correct, but purely by accident. Japan should have done more QE, and Bernanke should do more QE, but that's not what Bunning was talking about... He is furious that Bernanke is "propping up the banks".

He never criticized Bernanke for projecting 9.3-9.7% unemployment and 1.4-1.7% inflation for Q4, 2010 and being perfectly OK with it.

Typical Republican nonsense. Republican Senators don't know which way is up... Totally lost in space.

Hoisted from the Comments: Commenter Gabe

Commenter Gabe disagrees w/ my take on Bernanke:

The Fed has substantially expanded its balance sheet until 12/08 though. What you're saying is that the increase from a balance sheet of ~900 billion in March 08 to over 2000 billion in 12/08 and its stayed over 2000 billion since then. If something was going to cause inflation, that should have done it. I agree that Bernanke shouldn't have tapped the brakes, but its hardly being an inflation hawk.

In a liquidity trap, even QE won't matter. If the Fed buys assets and gives banks reserves, then they need to lend out those reserves to affect monetary aggregates and the price level. If the bank just puts those reserves back at the Fed, then this becomes excess reserves and has no effect on the money supply, and no effect on prices. QE might be worth it to monetize government debt, but if the intent is to increase money supply or lending, then it won't have an effect in a liquidity trap.

Also, if you want to get rid of Bernanke, who should he be replaced by? (I stick by De Long)

Also, how many reserves would be enough? The following chart should show that the Fed has been trying:

http://research.stlouisfed.org/fred2/series/BOGAMBNS?cid=124

Sharp comments. I have a few quibbles, however. The Fed's Balance sheet did go below 2 trillion -- from about 2.35 trillion on the 12/31/2009 to about 1.8 trillion in March. That's a fairly substantial "tap on the brakes" given that the "normal" pre-crisis balance sheet contained about $800 billion in assets. It was also clearly, in my opinion, a mistake. Since March, the Fed has started its normal QE program and poured more money into MBS and agency debt, growing its total assets slowly, but has not gotten back up to its previous high. Back in February of this year, I (and many other economists) were still under the mistaken impression that the Fed was still pumping money into the system like mad -- turns out they were pumping money out of the system. It did not occur to the Fed to start QE on long-term bonds until March. That would certainly have been something I would have tried the previous fall, back in the throes of the financial crisis.

Secondly, I think the nearly $1.5 trillion Bernanke pumped into the economy did stave off the financial crisis. Until 12/31/2009, one might be able to argue that, as far as the Fed's balance sheet is concerned, Bernanke did everything right. (In actuality, I think he should have been more expansionary much earlier in 2008, once it became clear that the markets were spooked.) And perhaps his actions merely staved off deflation rather than actually ignite much inflation? Of course, it is impossible to know the counter-factual, but I can see several plausible channels by which dumping large amounts of cash into a variety of assets helps out the economy: 1) When the Fed dumps $850 billion into MBS, this does help out banks' balance sheets and profits, making them more likely to lend (and less likely to fail), 2) Lowering the yields on a variety of long-term bonds also reduces borrowing costs for the economy as a whole, although perhaps the effects are not as strong as when the Fed Funds rate gets lowered, 3) More money created, even if it just sits in banks' coffers, still should lower the value of the dollar, helping net exports (IS curve shifts right), and, as Gabe concedes, 4) there is the added benefit that QE helps the government's long-term fiscal situation, plus 5) all that extra money swishing around means higher asset prices generally, which might have a small feedback into consumer confidence.

And I'll go ahead and concede that most of these channels will not be very strong unless we start talking hundreds of billions of dollars. But we are talking in hundreds of billions... (And this is why the graph linked is misleading, since, historically, a $50 billion increase in the Monetary base is a big move -- but now it isn't.) Instead of doing $300 billion on Treasury QE over six months, they might have done $300 billion in October to December of last year, another $600 billion from Jan. to March, and, then, had we gotten labor market results similar to what we actually did get, then another $1.2 trillion from April to June, and then, had the economy continued to bleed jobs in that period (as it did), then add another $2.4 trillion through September. Had the Fed followed this strategy, I suspect we'd have turned a corner on the jobs front months ago, I suspect inflation would start to creep up, and I suspect we'd be expecting 7% unemployment sometime in 2010 rather than sometime in 2012. And, yes, I realize that Monetary Policy operates with lags -- if the Fed had expanded it's balance sheet to $4 trillion by now, and if we had enjoyed our 2nd or 3rd consecutive month of 100,000+ job growth, with inflation ticking upward, then the Fed would need to reverse course, and need to move quickly to reverse large chunks of that $4 trillion very quickly. But we are at least three months away from having that, so the Fed's balance sheet should still be expanding.

I'll concede, of course, that fiscal stimulus is a better option. There should have been more money for states, and that money should have been dispersed sooner. I'll also concede that the latest unemployment numbers make more action on QE less urgent than before, but more is still clearly needed.

As to the question of "who to replace Bernanke" -- how about Jon Corzine? One critique of academic macro people like Bernanke is that he (and they) probably know nobody personally who has lost his/her job or really been directly impacted by the increase in unemployment. It's just a statistic to them. Corzine actually did loose his job solely b/c of the crisis! On another level, I do not think it matters. Clearly the experiment with picking an academic macroeconomist did not go so well. I do not have confidence in Ben Bernanke, and I think there are a large number of people who can do better. The most important qualification are that whoever does get the job had better know how to handle the yahoos on the FOMC, like Plosser, who is truly an embarrassment. It would also be nice to have a Fed Chairman who does not see fit to reminding the Congress it has the power to repeal Social Security and Medicare.

This Post is devoted to the Idea of Seeing Ben Bernanke Spend More Time with His Family...

Nobody was happier about this week's unemployment numbers than Ben Bernanke. It will probably save him. Worse than that, thanks to the substantial unemployment adjustments for the past two months, the Fed's unemployment projections for the current quarter suddenly seem entirely reasonable, so I'll eat crow on that one.

And Paul Krugman has it right -- now if you are the Fed, you are convinced you were right and are right that the economy needs no more QE -- see, the unemployment rate is dropping! If you are in the Congress, and last week you said that there was no need for more stimulus, then again you are proved correct!

But this is wrong. For even if unemployment is only 9.1% in one year's time instead of 9.5%, that is still way too high. And even if inflation is 1.8% next year rather than 1.7%, that is still too low. And, in general, the economy needs to add 110,000+ jobs per month to keep pace with the rising population. The moment to start to lighten up on the QE is once we have done that for several months consecutively.

And now we have Bernanke saying that not only is more QE out, but that more stimulus is also a bad idea. And, further then "Bernanke reminded Congress that it has the power to repeal Social Security and Medicare." Here is more: "In testimony before the Senate Banking Committee today, where he’s seeking re-appointment as the Fed’s chairman, Bernanke called for cutbacks in Medicare and Social Security even as unemployment rises and the middle class is endangered."

This is just too much...

We have a Fed chairman committed to doing nothing to an economy with 9%+ unemployment and inflation which is lower than it need be. And a Senate which now gets to vote to confirm Bernanke, basically voting on whether this is acceptable or not.

Thorstein on Bradford DeLong's Semi-Daily Journal...

Here:

The problem is that Obama has listened too much to Larry Summers, who is a deficit hawk, and who was never really a full believer in Keynesian prescriptions... He thought things should be left more to central bankers. And so went w/ a small stimulus. Here's the thing: this might not have been so bad but for a Fed which is perfectly content with 1.4% inflation and 9.7% unemployment. And but for Macroeconomists like Alan Blinder who call this "hitting the bulls-eye".

To which I'll add -- although I think Obama's stimulus was too small, had Thorstein Veblen been President, I might have only proposed a stimulus of $925 billion or $975 billion. Our current Macro situation wouldn't be that much different. But had I been Fed Chairman, I would not have shrunk the balance sheet from January into March. I would have started buying buying long-term Treasuries in November rather than March, and I would have bought $3 trillion rather than $300 billion. I'd have printed money until it obscured the sun. I'd have pumped money into the system until... until we have actual employment growth or inflation. What is the logic of stopping when we have neither? (And for all those who are worried that once the economy does rebound, we'll have to deal with the problem of having all this excess money floating around, I say, once there is a strong recovery, that money can be taken out, and banks' reserve requirements need to be increased anyway, why not do it while there's a trillion sitting around in excess reserves anyway?)

But I digress. The main point is that Ben Bernanke is God, not Larry Summers. Had Summers done more, who can say that the yahoos at the Fed wouldn't have done even less? And when Ben "inflation-fighter-extraordinaire" Bernanke talks to Macroeconomists outside the Fed, such as Alan "Ben,-you're-hitting-nuthin'-but-bulls-eyes" Blinder, what kind of a message is he getting? Is anyone telling him he's messing up, save a few fringe bloggers like Ryan Avent? That's not clear to me.

The Fed's Economic Projections

Isn't the Fed supposed to have lots of really bright people working for it?

Then why is the Fed's latest unemployment projection (from the minute's released the other day from the meeting on 11/4) for the current quarter: 9.8 to 10.3? The "Central Tendency" which excludes the three highest and lowest projections, was 9.9 to 10.1.

Keep in mind, these are forecasts for the average of the current quarter, but still, whose forecast was 9.8%? We're at 10.2% now. We will likely be at least 10.3% unemployment tomorrow. We would therefore need job growth of at least 250,000 in December to get back to 10.1%, and probably 600,000+ to get to 9.8, or else have lots of people up and leave the labor force (which is more likely).

In other words, the Fed's unemployment projections for the current quarter (made on 11/4) are already a straight-up joke. It doesn't inspire much confidence that the Fed's unemployment projections of a 9.3-9.7% average for Q4 2010 very good either...

Would anybody like to bet, and take the Fed's unemployment number-range for the current quarter? I'll give you 5-to-1 odds...

Just when you thought Macroeconomists could not be any more worthless... They just keep going out of their way to show that they cannot even do simple math yet again. Need another reason to pile on Macroeconomists? The ECB is just as bad as the Fed.

This may be a dramatic conclusion, but to me this just symbolizes the dramatic breakdown of any coherent thought at the Fed, and the majority presence of crazies on the FOMC.

Smackdown w/ Steven Landsburg

See it all here.

Landsburg linked Cochrane's "devastating" critique of Krugman. So I asked Landsburg why he backs Cochrane on Cochrane's belief in the discredited "Treasury View".

Landsburg replied: "If you believe this [the Treasury View] is Cochrane’s view, then you cannot possibly have read the piece I linked to (see the section headed “Stimulus”). I suggest that you read it."

To which I replied:

I suggest you read this.

I’ll give the mike to John Cochrane, and let him say what he believes:

“Most fiscal stimulus arguments are based on fallacies, because they ignore three basic facts.

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both1 . This form of “crowding out” is just accounting, and doesn’t rest on any perceptions or behavioral assumptions. ”

That is the Treasury View. John Cochrane wrote that, presumably because he believes it. You say you back John Cochrane. Krugman and DeLong attacked John Cochrane for re-inventing the Treasury View. Now is your time, defend the Treasury view. I.e., tell your readers why you believe, in Cochrane’s words, that: “Every dollar of increased government spending must correspond to one less dollar of private spending."

------------------------------------

Apparently Landsburg did not follow the Stimulus debate...

I'm kind of curious to see what he'll write. I predict he'll go crazy, and write stuff that makes no sense whatsoever... 40-60 he's too yellow to respond at all.

Update: Landsburg replied, suggesting I read Barro's Ricardian Equivalence paper, and other mumblings by Cochrane. I protest that he didn't reply to my question, and that Cochrane's other mumblings are just as crazy -- Cochrane says "the multiplier is likely less than zero". Commenter Gabe then points out that Barro's Ricardian Equivalence gives a positive multiplier in contrast to Cochrane.

Landsburg replied by cutting off the debate and refusing to let me post again. He did not reply why he supports Cochrane's belief that "the multiplier is probably less than zero" and why he told his readers to go read about Ricardian Equivalence to show why Cochrane's right when it shows the opposite.

Y tu, Bradford?

No group of economists are bigger fans of Bradford DeLong than the Economists for Firing Larry Summers (and Ben Bernanke too).

I do not understand his defense of Ben Bernanke, except that he does not want to be responsible for Bernanke's canning by the Congress.

Ben Bernanke has led the US economy to 10.2% unemployment and counting while leaving plenty of arrows in his quiver, ostensibly in case giant lizards come to invade Texas. Then he can do some real QE.

Btw, Ryan Avent has been money recently! Here's the key graf: "The Federal Open Market Committee generally expects ... the unemployment rate holding between 9.3% and 9.7% [in 2010]. ... and the FOMC believes that the unemployment rate might possibly fall as low as 6.8% by the end of 2012... Core inflation is forecast to reach no higher than 1.7%, even into 2012. But the minutes reflect no inclination to do anything more than what has already been put in motion."

At this point, the Fed looks to me like it's actively trying to screw the Democrats in the mid-terms. That's *NOT* what Bernanke's thinking is, but the effect is the same. What reason is there for the Fed to be OK w/ 9.3% unemployment while inflation is just 1.7%??? And, given that Fed has been serially overly-optimistic, a 9.3% forecast for the end of 2010 probably means 10.3%.

I think it's just become really clear that Ben Bernanke does not know which way is up. Hey hey, ho ho, Ben Bernanke has got to go.

Questions for Bernanke...

Here at the "Cunning Realist".

Here's my take on the questions:

#2 is my favorite: "2. On May 5, 2009, in front of the Joint Economic Committee, you said the following about the unemployment rate: "Currently, we don’t think it will get to 10 percent. Our current number is somewhere in the 9s" [source]. In November it hit 10.2%, and many economists predict it will go even higher. This is happening despite enormous fiscal and monetary stimulus that you previously said would help create jobs. What happened after your JEC testimony in May that caused your prediction to miss the mark?"

Bernanke has continually had overly optimistic projections for the US economy. The obvious follow-up to this question is, why, if he forecasted unemployment to be somewhere in the 9s, did he not do more Quantitative Easing? Why did he think 9% unemployment was "OK"? And given that consensus projections are for unemployment to be above 9.75% and inflation to be low at this time next year, why did the Fed just end a program to purchase $300 billion in Treasuries? Why not, instead, bump this program up to $700 billion given that the job market is still bleeding? (And, if that doesn't work, why not bump it up to $1.5 trillion?) Since it is clear the Fed Chairman has continually erred on the side of doing too little, why should the Senate not expect that Bernanke will continue to do too little?

I also liked question (1) -- the Fed did make a mistake in paying back AIG's counterparties 1 for 1. Although this was a clear mistake, at the end of the day this mistake at least did not cause unemployment to go higher or do any broader damage to the system, however, so if I had to ask Bernanke one question, it would not be this one. And most of the rest of the questions are about the past. Yes, most are important, but I would aim my questions around getting the Chairman to explain why his policy, right now, is so cautious. In not so many words, I would make it clear that he needs to start greasing the economy for the mid-terms next fall -- or else.

Paul Krugman is sometimes too good...

Here Krugman is poking fun at this truly inept article which quotes Bill Gross, bond trader, as saying '"What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”' Funny thing is, he's longer on US gov't debt than he's ever been!

Trouble w/ this is that it is winter, the job market is starving, and Ben Bernanke is leaving our stache of nuts for the spring...

The NYT story also gives more evidence of stupidity at the Fed: "The Fed, meanwhile, is already halting its efforts at tamping down long-term interest rates. Fed officials ended their $300 billion program to buy up Treasury bonds last month, and they have announced plans to stop buying mortgage-backed securities by the end of next March."

It's unfortunate that the Fed has stopped its bond purchases -- although it's clear we can't trust the gray lady. The Fed has recently been ramping up its purchases of MBS in recent weeks, and they actually just extended the MBS purchases until March from December...

Krugman is correct -- this sounds like a Judy Miller column on Iraq...

Elsewhere in the article it says: "Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point."

To the extent we can believe this (mostly b/c it matches my priors and not b/c I trust anything in the NYT), this just confirms the overall picture of a Fed who could be doing more but isn't.

Summers Dead Wrong on Cause of Crisis

This from Vanity Fair:

Summers has plenty of other things figured out as well, including the origins of the current financial crisis, for which he has crafted a cogent explanation worthy of his reputation as a policy wonk and his days as a college debating champion at M.I.T. “I think crises like this get made by multiple cascading misjudgments,” he explains, and then catalogues them: too much government spending, not enough private-sector saving, too much dependence on foreign debt, too much demand for “riskless” financial instruments that weren’t, in fact, riskless …

The first three of these were, at best, only tangentially related. As much as I think the Bush tax cuts were a mistake, Republican inability to balance the budget really did not have anything to do with the crisis. Ditto for Private-sector saving (even though i think saving is good, generally...) Dependence on foreign debt had nothing to do with the crisis.

Then there is this:

There were also charges of betrayal from Iris Mack, a former derivatives specialist at the Harvard Management Company (responsible for investing Harvard’s endowment) and the second black woman to receive a doctorate in applied mathematics at Harvard. Mack claims that soon after she started working at Harvard Management, in early 2002—after a stint at Enron—she became uncomfortable with the lack of understanding she thought her colleagues had with the risky derivatives they were investing in. (She was proved correct in the past fiscal year, when the endowment dropped 27.3 percent.) On May 12, 2002, she wrote an e-mail to Summers, alerting him to her concerns: “As a proud Harvard alum I am deeply troubled and surprised by what I have been exposed to thus far at HMC, and the potential consequences for my alma mater’s endowment. In addition, I strongly believe that if my fellow alum[s] knew how the endowment is being managed and the caliber of some of the portfolio managers, they probably would not give another dime to our endowment.”

She asked Summers for a meeting and that he keep the correspondence between them confidential, “especially due to th[e] fact that several individuals have been terminated from HMC when they raised concerns about such issues.” Nine days later, Mack got an e-mail from Marne Levine, Summers’s chief of staff at Harvard (and now his chief of staff at the National Economic Council), asking Mack to contact her and assuring her that the initial e-mail “remains confidential.”

But not for long. A month later, she was confronted by Jack Meyer, then head of H.M.C., who had copies of her correspondence with Summers and Levine. Meyer fired her the next day. She has since reached a confidential settlement with Harvard that she won’t discuss. But she is unequivocal about one thing. “I would say that there is 99.9999999999999999 percent probability that Summers had a hand in my departure,” she wrote me in an e-mail. (Summers replies he had nothing to do with her firing and could not, because she did not work for or report to him. “[Mack’s] allegations were the subject of thorough internal and external reviews and found to be without merit,” says a Harvard spokesman.)

I'd already heard (and posted) about this, but don't remember posting this part of the story... The rest of the Vanity Fair piece is garbage, as you would expect.