Nominations Oversights May Be Obama's Biggest Sin.
Especially if we throw Ben Bernanke into the mix...
This Sounds Very Familiar
13 hours ago
Friday, August 26, 2011
Worse than I thought...
“Most of the economic policies that support robust economic growth in the long run are outside the province of the central bank,” he said.And yet the Fed does nothing. Awesome.
...
"The recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that
temporary factors can account for only a portion of the economic weakness that we have observed. Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters. "With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate."
Jackson Hole is Here
Always dangerous to make a prediction of an event which is very close to happening, but I think Krugman has it correct -- whatever Bernanke announces today it will be too little. And, the underwhelming nature will be be immediately apparent. If I were Fed Chair, I would announce that short-term rates would stay at zero through the middle of 2013 no matter what, that I would allow temporary (but only very mild) overshooting of the 2 percent inflation target, that I would cut the Federal Funds rate all the way to zero, that I would cut the discount rate to .5. And none of this involves the "controversial" QE, which Bernanke could, and should, also adjust upward.
I disagree with Krugman on the importance of political pressure from the right. Here's a revelation: although obviously the criticism of Bernanke coming from the right is backwards, the criticism actually comes because Bernanke has done a poor job guiding the economy. If the economy were increasing at a 4 percent annual rate, I think we would find generally less criticism of Bernanke, and more support and pushback on fringe critiques from the media at large. And deservedly so.
What really is holding back Ben Bernanke is the five other Republicans on the FOMC, and the even the Democrats on the committee, not all of whom have been vocal supporters of less passive monetary policy -- even in private.
Also, I think the Woodford opinion piece in the FT was a bit off-base. If doing more QE were a mistake, it really would be only for political reasons, and Woodford is profoundly wrong to suggest otherwise.
Look, QE works, in part, because market participants see that if the Fed is being more aggressive buying more bonds over the next six months, then it's unlikely that they will raise rates anytime soon to fight inflation. In other words, it affects expectations about the future. The logic that more QE "just ends up as excess reserves" may sound true, but is deeply flawed. Look, Treasuries are just assets -- like any other assets. Suppose the Fed were to buy up all the Treasuries on the planet. Doing so would almost certainly lead to negative interest rates. As yields fell, yes, more money would be held at the Fed as excess reserves, but also some of it would slosh over into corporate bonds, the stock market, and other assets, such as real estate. And lower long-term yields would reduce borrowing costs.
In addition, as this blog has stated repeatedly, whenever QE has been announced, it has made an impact on prices. This is evidence that QE works.
Woodford writes that "The problem is that, for this theory [QE] to apply, there must be a permanent increase in the monetary base." But of course, that isn't literally true. If the Fed started now buying up all of the Treasuries on the planet, yields would fall -- probably the moment such a plan was announced. The need for such purchases to be irreversible is a purely imaginary need born of Woodford taking his play economic models too seriously, but more probably misunderstanding them. The guy might be a great theoretician, but his insights do not transfer to the conduct of real world economic policy.
To show QE "doesn't work" he writes about how Japan's experiment failed because it wasn't permanent. But Japan never actually did much QE at all -- just $300 billion, and then reversed it when their economy got better. Now, although I am a major proponent of QE, I think they did too little for it to have worked, but as soon as they reversed it, their economy did slip into recession. Hence, there's absolutely nothing you can point to from the Japanese dealings with QE which would lead you to conclude that QE doesn't work.
Woodford also sees harm in more QE: "But a further round of easing could actually do harm, by giving policymakers an excuse to avoid taking actions that would do more to help the economy." I think this ignores the political dynamic in the Congress -- the Republican party has every incentive to see that economic growth is dismal next year.
Instead, Woodford tells us that what we need is "clarity" from the Fed. But the Fed has already been clear -- it will act if we face an actual recession. Decades of Japan-style slow growth are just fine. I don't really agree with Woodford that the Fed's become harder to read... they've been pretty predictable thus far. Perhaps Bernanke will prove me wrong?
I disagree with Krugman on the importance of political pressure from the right. Here's a revelation: although obviously the criticism of Bernanke coming from the right is backwards, the criticism actually comes because Bernanke has done a poor job guiding the economy. If the economy were increasing at a 4 percent annual rate, I think we would find generally less criticism of Bernanke, and more support and pushback on fringe critiques from the media at large. And deservedly so.
What really is holding back Ben Bernanke is the five other Republicans on the FOMC, and the even the Democrats on the committee, not all of whom have been vocal supporters of less passive monetary policy -- even in private.
Also, I think the Woodford opinion piece in the FT was a bit off-base. If doing more QE were a mistake, it really would be only for political reasons, and Woodford is profoundly wrong to suggest otherwise.
Look, QE works, in part, because market participants see that if the Fed is being more aggressive buying more bonds over the next six months, then it's unlikely that they will raise rates anytime soon to fight inflation. In other words, it affects expectations about the future. The logic that more QE "just ends up as excess reserves" may sound true, but is deeply flawed. Look, Treasuries are just assets -- like any other assets. Suppose the Fed were to buy up all the Treasuries on the planet. Doing so would almost certainly lead to negative interest rates. As yields fell, yes, more money would be held at the Fed as excess reserves, but also some of it would slosh over into corporate bonds, the stock market, and other assets, such as real estate. And lower long-term yields would reduce borrowing costs.
In addition, as this blog has stated repeatedly, whenever QE has been announced, it has made an impact on prices. This is evidence that QE works.
Woodford writes that "The problem is that, for this theory [QE] to apply, there must be a permanent increase in the monetary base." But of course, that isn't literally true. If the Fed started now buying up all of the Treasuries on the planet, yields would fall -- probably the moment such a plan was announced. The need for such purchases to be irreversible is a purely imaginary need born of Woodford taking his play economic models too seriously, but more probably misunderstanding them. The guy might be a great theoretician, but his insights do not transfer to the conduct of real world economic policy.
To show QE "doesn't work" he writes about how Japan's experiment failed because it wasn't permanent. But Japan never actually did much QE at all -- just $300 billion, and then reversed it when their economy got better. Now, although I am a major proponent of QE, I think they did too little for it to have worked, but as soon as they reversed it, their economy did slip into recession. Hence, there's absolutely nothing you can point to from the Japanese dealings with QE which would lead you to conclude that QE doesn't work.
Woodford also sees harm in more QE: "But a further round of easing could actually do harm, by giving policymakers an excuse to avoid taking actions that would do more to help the economy." I think this ignores the political dynamic in the Congress -- the Republican party has every incentive to see that economic growth is dismal next year.
Instead, Woodford tells us that what we need is "clarity" from the Fed. But the Fed has already been clear -- it will act if we face an actual recession. Decades of Japan-style slow growth are just fine. I don't really agree with Woodford that the Fed's become harder to read... they've been pretty predictable thus far. Perhaps Bernanke will prove me wrong?
Wednesday, August 24, 2011
Dear NYT: The Fed is Impotent, but only by Choice
Catherine Rampell asks "How much more can the Fed help the economy?" and answers that "there are reasons to believe the Fed’s remaining tools may be losing their potency."
However, the evidence she offers is weak. Yes, we're close to the zero lower bound on the Federal Funds rate, but there's really no evidence that all of the other various options the Fed has at its disposal wouldn't work. As written on this blog numerous times, QE announcements and hints have moved markets every time, as did Bernanke's simple statement that he would keep the funds rate low through the middle of 2013 if conditions warrant.
Instead of looking at QE's impact on market prices, Rampell bases her argument around economic performance:
Rampell writes that "Twice now the Fed has engaged in large-scale asset purchasing, a process known as quantitative easing." As if two interventions in the past three years is somehow uncharacteristic, especially given that the interventions were split by an increase in the discount rate -- an increase which strengthened the dollar and caused longer-term treasury yields to rise. In normal times, the Fed tinkers with the Federal Funds rate extensively -- in 2008, for example, the Fed cut the Federal Funds rate 7 times, and the discount rate 8 times. In the first 7 months of 2011, by contrast, the Fed made almost no changes to its policy stance whatsoever, despite discovering an economic reality very different from its forecast.
In fact, since 1971, in no three year period has the Fed ever tinkered so little with policy (see here) as it has since the beginning of 2009. This is more than a bit strange given the wide chasm between recent Fed forecasts and economic reality.
However, the evidence she offers is weak. Yes, we're close to the zero lower bound on the Federal Funds rate, but there's really no evidence that all of the other various options the Fed has at its disposal wouldn't work. As written on this blog numerous times, QE announcements and hints have moved markets every time, as did Bernanke's simple statement that he would keep the funds rate low through the middle of 2013 if conditions warrant.
Instead of looking at QE's impact on market prices, Rampell bases her argument around economic performance:
“It’s hard to make the argument that QE2 was a rousing success or we wouldn’t be on the verge of seeing QE3,” the economists at RBC Capital Markets wrote in a client note. “The market may very well get what it seems to desire, but we believe there is no magic bullet here.”But of course, by this logic, those 7 Federal Funds rate cuts in 2008, when the rate went from 4.25 to 0-0.25 by Q4, 2008, when GDP fell at an 8.9 percent rate, were particularly unhelpful.
Rampell writes that "Twice now the Fed has engaged in large-scale asset purchasing, a process known as quantitative easing." As if two interventions in the past three years is somehow uncharacteristic, especially given that the interventions were split by an increase in the discount rate -- an increase which strengthened the dollar and caused longer-term treasury yields to rise. In normal times, the Fed tinkers with the Federal Funds rate extensively -- in 2008, for example, the Fed cut the Federal Funds rate 7 times, and the discount rate 8 times. In the first 7 months of 2011, by contrast, the Fed made almost no changes to its policy stance whatsoever, despite discovering an economic reality very different from its forecast.
In fact, since 1971, in no three year period has the Fed ever tinkered so little with policy (see here) as it has since the beginning of 2009. This is more than a bit strange given the wide chasm between recent Fed forecasts and economic reality.
The ECB is Crazy
Via Matt Yglesias, FT Alphaville has a nice graphic showing how ECB rate increases -- responding to mostly temporary commodity price shocks -- have triggered the recent phase of the Euro-debt crisis. It would have been very unlikely for Italy and Spain to have gotten into trouble without the past two rate increases.
At FT Alphaville, Joseph Cotteril quips that "On the bright side, at least the ECB left more room to cut rates?" Yet, of course, the ECB has always had room to cut rates, as at no point in the past three years did the ECB's main policy rate fall below 1 percent, while Eurozone core inflation has remained below 2 percent and Eurozone GDP is still roughly 2 percent below its 2007 peak. Although it's commonly thought that Ireland, Portugal, and Greece would be in trouble regardless, one really does have to wonder what the Eurozone would look like if Lars Svennson were setting rates. Germany has an output PMI consistent with GDP growth of less than .5%. Had the ECB been targeting German GDP growth successfully at 3% over the past few years, things would look quite different. Instead, German GDP the past 4 quarters is not even 1 percent larger than the pre-crisis peak -- so of course the Euro is in crisis.
And yet, there has been very little public pressure for the ECB to change its ways.
Don't Get Too Excited About Jackson Hole
Markets are apparently getting excited about the prospect of more intervention from the Fed. They would do well to temper those expectations, given that the most critical hard economic data -- unemployment and inflation -- point toward a Fed doing less, not more. CPI was up .5% in July, with even the core up .2%, and up 1.8% over the past 12 months, means that the Fed would be reluctant to do much more regardless of unemployment. And payroll employment was up 117,000 in July -- a bad number for most Fed's, but promising given the past few months, which means Bernanke will stand pat.
I was, admittedly, surprised at the July inflation numbers, as reduced inflation in automobiles stemming from the tsunami was already built in, and the increase in the core rate fell only from .3% to .2% in July, due to countervailing increases in the price of services, including shelter.
This is the highest the 12 month change in core inflation has been for over 2 1/2 years. I definitely don't see the Fed doing more. In fact, I would expect Bernanke to give stern warnings about an exit strategy if inflation doesn't slow in the coming months (which, I predict, is likely).
I was, admittedly, surprised at the July inflation numbers, as reduced inflation in automobiles stemming from the tsunami was already built in, and the increase in the core rate fell only from .3% to .2% in July, due to countervailing increases in the price of services, including shelter.
This is the highest the 12 month change in core inflation has been for over 2 1/2 years. I definitely don't see the Fed doing more. In fact, I would expect Bernanke to give stern warnings about an exit strategy if inflation doesn't slow in the coming months (which, I predict, is likely).
Tuesday, August 23, 2011
Seeds, Germs, and Slaves
Longtime readers of this sight will know that TV is a big fan of, what I call, the Diamond-Crosby-Kamarck-Sachs theory of development. Hence, I'm looking forward to reading Thomas C. Mann's updating of the utterly brilliant Alfred Crosby book "Ecological Imperialism" with "Seeds, Germs, and Slaves", reviewed in the NYT here.
From the review, it looks like it may be an interesting book of anecdotes, but it's not clear what new big theoretical insights the book contains... And so I can sigh, as my thunder may not have been stolen just yet!
From the review, it looks like it may be an interesting book of anecdotes, but it's not clear what new big theoretical insights the book contains... And so I can sigh, as my thunder may not have been stolen just yet!
Wednesday, August 17, 2011
Economists for Obama no Longer Advocating for Obama...
Economists for Obama reacts to the debt-deal with this:
The other issue here is, say Obama had gotten $100 billion in stimulus spending. I suspect, in that case, the Fed would not have changed its language at the last meeting (after which, two year Treasury yields plummeted). In short, not clear that fiscal policy mixed with a Fed that just isn't willing to play ball is the answer here.
Yuck.I think this is completely wrong-headed. Although I think Obama could have gotten a better deal, and should not have agreed to this, one of the key details is that it cuts budgeting authority by just $22 billion in 2012. That should reduce GDP growth by just .3 percent. Obviously, that's not the direction we want to move in, but that alone should have limited impact. My sense is that anything after 2012 will need to be ratified by future Congresses. I'm not really clear on how much "inertia" the deal will create, but I don't see how this deal is grounds to dramatically reinterpret one's support for Obama. The President could likely have gotten smaller cuts in 2012, but would have been really hard-pressed to get a small increase. Should the president have threatened default over $20 billion in 2012 spending? That seems like a judgment call...
That's what I have to say about President Obama's capitulation to the hostage-taking ways of congressional Republicans.
I suppose I might change my mind, but after watching the President give in to the Boehner-McConnell blackmail axis, I don't imagine I'll be spending much of my time advocating his re-election. Assuming he's the Democratic nominee, which I do, I'll vote for Obama, because the alternative will still--somehow--be worse. But I really can't see how, in good conscience, I could defend the economic policies of a guy who has signed on to fiscal contraction in the midst of a major downturn. And that's leaving aside the President's apparent lack of understanding of the importance of bargaining from strength. So much for all that poker expertise he's supposed to have.
What a shame.
The other issue here is, say Obama had gotten $100 billion in stimulus spending. I suspect, in that case, the Fed would not have changed its language at the last meeting (after which, two year Treasury yields plummeted). In short, not clear that fiscal policy mixed with a Fed that just isn't willing to play ball is the answer here.
Tuesday, August 16, 2011
A Note on the Texas Unmiracle
Never too late to chime in on the Texas Unmiracle, which Paul Krugman wrote a column about, and then blogged, twice.
One particularly interesting aspect of The Texas Unmiracle is actually to look at jobs gained by sector, particularly comparing "free-market" Texas with "socialist" California during the recovery. Turns out that from it's employment trough in early 2010, California has gained 209,000 jobs, less than Texas's 349,000. Yet, 61% of the difference came from government employment alone. That's right, Texas added nearly 28,000 government jobs over this period, while California's government bled 57,600 jobs. The other main differential job gain was in "mining and logging" -- a sector which has bounced back nationally. And Texas employs 10 times as many workers in this sector to begin with... These two sectors, combined, already explain 93% of the difference in jobs gained.
Of course, one should keep in mind that California is a larger state, and so it "should" have gained about 40% more jobs. But of course, the differential jobs in government, mining and logging, and the impact of higher oil prices, and one would expect that differential gains in these sectors would feed into retail and construction.
Hence, to the extent that Texas has done well owes to the growth of government employment.
(All data SA, from BLS.)
One particularly interesting aspect of The Texas Unmiracle is actually to look at jobs gained by sector, particularly comparing "free-market" Texas with "socialist" California during the recovery. Turns out that from it's employment trough in early 2010, California has gained 209,000 jobs, less than Texas's 349,000. Yet, 61% of the difference came from government employment alone. That's right, Texas added nearly 28,000 government jobs over this period, while California's government bled 57,600 jobs. The other main differential job gain was in "mining and logging" -- a sector which has bounced back nationally. And Texas employs 10 times as many workers in this sector to begin with... These two sectors, combined, already explain 93% of the difference in jobs gained.
Of course, one should keep in mind that California is a larger state, and so it "should" have gained about 40% more jobs. But of course, the differential jobs in government, mining and logging, and the impact of higher oil prices, and one would expect that differential gains in these sectors would feed into retail and construction.
Hence, to the extent that Texas has done well owes to the growth of government employment.
(All data SA, from BLS.)
Friday, August 12, 2011
Blame it on the Fed...
Because the Fed is simply not impotent at the zero lower bound.
There are a number of options the Fed now has, and market reactions, theory, and common sense all suggest that they can be effective. The Fed can cut the discount rate. When it raised the discount rate in 2010 -- for mysterious reasons since core inflation has remained below target for 3.5 years now -- the dollar rose and the stock market retreated, as theory suggests it should. The Fed can do more QE. Whenever the Fed has hinted recently at QE, the markets have responded in a big way, and when the Fed has tamped down the possibility of doing more, the markets have reacted negatively. The Fed can use language to be more explicit about the duration of the zero interest rate policy. When the Fed said it would keep rates low through the middle of 2012, 2 year government bond yields plummeted. And when QE has been announced anywhere -- the US, Japan, or Europe -- it has caused currency depreciation and lower yields on government bonds.
The Fed could also stop paying interest to banks on reserves (or go negative), it could target lower long-term rates, and it could promise to continue doing QE until core inflation hits 2%. Instead of doing domestic QE, the Fed could increase its holdings of foreign currency, or it could target state and local debt, to make it easier for local governments to borrow. In short, there is no reason to think that the Fed is "out of ammunition". Yes, more QE would tend to wind up in excess reserves, but it also pretty clearly changes prices. And prices matter.
Unfortunately, in private conversations, some of the members of the FOMC itself believe that the Fed is tapped out. (Actually, their beliefs are incoherent, as these officials conceded QE affects both bond yields and the dollar.) Prominent members of the administration also believe that the Fed can do little. This, probably more than anything else, explains the reluctance of the administration to fight for its Fed appointments.
The implication of a Fed that is quite clearly not tapped out is that the current state of the economy is the Fed's doing. As this blog made clear, monetary policy has been unnecessarily tight since the beginning of 2009, when the Fed inexplicably started contracting its balance sheet in the midst of the worst recession since the Great Depression. In 2010, it decided, prematurely, and despite nary a hint of inflation, to raise the discount rate. Then, when the economy faltered, it decided to postpone action until after the election. And now, once again, with the economy performing much worse than it had anticipated, with inflation still below target, with markets falling and with stimulus phase-out and state and local budget woes promising to subtract 3% of GDP growth the next 4 quarters, the Fed responds by effectively doing nothing.
Although no one's talking about it, the handling of your Fed appointments, and little else, might have been what sank your administration. Yet, there still is time. There are two FOMC seats open, and a third opens up in January. Make the most of these appointments, and you will beat Rick Perry. Continue to dawdle, or make more poor choices, and you are asking for a tough, tough reelection fight.
There are a number of options the Fed now has, and market reactions, theory, and common sense all suggest that they can be effective. The Fed can cut the discount rate. When it raised the discount rate in 2010 -- for mysterious reasons since core inflation has remained below target for 3.5 years now -- the dollar rose and the stock market retreated, as theory suggests it should. The Fed can do more QE. Whenever the Fed has hinted recently at QE, the markets have responded in a big way, and when the Fed has tamped down the possibility of doing more, the markets have reacted negatively. The Fed can use language to be more explicit about the duration of the zero interest rate policy. When the Fed said it would keep rates low through the middle of 2012, 2 year government bond yields plummeted. And when QE has been announced anywhere -- the US, Japan, or Europe -- it has caused currency depreciation and lower yields on government bonds.
The Fed could also stop paying interest to banks on reserves (or go negative), it could target lower long-term rates, and it could promise to continue doing QE until core inflation hits 2%. Instead of doing domestic QE, the Fed could increase its holdings of foreign currency, or it could target state and local debt, to make it easier for local governments to borrow. In short, there is no reason to think that the Fed is "out of ammunition". Yes, more QE would tend to wind up in excess reserves, but it also pretty clearly changes prices. And prices matter.
Unfortunately, in private conversations, some of the members of the FOMC itself believe that the Fed is tapped out. (Actually, their beliefs are incoherent, as these officials conceded QE affects both bond yields and the dollar.) Prominent members of the administration also believe that the Fed can do little. This, probably more than anything else, explains the reluctance of the administration to fight for its Fed appointments.
The implication of a Fed that is quite clearly not tapped out is that the current state of the economy is the Fed's doing. As this blog made clear, monetary policy has been unnecessarily tight since the beginning of 2009, when the Fed inexplicably started contracting its balance sheet in the midst of the worst recession since the Great Depression. In 2010, it decided, prematurely, and despite nary a hint of inflation, to raise the discount rate. Then, when the economy faltered, it decided to postpone action until after the election. And now, once again, with the economy performing much worse than it had anticipated, with inflation still below target, with markets falling and with stimulus phase-out and state and local budget woes promising to subtract 3% of GDP growth the next 4 quarters, the Fed responds by effectively doing nothing.
Although no one's talking about it, the handling of your Fed appointments, and little else, might have been what sank your administration. Yet, there still is time. There are two FOMC seats open, and a third opens up in January. Make the most of these appointments, and you will beat Rick Perry. Continue to dawdle, or make more poor choices, and you are asking for a tough, tough reelection fight.
Thursday, August 11, 2011
Announcement: Thorstein Veblen Now Able to Blog
Good news: Thorstein Veblen is now cleared, once again, to blog.
This blog will resume shortly, and could hardly come at a better time -- with economies mired in liquidity traps on both sides of the Atlantic (and Pacific), with another recession looming, and with the possibility, Mr. President, that you will last only one term.
Mr. President, you are now trading at 50.7 on intrade. Sure, online prediction markets aren't perfect, but still, given the state (and likely future state) of the economy, 50.7 sounds like it might be a short sale to me. 50.7 is a wake-up call.
This blog will resume shortly, and could hardly come at a better time -- with economies mired in liquidity traps on both sides of the Atlantic (and Pacific), with another recession looming, and with the possibility, Mr. President, that you will last only one term.
Mr. President, you are now trading at 50.7 on intrade. Sure, online prediction markets aren't perfect, but still, given the state (and likely future state) of the economy, 50.7 sounds like it might be a short sale to me. 50.7 is a wake-up call.
Tuesday, August 2, 2011
Announcement
This is TV's personal assistant, reporting on behalf of TV.
I am proud to announce that Thorstein Veblen will resume blogging from the middle of next week. His current duties prevent him from commenting publicly, and so he has been biting his tongue for quite literally months now, but can hardly wait to resume giving advice to this President, who has never been more in need of advice as he is at the moment. Though the economic problems facing the nation are immense, the solutions are actually quite simple. Stay tuned to find out!
-TVs assistant
I am proud to announce that Thorstein Veblen will resume blogging from the middle of next week. His current duties prevent him from commenting publicly, and so he has been biting his tongue for quite literally months now, but can hardly wait to resume giving advice to this President, who has never been more in need of advice as he is at the moment. Though the economic problems facing the nation are immense, the solutions are actually quite simple. Stay tuned to find out!
-TVs assistant
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