The Monetary Policy Debates
This article by David Leonhardt in the New York Times is getting a lot of attention.
Leonhardt argues that there is an active debate in the economics profession between inflation hawks, moderates and doves and that only the position of hawks and moderates are represented on the Fed open market committee (FOMC). He guesses that Perry’s equating dovishness with treason (now for monetary policy too) might be part of the problem.
I personally have a strong objection to Leonhardt’s article. He lumps together people who think that the Fed should not cause higher inflation with people who think that the Fed can’t cause higher inflation.
IF you were to conduct a survey of the country’s top economists, you would find a fair number who did not believe that the Federal Reserve should be taking more aggressive steps to help the economy. Some would worry that injecting more money into the economy might unnerve global investors or set off uncontrollable inflation. Others would wonder whether, with interest rates already so low, the Fed even had much power to lift economic growth.
But you would also find a sizable group of economists who thought the Fed could and should do far more than it was doing. This group, known as doves, tilts liberal, though it includes conservatives as well. If anything, it can probably claim a larger number of big-name economists — J. Bradford DeLong, Paul Krugman (an Op-Ed columnist for The New York Times), Christina D. Romer, Scott Sumner and Mark Thoma, among others — than the camp that believes the Fed has done too much.
Note that the group that think that the Fed doesn’t have much power to lift economic growth are lost somewhere between the two paragraphs. Leonhardt goes on to present the debate between DeLong et al on one side and FOMC hawks “Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.” with the moderates such as Bernanke in the mushy middle.
The hawks and those who doubt that the Fed can cause higher inflation absolutely disagree. The hawks say there is a risk of higher inflation. DeLong says higher inflation is possible and would be good. They agree on the first question and then disagree about the effects of inflation and the relative importance of economic catastrophe and whatever costs 4% inflation would have (small to minimal according to top conservative academics like uh Kocherlakota).
It is just not true that no prominent FOMC nominee Nobel Laureate has expressed doubt as to whether the Fed can cause higher inflation. Leonhardt seems to have decided that Peter Diamond just doesn’t exist (or to agree with Sen Shelby that he doesn’t know about money — I might add that top academic N. Kocherlakota’s research on money is all based on Peter Diamond’s search model).
I don’t have the sense that Romer and Krugman firmly disagree with those who think the Fed can’t do much more. They call for more more more, but don’t IIRC express confidence that anything the Fed might do would have a really big effect. Conflating the questions of should the Fed try to cause higher inflation and can the Fed achieve it makes them definitely doves. That’s why I object to the conflation.
Before the jump I note (again) that I think the Fed could do more which would be useful — buy risky assets (via Maiden Lane III if necessary). But that means I absolutely don’t agree with people who call for QEIII and look at the quantity and not the quality or who think that saying more inflation would be nice would have much effect or who call for targeting nominal GDP (why not jut “target” real GDP and cut out the middle man ?).
By the way Leonhardt forgets about Diamond also when making the obligatory claim that both parties share blame “The Obama administration has also been slow to fill some Fed openings. At least one of the 12 seats has been vacant since Mr. Obama took office, and two are now.” as Leonhardt knows perfectly well, the Obama administration can’t fill Fed openings if Republican senators filibuster votes on nominees. Obama is not the reason that there are two vacancies, Shelby is. Hat tip Tom Levenson
On the other hand the article does contain news for anyone who thinks that Scott Sumner is reality based.
Mr. Sumner has become so dispirited by the Fed that, before leaving on a trip for Italy last week, he left a post on his well-read blog, The Money Illusion, under the headline, “Not enough.” The headline, he wrote, “refers to my reaction if the Fed does something while I’m gone.”
Sumner just wrote that he doesn’t bother to wait to learn the facts, because he already knows the answer. I knew that was true of him (in general) but you aren’t supposed to say so.
I don’t understand why some of the people here are so pro commmunist? I just don’t get it? Why do they believe it is such a superior way of living?
Why do they not understand that they are so out numbered, and we will [edited]
[XoXoXXO, if you are going to talk like that you better provide some hard evidence!] them,when we lose our freedom?
Oh come on, sense of humour bypass re. Sumner. He was just making a light hearted crack about what he regards as the inevitability of insufficient Fed action. I’m sure if he got home to discover the Fed had moved mountains, he’d acknowledge it. Your not exactly reality based yourself if you react to a joke like that.
If it´s a joke, it has long ago become stale! It was pretty stupid to began with.
The “joke” I was referring to was the “Fed DebateS” joke. I think that its not a question of Sumner (not) being reality based. After 3 years of “twisted” monetary policy, its become hard to expect anything “positive” from the Fed.
WASHINGTON (AP) — President Barack Obama has chosen labor economist Alan Krueger for a top administration post as the White House scrambles for solutions to boost a fragile economy with the 2012 election looming.
I don’t see any commies here. Are there commies here?
Let’s keep in mind that the Fed has it’s normal tool — interest rates — strapped down at “Full Speed Ahead”. And nothing much is happening.
I don’t know much about this, but my sense is that much of the debate about further Fed activity is about whether unconventional Fed activities can actually stimulate anything; about how risky they might be; and the possibility that they might make things even worse.
Yes of course he was joking, but the joke was a joke about his own complete 100% predictability.
If I weren’t sure that Sumner is a reality resistant fanatical devotee of monetarism I wouldn’t have even mentioned the joke. Being absolutely sure that reality has no effect on his beliefs, I did.
The headline was “the monetary policy debateS.” The two words which you put in quotations marks are not a direct quote, that is, you misquoted me.
I stress this because you seem to think that the debate is between defenders of the Fed and critics of the Fed. This is not the case. Diamond, for example, seems to think the FOMC is wrong twice
1) they think more inflation would be a bad thing
2) They think they can cause more inflation.
Like the Leonhardt article, your comment convinces me that some people can’t imagine disagreement on more than one dimension (edited to reduce rudeness). The range of views on inflation is not hawks vs doves. Diamond is an ultra dove arguing that a bit of inflation is good in general (long before the crisis). He disagrees with Sumner (for sure and maybe some of the others) because he doesn’t think there is much the Fed can do right now.
Also uh the word “stupid” is not very polite and doesn’t raise the level of debate.
Vt you’ve got it. Except I don’t know of anyone who argues that unconventional monetary policy might make say unemployment worse. It is true that opponents of even more unconventional monetary policy say it is risky and the risk they mention is inflation. This means that on the practical question more unconventional monetary policy yes vs no those who are sure it will work (Sumner) and those who doubt that it will have much effect (Diamond and I claim Krugman) agree on doing it.
I add that unconventional monetary policy has been tried already and didn’t have much effect. QEII is a much more massive operation than anything the Fed ever did before 2008. $600,000,000,000
is a whole lot of money even for the Fed. No one has mentioned QEII in the thread. Even you only noted that the conventional instrument (the Fed Funds target) is pedal to the metal, but beyond that the Fed has done much much much more than it ever had done before 2008.
My problem with inflation doves who argue just do something is that my perception is that the Fed did something huge and it didn’t work at all (this opiniion is controversial). So the Fed has to decide to do something *and* figure out something useful to do. My proposal is to buy more risky securities, since safe securities such as 7 year Treasury notes (what they bought with QEII) are being treated as close substitutes for money by investors.
This debate, what unconventional monetary policy, isn’t even happening.
It might not be very important with a FOMC including lunatics who want tighter policy and wimps who won’t do anything new, but it is at least of academic interest and I am an academic.
Leonhardt sure isn’t, but accuracy is necessary even when discussing people who are politically irrelevant such as Diamond. Leonhardt mentioned people who think the Fed can’t cause much change in GDP but then ignores them. People who say do more it won’t hurt and will help a little bit (Krugman I claim) are lumped with people who say that the Fed can end all our troubles any time it gets going (Sumner). This is inaccurate.
The inflation doves listed by Leonhardt are all (but Sumner) outspoking advocates of more fiscal stimulus. They sure aren’t trying to distract people from the need for more fiscal stimulus. They talk about the Fed only because congress is hopeless. Bernanke might listen to (some of) them (again not Sumner) but the majority of Representatives sure won’t. Krugman in particular is a highly respected friend and colleague of Bernanke (who worked very hard to convince Krugman to come to Princeton).
I think Krugman writes about monetary policy on the principle that it is better to light one small candle and curse against the darkness than just curse against the darkness.
Isn’t it time that someone in the know consider that regardless of how the Fed pumps money into the economy it’s always done at the top of the money flow. Being that there is a pile already sitting at the top, and people with this money are now aware of “bubbles” do to money looking for a place to go, with no real economic growth on the horizon, the action taken is to buy Fed stuff. Which keeps rates down. Totally countering the Fed’s attempt to create some inflation.
Maybe if the Feb actually bought and wrote down the bad mortgages that people have, doing it directly, they would be bailing out the TBF banks and injecting money directly where it would cause growth and thus some inflation. If they did it enough one might actually have to worry about too much inflation. However, as long as labor is getting the short end of the stick via anti labor policy and out sourcing we will have the counting force to dampen the potential demand that could be created by freeing those trapped in the bad mortgage.
Oh no, they have to actually think about the people and the “labor economy” that the rest of the world lives and works in (as coined by a commentor here).
Monetary policy in a liquidity trap is very weak. Fiscal policy is very strong with large multipliers.
How can Weak Fed Monetary policy do much good if Strong Fiscal policy is Austerian and Contractionary?
Geez, now I’m glad I didn’t post “Not Enough” before the Fed did Jack Sh*t.
Robert. I wasn´t trying to misquote you. I was referring to the Leonhardt article. “Fed” is just short hand to “Monetary Policy”. And also to focus on the debateS within the Fed itself. We outsiders are just “inocent bystanders” giving our 2 cents. And the debate within the Fed sounds to me pretty stupid, especially given the state of the economy!
If you want, this is a more “polite” discussion:
“I personally have a strong objection to Leonhardt’s article. He lumps together people who think that the Fed should not cause higher inflation with people who think that the Fed can’t cause higher inflation…..”
“Note that the group that think that the Fed doesn’t have much power to lift economic growth are lost somewhere between the two paragraphs.”
Well, this had me scratching my head. Just who are these influential economists that Robert thinks David left out? Peter Diamond?
Well, true, Peter Diamond does have a Nobel Prize and he was nominated to the BOG. But honestly, had many people outside of the economics world even heard of Peter Diamond before he was nominated to the BOG? Furthermore, what makes Peter Diamond an expert on monetary policy other than the fact he was nominated to a political position occupied by lawyers, bankers and other similarly unqualified people? Sure, his search model was used by Kocherlakota, but isn’t that the same Kocherlakota that claimed that low interest rates cause deflation? (By logical extension of that argument we can of course claim that it is umbrellas that cause rain.)
But, honestly, if all the influential economists that thought that monetary policy had absolutely no ability to increase inflation, all gathered together at the same time at the Hockessin, Delaware Quiznos, the town fire marshall would say…”Yeah, fine, that’s no problem.” (Apologies to Jon Stewart.)
And that’s what really irks Robert. Because this huge public debate over the ability of monetary policy to cause inflation, that David apparently forgot to mention, is all a figment of Robert’s fertile imagination.
P.S. So nice to know that Obama leaving three BOG seats empty without a nominee for two years was the appropriate thing to do because the Republicans would have thrown a hissy fit. Nevermind that such a similar thing would never happen in the case of the Supreme Court, or that when Obama finally got around to nominating three nominees all but Diamond were approved.
P.P.S. It’s also nice to know that Obama had the good foresight to nominate someone to a monetary policy position who thought that monetary policy is completely ineffective. It would have been a complete waste to nominate somebody who actually thought it could do something only to have them rejected.
If you propose that all men are created equal, you are a “Communist”.
“If you feed the poor you are a saint, if you ask why the poor are hungry you are a Communist.”
If you don’t see wage slavery as freedom, you are a “Communist”.
If you think anti social greed is bad you are a “Communist”.
If you complain that infrastructure is built in Afghanistan and not Poughkipsee, you are a “Communist”.
If you question interminabloe war and readiness to fight fictions at the expense of the poor, you are a “Communist”.
I can go on.
I spent a good part of my misguided youth preparing to fight soviets.
War has to receed and taxes rise, on speculative activities.
The “created” money makes explosives and ABS’ the masses will be secondary.
As we learned at DeLong the opposite theory denies the liquidity trap as Keynesian and claims a Ricardian theory which is limited in application.
“Debt overhang” theory is anti social, worry about debt while the issue is deflation.
It has been a while, I hope all is well.
Looks like parts of Vt took a lot of flooding.
Einstein said words to the effect ‘you cannot solve a problem with the same level of consciousness which caused it’.
Pumping the late bubble was done for Bush II reelection, to hide the tragedy of tax cuts, empire of war on credit and it exploded badly.
The change of consciousness needed is to GUT the fed and nationalize the large banks. Raise taxes! Cut the empire of war.
Change is difficult when the few benefitting billionaires need to give some for the 300M.
I too assumed that the Fed would do jack shit. We all assume we know what the facts will be. But you’re not supposed to say so.
Look how would it be if I wrote “Scott Sumner’s post vastly overstates the effectiveness of monetary policy in a liquidity trap, and, indeed, ignores the concept of a liquidity trap.” I would not face a high risk if eating my words, but I would display disrespect for the facts (not my intention) as well as for Sumner (my intention).
OK no big deal about the quotation marks.
Yes yes yes. If the Fed can legally buy underwater mortgages (and seriously who is going to stop them) then that would actually work. I absolutely agree with your proposal. Of course we both no that it is not gonna happen.
Who had heard of Peter Diamond ?!?
Look most monetary theory is based on his work. Kocherlakota is just one example.
The post (at Ezra Klein’s blog) also quoted a former Fed vice chairman.
My reading is that Krugman is very skeptical too.
many people who think the Fed should do more (including me) also think that the more that could do would help just a little and not a lot. Consider Krugman’s reaction to the announcement of QEII which was pretty much ho hum won’t hurt but no big deal.
on the PS if Republicans block approval the BOG seats stay empty. Staying empty without a nominee is just like staying empty with a nominee who has not been approved. What difference does it make.
on PPS Diamond would have done fine. He is an ultra inflation dove, and believes it is better to light one small increase in inflation than curse against the darkness.
Note that I know he is an ultra inflation dove so someone knows his views on monetary policy.
“Who had heard of Peter Diamond ?!? Look most monetary theory is based on his work. Kocherlakota is just one example.”
Huh?!? Most Monetary Theory is based on his work? What fantasy world do you live in?
“The post (at Ezra Klein’s blog) also quoted a former Fed vice chairman.”
Yeah I read that. Who’s name was that by the way?
“My reading is that Krugman is very skeptical too.”
Your reading is very much in accord with the voices in your head.
“many people who think the Fed should do more (including me) also think that the more that could do would help just a little and not a lot. Consider Krugman’s reaction to the announcement of QEII which was pretty much ho hum won’t hurt but no big deal.”
Most Quasimonetarists believe a target is necessary for without a target how are you to get anywhere?
“on the PS if Republicans block approval the BOG seats stay empty. Staying empty without a nominee is just like staying empty with a nominee who has not been approved. What difference does it make.”
How are empty seats better than a nominee who is in favor of more monetary stimulus?
“on PPS Diamond would have done fine. He is an ultra inflation dove, and believes it is better to light one small increase in inflation than curse against the darkness.
Note that I know he is an ultra inflation dove so someone knows his views on monetary policy.”
Diamond would have voted for nothing. How is voting for nothing better than voting for something.