Dems Need to Pay Attention to Monetary Policy!
I’m not nearly the first to this party, but want to bring it up for my readers who may not be clued in to it.
For the second year in a row, some of the best economics bloggers on the Web (this year: Matt Yglesias, Mike Konczal, Karl Smith, Lisa Donner), did a session at Netroots Nation on monetary policy, and how the progressive left (including Democratic lawmakers) needs to saddle up and counter the destructive right-wing influence in this area.
Why the Fed is the Most Important Economic Issue You Know Nothing About
This is a big deal. Monetary policy often, even usually, has a far more potent effect on national well-being and the distribution of wealth and income than the fiscal policy that progressives consider to be so important. (At least in the short- to medium term.) Those fiscal issues are important. But ignoring monetary policy is like ignoring coal plants in discussions of global warming.
Lefty idol Paul Krugman has given this example a zillion times: when Volcker opened the monetary taps in ’83 (after clamping down to tame inflation), the economy — and the employment situation — turned around hugely, within months. That was something of a special case, but it imparts the potential power and immediacy of monetary policy compared to many/most fiscal initiatives, which usually take quite a while to play out, and are rarely large enough to be big short-term game-changers.
But in the political realm, Democrats have largely ceded their voices to the ‘Pubs (HT Ryan Cooper) and their inflation hysteria (which survives like a zombie that won’t die, year after year, even while being wrong, year after year):
“I wish you would take QE3 off the table,” said Texas Rep. Kevin Brady, the ranking Republican on the committee. “I wish you would look the markets in the eye and say that the Fed has done too much.” Similarly, Sen. Jim DeMint (R-SC) complained to Bernanke that many of the stimulative measures the Federal Reserve has taken “are giving us a false sense of security.”
By contrast:
The ranking Democrat on the committee, Sen. Bob Casey, merely inquired, in a neutral tone, whether the Federal Reserve was planning to take further action. Bernanke simply replied that the Fed was still contemplating the matter, and a lot depended on whether “there will be enough growth going forward to make material progress on the unemployment rate.” (Fed officials meet on June 19 to discuss their next steps.)
The Fed is supposed to:
1. Provide for both stable prices and full employment.
and
2. Be politically independent.
But:
1. It has criminally abdicated its responsibility for employment in recent years, while fetishizing its inflation mandate.
2. It is subject to political pressure, as the quotations above make clear.
More proof of #2, from Binyamin Applebaum (HT Matt Yglesias), quoting Eric S. Rosengren, president of the Federal Reserve Bank of Boston:
“We’ve done things that are quite unusual. We’re using tools that we have less experience with,” Mr. Rosengren said. “Most of the criticism has been that we’re being too accommodative. That is a concern that we have to put some weight on.”
It’s time for progressives and congressional Democrats to start exerting some of that pressure. Pay attention, people!
Cross-posted at Asymptosis.
Yeah, 1980, kill the inflation with 19% rate. Since then investments believe they they need to get 20, 30, 40% or more. The old 10% thingy, it’s a myth like the other “good old days”.
Also, QE1, 2, and all the rest of money dumping let to 93% of the income going to th etop 1%. The rest of the economy, the labor economy, didn’t do much.
I’m sure the conservative/Paul/fiat money argument needs to be pushed back against. However, I see no way for anything the Fed does to reverse what is our economy currently.
Then we have Mike work on the Fed and what they historically have done around the time of presidential elections.
Finally, I think any economy would reverse dramatically after seeing rates hiked to 19%. It’s that 100% return on a penny stock vs Google’s shares.
Fed only controls interest rates. Does not control jobs, does not control money supply, does not control household debt levels.
Are you proposing negative interest rates ? Oh wait, the rates on inflation-indexed bonds are ALREADY negative. Never mind.
Re: 1983. Oil prices fell, budget deficit increased. But Volker gets all the credit ?
QE removes interest income from the economy, shifts investments into riskier assets, driving those asset prices up, enriching the 1%, and leading to speculative bubbles.
Answer is fiscal policy, not Fed policy.
Steve: Yes!
You need a good slogan. Maybe: “Yes we can! (get the Fed to target 5% higher NGDP)”
I am reminded of this quote from Keynes, October 1939: Keynes attacks the attitude of the intellectual Left to the war, writing in The Times:
“The intelligentsia of the Left were the loudest in demanding that the Nazi aggression should be resisted at all costs. When it comes to a showdown, scarce four weeks have passed before they remember that they are pacifists and write defeatist letters to your columns, leaving the defence of freedom and civilization to Colonel Blimp and the Old School Tie, for whom Three Cheers.”
I expect I’ve come close to violating Godwin’s Law, and Scott Sumner isn’t really like Colonel Blimp, but it still resonates a bit.
Dan
according to Greider, who seems to have done a lot of talking to those who know, and doesn’t seem to have an axe to grind, the recession of 82 was all due to the Fed chasing a money supply problem that didn’t exist and driving up interest rates in the face of a recession…. apparently to the happiness of the bankers and “pain” to ordinary workers. when the results of that policy looked like bankrupting the banks (Mexico could not pay its debts. Neither could the people the Banks were lending to in Texas) the Fed reversed. Then took credit for saving the country.
The budget deficit was already in the works. And I never thought the oil prices were inflationary absent Fed policy. Greider doesn’t even mention oil prices.
Steve
I think the Congress turned over monetary policy to the Fed because it’s too important and they don’t want to take the blame.
In any case, don’t expect the Congress to actually DO anything if they can’t see how it wins them votes. It’s so much easier to shout slogans on TV.
Nick
I think you have the intelligentsia of the Left pegged.
now don’t get me wrong. i am leftier than thou. That’s the problem.
Dan,
Actually, the Fed only controls the money supply, and even that isn’t true – it controls how many bonds (and which ones) it is willing to buy or sell, and what its reservation price happens to be.
In theory, that sets interest rates and MS. In theory, more (real) MS means lower (real) r. The problem with Krugman and others is this assumption that you can’t do anything with MS when r is close to the zero bound. That would be true if there was a fixed relationship between MS and r. But the theoretical relationship between real MS and real r goes off the rails sometimes. Feel free to run some numbers and check.
It is an election year with an incumbent Democrat. The Fed will do only the bare minimum to try to prevent a recession. It will not try to increase growth or reduce unemployment unless it is necessary.
It is an election year with an incumbent Democrat. The Fed will do only the bare minimum to try to prevent a recession. It will not try to increase growth or reduce unemployment unless it is necessary.
It is an election year with an incumbent Democrat. The Fed will do only the bare minimum to try to prevent a recession. It will not try to increase growth or reduce unemployment unless it is necessary.
This is the stupidest single meme on the left, in my opinion. The Fed can backstop the banks, but has little power to affect consumers and get more money in circulation. The whole business of NGDP targeting is beyond belief. It’s the equivalent of a placebo policy. Give the people a sugar pill and the placebo effect will infect the animal spirits. But the real vigilantes are those who can tell when the leaders are bluffing, and NGDP targeting is one big bluff.
Or would Nick Rowe care to tell me what the Fed will actually to meet NDGP targets?
Even the usually down-to-earth Atrios is spouting nonsense on this issue. “The Fed should give free money to everyone”, he says. Is this, or is this not, complete nonsense? That is not something that the Fed can and should do. Yglesias and Krugman are equally off course here.
Oh, and Nick Rowe thinks that we should blame the Fed for something they have little control over because the left were pacifistic in the face of the Nazis. Or something….
what the fed decides to do is different than what it can/could do. if the fed wanted it could give americans 5,000, it could require people who take this money to use half of it for purchases or many other things; the fed could also use banks to fund massive infrastructure products. the power and ability of the fed is near limitless and to unleash this we need fed board members who want to improve the economy an who are willing to do it
the fed can. it already gave trillions to banks and with a few tweaks could give it to people. further more doing this would create millions of jobs and expand production how you can think that jobs are nonsense is a testament to your stupidity
Oh really. The Fed could give trillions to the general public? Bernanke could do a helicopter drop? I don’t think so. Please tell where the Fed is authorized to do that.
This is the kind of non-reality based thinking that has no place in a reality-based community. The military could confiscate money from the 1% and give it to the 99%. But’s it’s not gonna happen and shouldn’t happen. Same for the Fed doing a helicopter drop.
There are enough people to blame for the economy without blaming people who aren’t responsible. As Jesus said, those of us who throw stones should be a little more selective…
Ben Bernanke’s Office Phone Number Given Out at Netroots Nation Keynote
so call him! 1- 202-452-2955
And tell him to do what??
as far as i’m concerned, it wouldnt matter what you told him, i aint convinced that he could do much…but steve closed his post with:
It’s time for progressives and congressional Democrats to start exerting some of that pressure. Pay attention, people!
& that’s what i was responding to…
There’s nothing more the Fed can do in terms of conventional monetary policy. If we’re going to ask them to do something unconventional, we should at least have a specific suggestion in mind.
And “target NGDP” doesn’t count as that is nothing more that than words with no actions to support the words. The idea seems to be to demand that the Fed do something which makes no sense and that they therefore will never do. Our energy will be wasted.
We need fiscal stimulus, and that is where our energy should be directed. Also, we need to call out the Republicans for sabotaging fiscal stimulus and promoting austerity…
Dan:
First the Dems have to have balls and so far they are a bunch of capons. I told Durbin one time, it would be nice if the party of the majority began to act like the party of the majority rather than the party of the minority it used to be. It would just take one with the same ilk as Liberman to self destruct in the senate and hold it hostage.
The answer to our current situation is simple but painful. End fiat currency and fractional reserve banking. Commodity based money will be resistant to debasing, and the elimination of fractional reserve banking will eliminate the fraud that is inherent in the current Fed system. Yes, this is a pie in the sky answer, but it is THE answer. Unfortunatey, the politicians and bankers in BOTH parties would never go along with it. This would curtail a lot of the government’s ability to deficit spend because money couldn’t be created out of thin air. The bankers would have an absolute fit! Their influence would be severely curtailes. Ahhh, the fantasyland that is sound money. So very alluring, unless you are one of the connected sucking the life out of the current system.
The answer to our current situation is simple but painful. End fiat currency and fractional reserve banking. Commodity based money is resistant to debasing, and the elimination of fractional reserve banking will eliminate the fraud that is inherent in the current Fed system. Yes, this is a pie in the sky answer in the current political climate, but it is THE answer. Unfortunately, the politicians and bankers in BOTH parties would never go along with this. This would curtail a lot of the government’s ability to deficit spend because money couldn’t be created out of thin air, and the bankers would have an absolute fit seeing their influence severely curtailed. Ahhh, the fantasyland that is sound money! So very alluring, unless you are one of the connected sucking the purchasing power of the dollar out of the middle class for your own personal gain.
“We need fiscal stimulus, and that is where our energy should be directed. Also, we need to call out the Republicans for sabotaging fiscal stimulus and promoting austerity…”
Dan,
Have you ever heard of malinvestment? If there was a demand for products and services by the market, the money would flow there. All you’re doing spending more money is piling more immoral debt onto those in the future who have no say in how you are wasting their future confiscated earnings. You need to suck it up and take your medicine, not just pass more pain on to those in the future, so you can avoid the resulting discomfort of big-government progressive policies.
Bryan– IMO there are several basic errors in your logic. 1) Fiscal stimulus need not result in malinvestment. It can be tax cuts, for Pete’s sake. The basic concept is that money is injected into the economy via fiscal deficits and that this stimulates demand for the almighty market. 2) There are a lot of areas not served by the almighty market. That’s why we have government provide many essential services, and inventing stuff like the Internet. 3) The whole concept of the future paying off our debts is bogus. Once the money is spent, it is spent, regardless of whether the spending is in cash or bonds. Bonds are as good as cash in terms of liquidity.