Friday, September 14, 2012

Krugman on the Fed

Since the blogosphere has matured to some extent, I always wonder whether reposting other posts without commentary does much good. I assume you all read Paul Krugman, after all. Still, sometimes I can't keep up with everything in detail so when I see a couple people repost it focuses my attention on the important posts.

This is Krugman on the Fed, and I thought this was a good thought:

"It certainly sounds as if Bernanke is reacting to the Woodford critique, which argues that quantitative easing is mainly effective through its effect on expectations. While the policy does take the form of purchases of unconventional assets — mortgage-backed securities — Bernanke is not relying on portfolio balance effects alone; instead, he’s trying to move expectations by declaring that the Fed will continue to ease for some time after the economy has begun to recover...’s kind of vague. No clear target, whether nominal GDP or some kind of inflation/unemployment mix. Put it this way: you could imagine a future Fed chairman tightening policy in line with the same Taylor rule that seemed to describe policy before the crisis — a rule that suggests that interest rates wouldn’t start to go up until unemployment was below, say, 7 percent — and still being able to claim that he had not violated any promise Bernanke made. In other words, it’s not totally clear that we really do have a shift in future policy. And since the whole point is to move expectations, leaving this kind of wiggle room is not a good thing.

To paraphrase an old joke: what do you get when you cross a Godfather with a central banker? Someone who makes you an offer you can’t understand."


  1. At Williamson I posted this comment:

    What a fascinating display of human nature and agency problems.

    1. The Fed violates its mandate for price stability and causes what is charged to be a bubble in housing prices to be pricked, letting house prices collapse 40%

    2. To CYA, it now targets MBS, which sorta tends to show that it is trying to pump up housing prices. [Why didn't it commit to buy $85 billion a month in non-recourse small business loans. Seriously, why didn't the Fed agree to lend non-recourse to newly incorporated small businesses, not even requiring personal guarantees?]

    3. In theory this might result in some activity in the home market. I suppose a few unemployed people will qualify for a loan. :<)

    4. The fence sitters,like here, go blah blah blah. "I got most of it right" except the little part that it was $85 billion and not $40 billion :<)

    5. The GOP accuses the FED as siding with Obama. Why would cold bankers throw their lot in with a Democratic President?

    6. People who say the QE3 won't work don't understand why the stock market went up, admitting they know nothing about economics. Hint. Markets are irrational because people are irrational. Get out your Munger and Soros.

    7. Those of us who have altitude and perspective smile, for we know. It is all there in Gone with The Wind. The entire mental model of macro, and of much of our society of itself, is gone. We are in a period of history like that when Caesar crossed the Rubican. Our political institutions are so failed, see Roubini's new post on Project Syndicate, that we are operating in a vacuum. Roubini's last two paragraphs:

    Ineffective governments with weak leadership are at the root of the problem. In democracies, repeated elections lead to short-term policy choices. In autocracies like China and Russia, leaders resist the radical reforms that would reduce the power of entrenched lobbies and interests, thereby fueling social unrest as resentment against corruption and rent-seeking boils over into protest.

    But, as everyone kicks the can down the road, the can is getting heavier and, in the major emerging markets and advanced economies alike, is approaching a brick wall. Policymakers can either crash into that wall, or they can show the leadership and vision needed to dismantle it safely.

  2. Actually, I find that reading Krugman is tedious much of the time. Way too many posts about evil Republicans last time I checked which is a topic I find supremely uninteresting. And the fact that I can't get the whole post in my RSS reader is what sort of seals the deal for me. So I'm grateful when you and others re-post the interesting stuff he says.


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