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Thursday, December 22, 2011

Fed Policy Failure As Root Cause

I decided long ago to not read Scott Sumner, but I'm not bigoted about it.  Karl Smith directs us to this post by Sumner, in which he does a clever personal riff on a Wittgenstin quote.

In the context of the great recession we are still enduring, Sumner uses this to blame the Fed.  He says this in comments to his post, at 14:13 on 16 Dec,. re: the Fed.

 They intervene every second of every day. They control monetary policy and hence NGDP. 

And this:

The crisis of 2008 was caused by tight money at the Fed. They deviated from their normal dual mandate in September 2008, and it was all downhill from there.

There is probably a good argument that the Fed was following tighter policy than they should have around that time - and quite possibly had been for a considerable while.  But the view that monetary policy is omnipotent seems awfully one-dimensional to me.  I cite the inability of QE money to spur the economy - it has mostly wound up in excess reserves. This view also implicitly dismisses the idea suggested about 20 minutes earlier by commentor Donald A Coffin, that capitalism has some level of inherent instability -- which Sumner simply shrugged off.

The idea that that the Fed is intervening during seconds, hours, days and weeks on end, when they make no policy decisions at all seems to be a reach too far.

The really striking thing, though, is the accusation that that the Fed made a policy turn in September, 2008.  Does anybody have a clue what they might suddenly have started doing differently?

Later in comments, flow5 says:

That’s not exactly what happened. Bernanke tightened MVt for 29 consecutive months. The Case Schiller housing index peaked @189.93 when Bernanke initiated his tight money policy. Based upon the FED’s technical criteria (interest rates), the 4th quarter contraction in 2008 was already “set in stone” beginning in Jan of that year. I.e., the Fed’s failure to prevent NGDP from falling started long before the economy collapsed.

In the midst of all this, what I find most puzzling is Sumner's insistence that a market in NGDP futures contracts will lead to stable levels of NGDP.  This is the highest order of dog wagging I have ever seen suggested to any tail.


BadTux said...

From what I can tell, the Fed did everything they were supposed to do. The policy failures happened on the fiscal side of things. You can't just print money and watch it go under mattresses and expect that to accomplish anything other than lumpy mattresses (or lumpy virtual mattresses at the Fed anyhow). The money has to be spent. And it has to be spent *here*, hiring Americans to do useful things here in America, which is why Helicopter Ben hasn't ramped up his helicopter fleet to drop dollars over every residential neighborhood in America -- all those dollars would simply go over to China and make *their* vaults lumpy while employing Chinese, since we don't make anything here anymore. Okay, I exaggerate a bit for effect, but you get the point -- printing money does nothing for the idle resources of America if it's not spent here in America on goods made in America by Americans.

If you want to look at a bank that *really* has been Fail(tm), look at the ECB, which only *now*, four years after it was needed, has started any sort of quantitative easing -- and in only half the quantity needed. Wow, I'm so impressed...

- Badtux the Snarky Economics Penguin

Jazzbumpa said...

The policy failures happened on the fiscal side of things.

Well, that's what I think. But I don't believe the word combination "fiscal policy" exists in Sumner's lexicon.

That's only one of the reasons I can't take him seriously.