Matt Yglesias

What Happened in 2004?

Over the weekend, Noam Scheiber offered a smart take on the question of Alan Greenspan’s interest rate policy between the bubbles:

Problem is, once you break the 2001-2004 easing into its 2001-3 and 2003-4 subcomponents, and you acknowledge that the point of the 2003-4 period was to prevent a deflationary spiral, Greenspan’s reasoning starts to look extremely circular. That is, Greenspan was lowering interest rates in order to prevent a costly deflation at the risk of creating a bubble which could lead to an even costlier deflation. But if you have the tools to prevent the costlier deflation from destroying the economy, then you have the tools to prevent the less costly deflation from destroying the economy, and there’s no need to pre-empt it.

Here’s a chart of the past ten years’ worth of interest rates:

As you can see, the very steep interest rate cuts during and in the wake of the recession are one thing. The additional lowering of rates in 2003 and the continuation of sub-two percent rates throughout 2004 is another matter. Meanwhile, there seems to be a taboo around talking about this, but it seems worth mentioning that while the low interest rates in 2004 were somewhat unorthodox monetary policy, they were almost certainly helpful to the George W. Bush re-election campaign.

Insulating GM From Politics

As Brendan Nyhan points out, no matter how sincere the Obama administration is about its desire to avoid politicized management of General Motors, in practice it’s hard to imagine a de-politicized state-owned firm. Members of congress are already putting their requests in and no administration can totally ignore congressional pressure. Meanwhile, “Even when the administration does not weigh in directly, the management of GM will be forced to consider what issues might draw political attention and adjust its strategy accordingly.”

Nyhan’s proposal:

Shouldn’t the government now bind itself to the mast and directly forswear intervention in the company’s decisions? For instance, after voting for a new board of directors, the Obama administration could transfer control of the government’s shares to a Federal Reserve-type board of independent experts. This step would free the administration of de facto responsibility for GM’s decisions and insulate the President from any resulting fallout. By contrast, political meddling is likely to hinder the company’s efforts to return to profitability, which would in turn harm the administration and the country.

This might be a good idea. But it’s worth emphasizing that even this doesn’t really solve the problem. The Fed’s independence, after all, is in many ways nominal. There’s nothing stopping congress from changing the laws that govern the Fed—including the provisions making it “independent.” Thus, in principle, a Fed chair can be swayed by informal political pressure. The reason the Fed is independent in practice is that Paul Volcker and Alan Greenspan built a strong political consensus around the idea of Fed independence so politicians don’t want to be seen as undermining it.

Earlier Fed chairs were much more inclined to do the bidding of the Johnson and Nixon administrations and this was a major contributor to the super-high inflation that emerged in the 1970s.

Food Prices Up

Food prices are jumping up and bringing the overall CPI up with them. The New York Times coverage implies that this means we should be less worried about deflation, but I’m not so sure.

Normally, in terms of setting interest rate policy the Fed focuses on the “core” rate which excludes food and energy prices. They do that because food and energy prices tend to jump around quite a bit in response to events in a way that’s not closely tied to the overall price level and macroeconomic condition. But of course the fact that food and energy aren’t part of “core” inflation doesn’t mean they aren’t real, or don’t matter to people’s lives. Now we’re in a situation where the core inflation rate remains dangerously low, meaning we still need to worry about deflation, but it’s also a situation in which food and oil prices are rising. That’s a lot of hardship for consumers, and it could do a lot to strangle recovery in the crib.

Additional Easing in Europe

The European Central Bank continues to seem pretty behind the curve in terms of recession-fighting tactics, but with today’s announced steps they’re at least moving in the right direction. Given that the EU’s balance of payments situation is much more reasonable than ours in the USA, it’s arguably more important to stimulate consumer demand over there than it is over here.

Volcker Says Not to Worry About Inflation (For Now)

These remarks from Paul Volcker mostly seem a bit too cryptic for me to comment on in a reasonable way. But I take it that Volcker has credibility as an inflation-fighter, so I hope people will listen when he says this shouldn’t be the worry for now:

“The inflation problem, which should be a real threat for the future, is not right on the doorstep,” he said. “But two or three years from now that may be the critical problem, how that’s handled. Because, given what the Federal Reserve has been doing, it’s going to be harder to retrace their steps, so to speak, than it ordinarily would be.”

What I see this as is mostly reason to be worried about a prolonged recession. At the moment, the Fed is engaged in massive expansion to get the economy growing again. That’s smart. But if it works, then we really will need to start worrying about inflation. But efforts to curtail inflation could mean that even when we do return to growth, it’s sluggish growth carried out in the face of monetary contraction.

Deflation

I’ve gone a few rounds with some readers over this, but the reason I don’t want policymakers to be worrying about inflation is that we’re very close to a period of deflation. The recently released March CPI numbers, for example, saw the cost of living falling. That was nice for me, personally, since I have a job and I don’t think I’m at great risk of being laid-off in the short term. But it’s very troubling for the economy as a whole. The party line was that we shouldn’t panic about deflation because the “core” CPI—excluding volatile food and energy prices—was slightly positive.

But via Ryan Avent at his new Portfolio.com digs, I see that “more than 60 percent of the gain in so- called core prices came from an 11 percent jump in tobacco products,” a jump that was tied to a one-off tax increase to pay for children’s health care expansion.

The economy, in other words, is still under huge deflationary pressure. And that’s very bad. Businesses that are able to expand will tend to choose not to expand if they anticipate that prices will drop. And consumers will tend to delay discretionary purchases if they anticipate that prices will drop. And these deflationary expectations can form positive feedback and get us into a cycle out of which it’s very hard to break.

Unconventional Monetary Policy and Central Bank Independence

Central bank independence is based on a weird set of political conventions. This starts with the fact that the Fed isn’t really all that independent. Congress could, pretty easily, boss the Fed around. They write the laws, they created the system, they can do what they want. They just choose to ignore that. Meanwhile, under normal circumstances the Fed basically pretends that it’s just making technical decisions and technical adjustments. Doing something called “setting interest rates.” The idea that there are political tradeoffs here, or that the Fed is actually buying and selling stuff on the market is basically kept out of sight.

Lately, though, we’ve been having a lot of unorthodox monetary policy. And when monetary policy gets unorthodox, it gets out of the usual routine ways of talking about. People start paying more attention to what’s really happening, and asking questions to try to understand it. And as the later parts of this Ryan Grim article on the Fed’s latest moves makes clear, that winds up threatening the bank’s independence:

The Fed is already printing trillions of U.S. dollars and pumping them into the global economy in an effort to stave off a financial collapse. Now it plans to start injecting foreign currency, too, according to minutes recently released from its March meeting. [...] Rep. Alan Grayson (D-Fla.), after reading the minutes, describes the Fed plan as “a massive transfer of wealth from the American people to who knows where,” calling it a “round-about bailout.” [...]

On Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) called for the GAO to have more authority to investigate the Fed. Grayson says Frank has told him on numerous occasions that Congress needs a better idea of what it is that the Fed is doing.

On Wednesday night, House Speaker Nancy Pelosi (D-Calif.) called on the Fed to post its financial transactions online during a conversation with the Daily Show’s John Stewart. She plans to address “Fed authority” when Congress returns.

Some would say that this is a reason for Bernanke to chill out with the unorthodox moves. Better, this school of thought would go, to more jealously guard the institutional prerogatives of the Fed than to take risks by a making unorthodox moves. My sense is that that’s at least part of what’s going on with the European Central Bank. It’s a new institutions trying to establish its credibility, both in political terms and as an inflation-fighter, so the ECB is willing to take huge risks with the global economy rather than take risks with the bank itself. I think Bernanke, by contrast, is making the right call. And I hope that Pelosi and Frank will realize that, though the circumstances may well call for more disclosure than currently exists, neither of them actually wants to be in a position where they’re setting monetary policy for the United States.

Jean-Claude TrichFAIL

The conventions of central bank independence dictate that the bizarre behavior of the European Central Bank not be discussed at the G-20 meeting, but with the ECB cutting rates by less-than-expect, bank chief Jean-Claude Trichet seems to be continuing his campaign to drag the world into years of depression.

This whole issue continues to be generally under-discussed. It’s widely understood in the United States context that Ben Bernanke is one of the very most important economic policymakers in the country. He’s probably the number two guy after Barack Obama. But the Eurozone’s economic output is about the same as that of the United States—it varies according to the exchange rate of the day. This means that Trichet is about as important as Bernanke, and probably more important than any of Europe’s elected officials. He’s a top-five guy in terms of determining the economic fate of the globe. And he’s a rare dissenter from the general view that the current downturn is a true crisis that requires emergency measures. This is a big deal and, if he’s wrong, a very big problem.

Reps Bachmann and Hoekstra Continue to Foster “Global Currency” Conspiracy Theories

Representative Michelle Bachmann (R-MN) continues to fight the good fight against the plan to replace the United States dollar with a new global currency. It’s true that there is no such plan, but her bill to ban the Treasury Department from implementing it already has 31 co-sponsors. And Dave Weigel reports that non-cosponsor Pete Hoekstra (R-MI) might be getting on the bandwagon:

“I’m watching Neil Cavuto,” said Hoesktra, “and I see [Treasury Secretary] Tim Geithner is talking about how he might be OK with a world currency. I don’t think Americans are going to be comfortable with that. You’re going to see things that people perceive as eroding American sovereignty—this is something that’s clearly un-American. I mean, here’s the secretary of the Treasury, and instead of defending the United States and defending our currency, he’s saying he might be open to a world currency. What does that mean? It means turning our currency over to the UN.”

For the millionth time, the proposal under discussion was for other countries—i.e., not the United States—to start moving away from near-exclusive use of the dollar as a reserve currency. This has nothing to do with American sovereignty or the United Nations. And, again, neither congress nor the Treasury Department can force other countries to use the dollar as a reserve asset.

Members of the opposition might want to consider spending more time figuring out what their budget proposals say and less time pushing weird conspiracy theories.

The Specter of Inflation

Like Ryan Avent, I don’t really get worrying about inflation in the current circumstances. It’s like if your house was on fire and you were worrying that the fire department’s hoses were going to wreck your television. It’s not irrational to say this might happen, but it’s very strange to be focusing your attention on it.

Basically, if we get into a recovery, then there will probably be some inflation. If that’s a modest amount of inflation, that’s fine or might even be a good thing. But it’s reasonably likely that the inflation might get problematic, in which case the Fed would have to try to tighten quickly. And if that happens, there’s a fair chance that they might tighten too quickly and we’d wind up in a “double dip” recession. That really might happen (but then again it might not) but at worst we’d be more-or-less back where we started. By contrast, there are plenty of other things that might go wrong and leave us in a much worse state than we’re currently in. So inflation is pretty far down my list of worries.

That said, there are particular classes of people for whom inflation would be a very worrisome prospect. If, for example, you’re a tenured professor with no real chance of losing his job who’s also amassed a responsible quantity of savings, then inflation is a pretty bad scenario for you, personally. But that’s hardly reflective of typical conditions in the country. Thus, I think you may see inflation fears overstated among economics commentators relative to how troubling the possibility really is.

House Republicans Endorse Higher Unemployment Rates, European-Style Central Banking

Most commentary on the House GOP “budget” released today has focused on its not-very-budget-like lack of actual budget estimates. How much money would they have the government spend? And on what? And how much revenue would the government take in after their tax changes? Such questions are not addressed. However, another point of interest in the “plan” is that it stakes out some fairly radical positions on monetary policy near the end. They condemn the Fed’s current quantitative easing strategy and, somewhat confusingly, specifically urge the Fed to stop doing this on the grounds that listening to the Republicans is necessary to preserve the Fed’s independence. They “support a requirement that the Fed establish some numerical definition for price stability and maintain that policy.” And most strikingly of all for a party that mostly defines itself in opposition to the dread specter of Europe these days, they want the Fed to abandon its current generalized prosperity mandate in favor of a European Central Bank-style pure inflation target:

In addition, Republicans support amending the Humphrey-Hawkins Full Employment Act, which currently diverts the Fed’s attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, contributing to the present crisis and a loss in public confidence of the institution.

If you want to make a serious inquiry into the roots of persistently high unemployment in many European states relative to the United States, one great place to start would be in the policy difference that the GOP wants to eliminate here. The European Central Bank has no mandate to concern itself with keeping unemployment low. Consequently, unemployment is generally not low.

Meanwhile, to put these concerns in context it’s worth observing that we haven’t actually had a Democratic Fed chair in over 20 years and that the last one we did have is known as the man who finally whipped the inflation of the 1970s. But Alan Greenspan and Ben Bernanke are hardly left-wingers. They’re both people with views of monetary policy grounded firmly in mainstream economic thinking, with political views grounded firmly on the right. Before Bernanke was put in charge of the Fed by George W. Bush, he was chairing Bush’s Council of Economic Advisers. I think it’s nice that the GOP has decided, in at least one respect, that the “more Bushism” approach isn’t the way to go, but it’s a bit odd that they’ve decided that we need to go in a much more conservative direction.

Bachmann Introducing Bill to Ban Use of Made-Up Global Currency

The madness continues as Michele Bachmann introduces legislation that “would bar the dollar from being replaced by any foreign currency.”

What the Chinese were proposing, of course, was to replace the dollar as the world’s reserve currency. I would take the view that a move away from near-exclusive reliance on the dollar is probably inevitable irrespective of what we do. But whether or not you agree with me about that, this isn’t something congress can ban—it’s a decision by foreign countries about what they do with their reserves.

Nature Decays, But Latinum Lasts Forever

With Fox News and Drudge stoking fears of a new global currency the question naturally arises of what to call the currency. One option, based on analogy with the Euro, would be to call it the Globo. On the other hand, part of the appeal of “Euro” is that it’s solid multi-lingual word—something that works as well in Portugese as it does in Finnish. On the world-wide scale, I’m not sure there’s anything truly similar that works.

One leading contender in the future monetary policy literature is the “credit” found in Galactic Empire’s as varied as George Lucas’ and Isaac Asimov’s. There’s also the “cubit” from Battlestar which actually manages to stay in use despite the near-total destruction of humanity.

But Glenn Beck should consider that the left’s agenda goes considerably beyond a black helicopter-based global monetary system. The ultimate aim is to establish a Star Trek-style post-capitalist society in which there’s no currency whatsoever. Fortunately, the Trek universe does provide some refuge for the right—the Ferengi who stand strong against the collectivist proclivities of their Alpha Quadrant neighbors. They, of course, have moved beyond fiat currency to a sound money system based on the un-replicatable liquid latinum; used in its gold-pressed form as a convenient means of exchange.

Right-Wing Echo Chamber Fomenting Panic About Fake Sino-Russian Global Currency Plan

Zhou Xiaochuan, head of China’s central bank, suggested earlier this week that we might need to transition away from exclusive reliance on the US dollar as a global reserve currency through the creation of a “super-sovereign reserve currency.”

I couldn’t possibly speak in detail about the merits of that proposal. But in a broad sense, the creation of the Euro, the integration of Russia into the global economic system, and the rising economic significance of China, India, and Brazil all argue toward the long-term adjustment of global economic institutions to a less dollar-centric dynamic. When these things were put into place, a large swathe of the world was Communist and not participating in its mechanisms, Europe was a land of many currencies, and the poor world was much poorer. Over time, things change. Meanwhile, a phrase like “super-sovereign reserve currency” is going to be confusing to most people. One thing political media and political leaders could do is try to explain it to people. Instead, as Ali Frick observes, Matt Drudge teamed up with Rep Michelle Bachman (R-MN), Glenn Beck, and Major Garrett to generate a massive freak-out about a U.N. conspiracy to create a “global currency” and “tie the entire globe together into one big government.” Check out TP’s video montage:

For any given insane freak-out, a majority of conservatives don’t happen to participate. But the non-participants don’t do anything to disavow their confrères doing the freaking-out. Some fuel anxiety about a mythical mag-lev train to Las Vegas. Others are now scaring people about a global currency. The other day, I saw Judd Gregg (R-NH) saying the United States was going to go bankrupt*, a hugely irresponsible step that no doubt isn’t making the Chinese feel any better. And almost nobody in the conservative media seems to feel that actually calming and informing their audience is part of their job.

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Quantitative Easing 101

Here’s a nice primer from the Financial Times on quantitative easing. When trying to understand this, it’s worth keeping in mind that the name “quantitative easing” is very non-descriptive and I have no idea how it got this label. So don’t try to think about what those words might mean, just pay attention to the description of what it is.

Meanwhile, Larry Kudlow finds the inflationary potential of this move so terrifying that he’s setting money on fire which, as Ryan Powers observes, is actually illegal:

Spurring Kudlow’s inflationary expectations is, however, actually part of the idea. One problem the US economy is having right now is that even though I’d kind of like to buy a new MacBook and have the money in my bank account to pay for a new MacBook, I’m not buying a new MacBook. Why? Well, because I don’t really need one, and I keep having this feeling that they’re going to start being discounted soon once Apple realized that nobody wants to buy their super-expensive laptops amidst a cataclysmic recession. I have, in other words, deflationary expectations. These kind of expectations, when widespread, become self-fulfilling as all kinds of spending on non-necessities collapses. Change those to inflationary expectations and I think, hey, I’d better buy that today because it’ll cost more next week. And that helps the economy grow.

Obviously, this is the kind of thing that can be taken too far. And it is true that if aggressive Fed policy succeeds in returning us to growth, we will soon enough need to deal with the prospect of problematic inflation—either in the sense that the level might get too high, or that we might see increases of an accelerating character. Which is certainly a good reason to wish we hadn’t gotten into this situation. But it’s not a good reason to eschew the methods that are most likely to get us out of it.

Cato’s David Boaz Turns Goldbug

The Cato Institute usually doesn’t mess around with the way-outside-the-mainstream elements of the libertarian worldview (see Chris Hayes for some of this) and certainly not with the elements of hard-core anti-statism that the business community would find very distressing. But with the economy in crisis, a lot of people are feeling somewhat ideologically discombobulated (myself included, at times) so I suppose it’s not shocking to see some loopy ideas moving closer to the mainstream. At the same time, there’s another trend that Brad DeLong’s been calling attention to, namely the fact that the present crisis has reached a level where even Milton Friedman’s ideas suggest that we should be doing stimulus. Brad, with touching naiveté, seems to think that that means that people normally inclined to admire Friedman should start agreeing that stimulus is a good idea. What’s happening, in fact, is that people normally inclined to admire Friedman are embracing fringy “Austrian” ideas (or Ayn Rand books) since the point of admiring Friedman is to reach the conclusion that government intervention is always economically ruinous.

All of which is by way of introducing the fact that Cato Institute Executive Vice President David Boaz apparently thinks we should adopt the gold standard and abandon “fiat money.” Of course, contractionary monetary policy amidst a sharp worldwide recession would doom us to years and years of misery. And during the Great Depression, nations’ ability to recover was strongly linked to their willingness to abandon gold.

Paul Krugman’s old post on “The Goldbug Variations” is always worth re-reading.

Greenspan: Greenspan is Not to Blame for the Housing Bubble

I’m not entirely sure what to make of what Alan Greenspan has to say on his own behalf. But I am quite sure that he’s dodging what I would think would be the main issue Alan Greenspan needs to address regarding Alan Greenspan and the housing bubble, namely the time Alan Greenspan fueled the bubble in 2004 by urging people to go get Adjustable Rate Mortgages. Now I don’t know how much impact that advice had. Or how much impact advice given in the other direction might have had. But I do know that it was weird for Greenspan to even be commenting on the issue. And that his advice was bad advice. In retrospect, it looks disastrous. Even at the time, many observers found it bizarre.

At the time, recall that Greenspan was treated as an oracular figure. An economic miracle-man who’d run the show from Reagan through Bush and Clinton into Bush II. An irreplaceable “maestro” whose unique genius was the architect of our prosperity. So I’m inclined to say that his remarks on all kinds of subjects had influence.

In retrospect, he says we were in the early days of an unsustainable worldwide housing bubble that it would have been inappropriate for the Fed to pop by raising interest rates. He could have said that at the time. “Some people say current housing prices are sustainable, others say they’re an unsustainable bubble that I should pop with interest rates; in my judgment, both are wrong—the bubble is real but interest rates are the wrong cure.” Instead, Greenspan urged people to run out and get ARMs!

Monetary Policy is Policy; The Fed is a Government Agency

Justin Wolfers offers up a chart showing economists’ greater interest in research questions relating to monetary policy and remarks:

I’m not sure why fiscal policy is the ugly stepsister. Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role.

This reflects one of the weirdest features of contemporary discussion of the economy, the idea that monetary policy somehow isn’t a “government role” in the economy. To this day I remember when I was in eighth grade and my father first explained to me that there was a man named Alan Greenspan who ran a government agency that watched with an eagle eye for the day when there might be an insufficient number of unemployed people. If too many people had jobs, he was supposed to swoop in, tighten the money supply, and make sure some people lost their jobs. Otherwise, wages might get too high! This was followed by a small disquisition on Marx and the reserve army of the unemployment.

Today, I’m not a Marxist. But I do recognize that public policy has a pervasive impact on the economy, not only through the actions of Congress and the White House but through monetary policy. As you can tell from the name, monetary policy is a kind of policy. And the Federal Reserve is a government agency, even when it’s run by an Ayn Rand acolyte. That doesn’t mean you have to turn into a Communist. But insofar as right-of-center economists are worried that admitting to the efficacy of fiscal policy as a macroeconomic stabilizer will legitimize all sorts of other policy interventions, we need to understand that admitting to the efficacy of monetary policy is just the same from a logical point of view.

Worries and Options

Paul Krugman notes that the economy is falling fast and it may be difficult to bring stimulus to bear all that rapidly:

Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 — and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.

So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.

This is one reason why I think it’s important for a stimulus package to have a heavy element of aid to state and local government and related agencies. The federal government contains a lot of automatic stabilizers (spending keeps going even though revenues fall) that should act as stimulus, but those stabilizers are offset by the pro-cyclical nature of state and local budget practices. A federal promise of aid will forestall state and local budget cuts, and thus allow the automatic stabilizers to work. All that can be mobilized on a rapid time scale. Somewhat similarly, the federal government could pledge funds to transit agencies in order to finance fare cuts rather than the contractionary combination of fare hikes and service cuts that we’re currently looking at. Add “a few tens of billions” worth of shovel-ready infrastructure projects, and you might be getting somewhere.

But beyond that, it does seem that it’s important to not just say “conventional monetary policy can’t do any more, so we need to rely on fiscal policy” and hope for the best. My understanding is that there’s such a thing as “nonstandard monetary actions” that the Fed can undertake to try to produce monetary expansion. I won’t try to pretend to really understand what those are or how they work, but it seems like an important and potentially promising line of inquiry and I will hereby commit to reading something about it later.

Ideology and What Matter

Dave Boaz offers links to a variety of Cato products on Alan Greenspan and the Greenspan legacy. What’s interesting is that there’s no consensus whatsoever. And yet, libertarianism is probably more prone to consensus-building than other ideologies. And of course people with progressive views disagree a lot about Greenspan’s monetary policies.

What’s telling here is that the Chairman of the Federal Reserve is the second most-important person in the American government. As Brad DeLong details in an excellent American Prospect article the Fed has incredibly sweeping powers over the economy. And those powers give the chairman leverage — and thus, in effect, more power — over other areas of policy. And yet knowing which broad ideological family someone subscribes to tells you very little about his likely views on monetary policy. But it’s a hugely important subject. Which I think tells us something about the bounded relevance of these ideological considerations.

Hope for America

Ron Paul supporters outside the Target Center try to co-opt Barack Obama’s “hope” message: