I expect Congress will pass reforms that interest them (consumer protection), not reforms that address the crisis (banning sub-prime mortgages.) ...
I am one of the few macroeconomists who actually lived through the Great Depression. No, I’m not in my 90s, but I spent about 10 years reading every NYT from 1929-38, and many other papers as well. When you immerse yourself in a period in that way, you start to see events unfold as they were perceived at the time. There were frequent Congressional hearings looking for all sorts of scapegoats, especially evil Wall Street traders and greedy bankers. ... But even if it is understandable, it is still demoralizing to experience (in real time) the same blindness that I read about in the 1930s. ...
A managed exchange rate is first and foremost a monetary policy. ... The mistake is to view exchange rates through a trade lens, as a zero sum game. During a deep slump an expansionary monetary policy will raise both domestic and world output. Holding other monetary policies constant, a more expansionary Chinese monetary policy means a more expansionary world monetary policy, and this boosts world aggregate demand.
------------------
It's funny how often when you notice a pattern, it breaks down. Remember all the articles in 2005-06 about how real estate prices hadn't declined nationwide since the 1930s? ...
To summarize, the Tabarrok/Cowen model suggests that a negative 8% AD [Aggregate Demand] shock would
produce the sort of recession we just experienced, regardless of whether there were any banking problems, or any needed reallocation in the economy. ... [He admits this is a bit simplistic since] these undergraduate models need to oversimplify a very complex reality. ...Now let’s return to the Tabarrok/Cowen diagram and ask; “What should the Fed have done?” You may notice that they drew the point of macroeconomic equilibrium at precisely the point where there was enough AD to create 5% NGDP [Nominal GDP] growth. Hmmm, where have we heard that suggestion before? And their graph suggests that if you let NGDP growth fall below 5% you will get a slowdown, or even a recession. So the Fed should set monetary policy at a level where 5% NGDP growth is expected. This had been their strategy for several decades. But last fall the Fed abandoned the policy, letting NGDP growth expectations fall well below 5%, indeed even below zero.
I get frustrated by all these news articles and heterodox economists claiming that mainstream macro can’t explain the current crisis. The Tabarrok/Cowen textbook provides a precise prediction of what would happen if the Fed let NGDP fall 3%. And what actually happened is almost exactly what Tabarrok and Cowen predicted would happen under that sort of monetary policy. So if even an intro to macro text can almost perfectly explain this crisis, then what is the big problem with modern macro? ...
And speaking of textbooks, recall that I teach all my undergrads the following maxims from Mishkin’s best-selling textbook:
1. It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short term nominal interest rates.
2. Monetary policy can be highly effective in reviving a weak economy even if short term interest rates are already near zero.
-----------------------------------
Good monetarism uses the excess cash balance mechanism. It relies on the thought experiment that if you double the supply of base money in the economy, and the demand for base money is unchanged, then nominal expenditure levels must also double in order for money supply and demand to reach equilibrium. And that in the long run monetary shocks don’t have real effects, so any change in NGDP is attributable to prices, not output. ...
When the Fed changes monetary policy it adjusts the expected future path of the monetary base. It may signal its intentions by adjusting its target interest rate, but that target rate plays no important role in the transmission mechanism. Indeed market rates often move in the opposite direction from unanticipated changes in the target rate. Monetary policy is primarily about changing the number of dollars in people’s wallets. ...
Bad monetarism is focused on the banking system [and] sees monetary policy affecting the economy by first impacting the monetary aggregates through a “multiplier process.” In fact, the aggregates respond endogenously to the overall macro environment, which is determined by expectations of future changes in the supply and demand for base money, and hence NGDP. ... The problem with this approach is that when velocity is unreliable, the money multiplier is equally unreliable. In the US during the early 1930s velocity fell sharply. So did the multiplier. In the 1990s in Japan velocity fell sharply. So did the money multiplier. In the US in 2008 velocity fell sharply, so did the money multiplier. Do you notice a pattern? ...
Banking is only special [in] a few cases. For instance, government regulation of banks might create a large and time varying demand for base money. Or the public may hoard cash because they fear a banking collapse. Otherwise, banking is of no interest to monetary economics.
-------------------------------------
More and more I think this whole crisis was caused by [a] mysterious bout of mass stupidity.
PS. I suppose calling the whole world stupid, is well. . . kind of stupid. So just treat this as a cry of frustration.
No comments:
Post a Comment