Sometimes I really think Scott Sumner is the Deep Throat to my Bob Woodward. He leaves really obvious clues on his blog, but because of his prestigious position at Bentley he can’t connect all the dots. Yet he knows that I am out here, reading, and won’t let him down.
For example, Sumner starts off this recent post by expressing outrage at the hatchet job that his former professor, Frederic Mishkin, suffered at the hands of the documentary “Inside Job”:
I’m not happy about having to criticize Frederic Mishkin’s money textbook. He was my teacher at Chicago and he seems like a great guy. I’ve used his text for roughly 20 years and it’s a fine book. Even worse, he was recently victimized by an unfair and misleading ambush interview. But I must pursue The Truth wherever it takes me.
Now, if you haven’t seen the short clip, you really should. Just click on Scott’s link and watch; it’s under 2 minutes (though I had to watch a 30 second ad for a smart phone). The video alleges three misdeeds on Mishkin’s part:
(1) He naively went along with his colleagues by giving the benefit of the doubt to central bankers in Iceland that they knew what they were doing.
(2) He was paid $124,000 by the Icelandic Chamber of Commerce to write a 2006 paper–titled “Financial Stability in Iceland”–but didn’t disclose in the paper itself that he was paid.
(3) He lists the paper on his resume with the title, “Financial Instability in Iceland.” (For people who don’t get it, note the slight change in title, and remember that Iceland’s financial system crumbled after Mishkin gave it a clean bill of health in this 2006 paper.)
Of the three alleged sins, I am not sure how to rate (2). Before this episode with Mishkin, I would have said that of course any self-respecting economist would note organizations that funded a particular research paper, either as a courtesy to them (i.e. to make sure the sugar daddies see all the good work that their checks are producing), or as a statement of possible bias to the reader. (To take an exaggerated example, if a medical doctor did a study of mouth cancer and said cigarettes don’t cause it, and he were paid $124,000 by tobacco companies, most people would think he should acknowledge, “This research was made possible by a grant from the Virginia Slim Foundation” or something. It doesn’t mean the guy’s research is wrong, it’s just a standard disclosure.)
Now in Mishkin’s case, I don’t really know what the norm would be for something like this. As some of his defenders have pointed out numerous times, it’s not like this was a refereed article he published in the QJE. Since it was put out by the Icelandic Chamber of Commerce, and since Mishkin is obviously not their direct employee, then maybe it would have been superfluous to say in a footnote, “By the way, I didn’t write this paper because Iceland is my hobby; they paid me.” So like I said, I could go either way on alleged sin (2).
However, alleged sin (1) seems worse, and falls in line with the main theme of the “Inside Job” documentary: that there is an incestuous revolving door network among big businesses, academia, and central banks/governments. It doesn’t mean everybody involved is laughing evil laughs behind closed doors, but at the very least that they are in a bubble and don’t see that their policies are wrecking things.
Finally, alleged sin (3) is outrageous if it were intentional (and of course assuming it’s true). Now we can never know for sure, but that is a VERY convenient typo to have on one’s CV.
Now that we see the type of nefarious behavior of which the documentarian thinks Frederic Mishkin is capable, let’s turn to Scott Sumner’s assessment of some recent changes in Mishkin’s textbook. I have to quote him extensively but I think it’s worth it:
One of my favorite things about Mishkin’s text was that it presented aggregate demand curve in two ways. At the beginning of chapter 22 it developed what is sometimes called the “monetarist” version of AD, which shows the curve as a fixed level of nominal GDP, i.e. a rectangular hyperbola in P-Y space…
Thus I was very disappointed to see Mishkin drop the monetarist AD curve from the new edition….
If I was a conspiracy buff, I would note that this change occurred right after the biggest fall in NGDP since 1938. If one used the monetarist framework, it might lead students to ask uncomfortable questions about why the monetary policymakers allowed M*V to fall so sharply. But I’m not a conspiracy buff.
Another thing I really liked about the 7th edition was the following question (on p. 368) about IOR [paying Interest On Reserves–RPM]:
“10. The Fed has discussed the possibility of paying interest on reserves. If this occurred, what would happen to the level of e [the excess reserve ratio]?”
I loved this question. And when it actually happened, I couldn’t wait to show my students how Mishkin’s book predicted the dire consequences of the Fed’s October 2008 decision to adopt IOR.
So you can imagine how disappointed I was to find the question mysteriously deleted from the 8th edition. If I was a conspiracy buff I’d wonder whether Mishkin was trying to hide something. Surely students who did this question would be inclined to ask why the Fed did a highly contractionary policy in the midst of the biggest fall in AD since 1938 (that is if they still understood that AD=NGDP, which is doubtful.)
…A year ago I did a long post discussing how Mishkin’s text provided a template for my critique of the conventional wisdom circa October 2008. I specifically cited 3 of the 4 key principles that Mishkin identified in his summary of the monetary policy transmission mechanism (pp. 610-11):
“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. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms.
3. Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero.”
I had thought that all economists accepted these propositions, as they are taught in the number one undergraduate money text. And not just taught; they are the summation of the most important chapter in the text. And they also happen to be true. But I found out in late 2008 that very few economists accept these propositions.
I was anxious to get Mishkin’s new text, where he could take a sort of victory lap. He could show how the Fed made a huge mistake allowing all sorts of asset prices to crash in late 2008, which signaled ultra-tight money. But before I got the new edition, I read some articles where Mishkin seemed to be defending Bernanke’s moves. I guess I shouldn’t have been so naive. Mishkin and Bernanke are both center-right New Keynesians. Both served on the Federal Reserve Board. And of course Bernanke had also held similar views in the early 2000s, when he insisted that BOJ policy was far too tight, despite low rates. So if Bernanke did a complete flip flop, why should I be surprised if Mishkin did as well?
Still, there was the question of how he would reconcile his views of the 2008 crisis with those three key principles of monetary policy. I know what you are thinking—he dropped the key principles. No, those are far too important to eliminate. Did he refrain from discussing the crisis? No, how could he do that? Instead, he stated his view of the crisis just one page before the three principles that completely conflict with his view of the crisis. That takes chutzpah!
Here’s what he says about the crisis on page 609:
“With the advent of the subprime financial crisis in the summer of 2007, the Fed began a very aggressive easing of monetary policy. The Fed dropped the fed funds rate from 5 1/4% to 0% over a fifteen-month period from September 2007 to December 2008.”
Wait a minute; doesn’t he say just one page later than low rates don’t mean easy money—that you have to look at other asset prices? Yes, but perhaps Mishkin didn’t know about all the other asset markets (TIPS, stocks, commodities, forex, commercial real estate, etc), which all started screaming that money was too tight in late 2008, as rates were gradually cut from 2% to 0%.
After discussing the crisis, Mishkin continues (p 610):
“The decline in the stock market and housing prices also weakened the economy, because it lowered household wealth. The decrease in household wealth led to restrained consumer spending and weaker investment, because of the resulting drop in Tobin’s q.
With all these channels operating, it is no surprise that despite the Fed’s aggressive lowering of the fed funds rate, the economy still took a bit [sic] hit.”
So I guess he did know. But perhaps there is nothing more the Fed could have done once rates hit zero? Surely I can’t seriously claim that monetary policy can be highly effective once rates hit zero? Go back and read Mishkin’s third principle.
If I was a conspiracy buff, I’d say that Mishkin followed almost every other famous economist in assuming that Fed policy was easy during late 2008, despite plunging stock and commodity prices, soaring real interest rates on 5-year TIPS, plunging inflation expectations, a soaring dollar, and plunging real estate prices. And he assumed there was nothing the Fed could do about it because they had already cut rates to zero.
If I was a conspiracy buff, I’d wonder if he knew there was a contradiction, and erased any passages of the book that might alert students to the possibility that the Fed policy was actually tight (such as the IOR question) or that the sharp fall in M*V was the big problem in 2008–i.e. the monetarist view of AD.
Do I need to point out that the things Sumner brings up, are eerily similar to the behavior that the “unfair” documentarian alleged?
Notice how Sumner tries to throw off the scent by constantly making jokes about conspiracy theorists. Nice, Scott, I get it. Blue Horseshoe loves Frederic Mishkin.