31 Mar 2012

Potpourri

Economics, Federal Reserve, Market Monetarism, Mises, Potpourri 41 Comments

==> This article about “how modern men are trained to hate women” is actually really insightful. It’s supposed to be entertaining and has lots of absurd photos, but I actually think the guy makes some good points.

==> Even though he and I don’t see eye-to-eye on everything in the “free banking” argument, I must admit George Selgin has a fantabulous critique of Bernanke on the history of the Fed here.

==> Tom Woods jumps on the clicking-Like-on-Facebook-does-nothing bandwagon. But actually, I think we need to be more specific. “Raising awareness” actually is tremendously important; that’s all Tom and I do, for heaven’s sake! In other words, we agree with Mises that public opinion ultimately determines what the government can get away with, and so that’s why Tom and I (and just about all of our professional colleagues) devote our lives to educating the public. As far as I know, we’re not going to intercept funds flowing to the IRS and return them to their rightful owners. So I think the scorn heaped on the “Kony 2012″ crowd, if it’s to stick, has to be more accurately defined. It’s not that “just telling people how you feel about something” is a waste of time, but rather, “telling people how you feel about something that you’ve spent 20 minutes investigating” is a bit silly.

==> It was pledge week at my NPR station and holy cow, this piece on Texas secession almost made me donate. Of course they ultimately make it a criticism, but tell me the first 3 minutes aren’t awesome! I’m moving to Texas, baby! (It’s also funny that when they start discussing the problems of Texas secession, the first thing that actually makes any sense is that they say the feds would retaliate. Yeah, that’s what happened the last time, too.)

==> So if I’m interpreting this article correctly, in 2011 fully 61% of the new debt issued by the Treasury, was picked up by the Fed. At what point will people stop saying, “IF then Fed ever started monetizing the debt, then we’d be in trouble”?

Let me elaborate on this theme: If I understand Scott Sumner’s worldview, he is saying that our ultra-low interest rates right now are a sign of “tight money.” So let’s say starting Monday, the Fed began selling off $1 trillion of its Treasury holdings, and Bernanke promised that he wouldn’t let the Fed’s balance sheet rise more than a 3% rate per year, thereafter. Does Scott think yields on Treasury securities would go down because of this move? In other words, does Scott actually think if the Fed suddenly dumped one trillion dollars (at current prices) of an asset onto the market, and promised that it wouldn’t buy it back anytime soon, that the new market price for this asset would go up?

Let me also turn this question over to the Keynesians: If I understand them, they are saying that the big problem right now is that people are trying to save (particularly in safe assets like Treasury securities) way more than people want to borrow. The only way to get that market to clear, at full employment, would be to have a negative nominal interest rate. So from that perspective, the absolute worst thing the Fed could do, would be to buy up a trillion dollars of Treasury securities, right? I mean, injecting new reserves (through open market operations) per se might be OK, but it would be far far better if the Fed created money out of thin air in order to, say, hire people to dig ditches and fill them back up, right? But given that Bernanke is going to issue a new trillion dollars, the single worst thing (from a Keynesian perspective) he could do with that new money, is go buy U.S. Treasuries, right?

41 Responses to “Potpourri”

  1. Darf Ferrara says:

    I’d like to hear an argument from you (or someone) against free banking as described by Selgin. From what I’ve learned from him (and others at Free Banking) I find it to be the best banking method being discussed, although I haven’t heard any arguments against it.

    • Richard Moss says:

      Darf,

      There are several critiques of Selgin’s (and White’s) theory of free banking offered by other Austrians.

      Here is Prof. Joe Salerno on why he thinks free bankers, like Selgin, are wrong about Mises’s view of free banking;

      http://mises.org/media/7457/Mises-as-a-Currency-School-Free-Banker

      Here is David Howden with a more thorough criticism;

      http://www.youtube.com/watch?v=mERetJytkyY

      There also several articles critiquing Selgin and White on the Mises website. If you go here;

      http://mises.org/Literature/Authors

      you can find papers critiquing ‘free banking’ written by Phillip Baggus, David Howden, Jesus Huerta de Soto, Hans Hoppe, Guido Hulsmann, Malavika Nair, Murray Rothbard and Joe Salerno.

    • Warren says:

      This is a response to the question in general not just to Darf who likely understands most of what I’m going to say.

      There are no substantive criticisms of free baking.

      First, it does not matter where Mises stood on the issue as I’m sure he would support a free-market in banking ventures regardless of any concern he had with the practice. And why are we appealing to Mises on this anyway. His opinion, one way or the other, does not match up to the nearly 150 years of positive results the practice brought forth.

      In any event, the men who were running the banks were not Miseians and yet they managed their businesses quite well despite this disability.

      The criticisms of the Rothbardians comes down to the fact that they consider free banking just another fractional-reserve scheme and they promote a 100% reserve form of banking.

      Fractional reserve banking is a fraud and unsustainable goes the theory and as such free banking must not be allowed.

      What they fail to mention or perhaps even notice is that while the Scottish, Canadian, Hong Kong(ian? olese?) Northern irish, and other banks run on these principles indeed had little gold in reserve the total assets of the banks covered the note issue.

      Scottish banks usually had between 1/2 percent and two percent of their assets in gold. The rest was interest bearing securities and the collateral of the borrowers. In addition the banks were unlimited liability joint-stock companies which means that any shortfall in note backing would have to be made good by the shareholders out of their personal assets. Plus, the other banks stood ready to buy up outstanding notes once all the rest of those protections were used.

      So those notes were very secure. If the practice was a fraud or unsustainable how do the Rothbardians account for the many decades of satisfied customers and the many decades of solvent banks?

      Or, if it was such a bad practice, why the lack of bank panics or bank runs? Millions of people lived their entire lives with these banks and had no problems of fraud or loss.

      What about how fast the Scottish economy grew?

      History does not matter. For Rothbardians it is all about the gold. Hypothetical instant redeemability for all depositors is a must even in cases where the majority of people do not want that from their banks. As evidenced by the fact that the banks could carry so little in reserve. Folks didn’t want or need the gold, they were happy to carry banknotes.

      What the Rothbardians want is for banks to saddle themselves with a lousy business tactic in order for the their bank to be called “non-fraudulent.”

      They want banks to forgo the possible interest that could be earned by trading the gold for securities and pay the additional costs of having to store all that gold which negatively impacts the bank’s bottom line and thus makes them more likely to fail. This is ivory-tower thinking. They have an ideal and actual history be damned!

      Getting down to the heart of the matter, since no one was forced to use this style of banking or could be forced to transact in the currency how is it in anyway unethical? And if it is not unethical should it be prohibited? And who, in an area with no coercive government, would do the prohibiting? Certainly they could prohibit it on property they controlled but not in general. Not over an entire region.

      Lastly, no one owes anyone any sort of “system”.

      Currency in Scotland came about by people making loans in order to earn interest and make a profit. So with numerous banks engaged in the practice an ad hoc web of note issue and conversion and clearing evolved. No one planned it, no one was obligated to do it and no one had an inherent right to use it. The same as our system of farms, distributors and supermarkets. Or mines, refiners, car manufactures, and auto salesmen. Or whatever.

      Explain how you have some “right” to have any of this existing. You cannot. Nor can you explain how any of it must exist only according to your views. If you want to change how things are done in any of these industries, you must either enter the industry and give folks another option, lead a boycott, or use force.

      For Rothbardians, force is out of the question and as to the other options I’m sure they would be displeased to find themselves roundly ignored by the great mass of individuals. Both bankers who like earning interest in place of storing gold and bank customers who like earning interest on their demand deposits.

      So, to sum up, the critics of free-banking are just mumbling in the wind.

      • Richard Moss says:

        Warren,

        “This is a response to the question in general not just to Darf who likely understands most of what I’m going to say.”

        That’s odd – because Darf wrote “although I haven’t heard any arguments against it.” I took him at his word and so posted the material. (Maybe he meant to write that he hasn’t seen or heard any arguments persuading him that it’s wrong, but it’s not clear).

        “Why are we appealing to Mises on this…”

        Of course, Mises’s position on the issue doesn’t make that position correct. But, my understanding is that Selgin and White do invoke Mises to support their theory of free banking, so I think referencing a debate over Mises’s views on the issue of ‘fiduciary’ media is certainly appropriate.

        “What they fail to mention or perhaps even notice is that while the Scottish, Canadian, Hong Kong(ian? olese?)..”

        I am not sure about all the historical incidences you mention, but I know anti-Fibers have at least addressed the Scottish case. They have also put forward a few historical cases of their own (Chile). You can certainly accuse them of being wrong about ‘historical cases’, but not ignoring them.

        “They want banks to forgo interest …. makes them more likely to fail.”

        Not sure what you mean here. Anti-FRBers are not against banks earning money by charging interest for loans or charging storage fees for deposits

        “Getting down to the heart of the matter,..”

        I think the main anti-FRBer position here is that if gov’ts stayed out of banking all together that fiduciary media would eventually disappear. Listen to the Salerno lecture I posted above.

        “For Rothbardians, force is out of the question and as to the other options I’m sure they would be displeased to find themselves roundly ignored by the great mass of individuals.”

        Well, we have something in common. The great mass of individuals today are certainly ignoring free bankers as well as anti-FRBers.

  2. Christopher says:

    If someone says ‘men always want’, ‘men always think about’, ‘all men need’ and the like I almost always find myself in disagreement. It’s like every conventional wisdom and cliché that holds true for all my fellow men doesn’t apply to me. What’s wrong with me?

    • jjoxman says:

      Christopher,

      Do you mean ‘what’s wrong with us?’ because I’m with you. That whole article was pretty much nonsense, and I don’t normally disagree with Bob Murphy. I think it’s a rather shallow article. Not that I think there aren’t problems with modern males, but I don’t think modern men hate women. I think modern men in many cases are emasculated. But that’s another story.

      • Watoosh says:

        I think it’s fair to say that a significant portion of men harbor animosity towards women, especially when they don’t conform to their view of what women should be like. Yes, it’s hyperbolical to say things like “Why men hate women”, but you’re supposed to read between the lines and understand that it means “These are the reasons men of certain persuasion are liable to get misogynistic tendencies” This comes in degrees, of course – only a minority of men are actually vocal and violent womanhaters. But many men have sexist views they themselves aren’t aware of, and that doesn’t make them bad people necessarily. I find myself being sexist every once in a while too.

        • jjoxman says:

          “I think it’s fair to say that a significant portion of men harbor animosity towards women, especially when they don’t conform to their view of what women should be like.”

          I see your point, although I hope by ‘significant’ you don’t mean ‘majority’ because I don’t think that’s a defensible claim. Maybe it is, I just have trouble buying it.

          What I was trying to say above is that some men have animosity towards women but I think it’s much more likely that men are actually scared of powerful, attractive women. I mention attractive specifically because I don’t think men are scared of unattractive women. I also don’t think men hate unattractive women. I’m starting to ramble here, so let me just say this. If the sexist thing you think is actually the case, is it really sexist? For example is: men are physically stronger, on average, than women, sexist?

          All I’m trying to say is that the problem with men now is that they’ve forgotten how to be men, and instead often act like women with different parts. That doesn’t lead to ‘hate women’ but it does lead to ‘deep confusion that manifests as anger.’

    • Carrie says:

      I’m glad to hear that that article does not speak for all men. I do not see it as an entertaining look at how men are trained to hate women. Rather, I see it as an unintended exposé of the author’s failure to understand how self-esteem is built, his desire for the unearned, his resentment of being bound by reality, and his eagerness to deflect his shame onto someone other than himself.

      #5. We Were Told That Society Owed Us a Hot Girl

      Suppose, for the sake of argument, that we accept “hotness” as a woman’s greatest virtue and thus her most desirable trait. Suppose, for the sake of argument, that the author desires this virtue in his partner for a sincere reason such as his own pleasure rather than as a trophy with which to impress other people. [In reality I do not believe either of these claims.] A good argument could thus be made: A heroic man is worthy and deserving of a virtuous woman. The virtuous woman, of course, admires the man precisely because of his own virtues and heroism.

      Alas, the author writes of men, “We all think of ourselves as the hero of our own story, and we all (whether we admit it or not) think we’re heroes for just getting through our day.”

      Such a man wants a virtuous woman to admire him without having to put forth the effort of engaging in any actions worthy of admiration. A virtuous woman is to offer herself to a man who knowingly offers nothing in return.

      In reality, a virtuous, self-respecting woman would not engage in such a sacrifice. The author explains that fact as a reason men hate women. What is really going on is that the author desires the unearned; he hates himself (and thus lacks self-esteem) for not being courageous and heroic; and he resents that the trader principle operates in romantic relationships as well as in business transactions.

      Also, on the odd chance that he does somehow con a virtuous (“hot”) woman into falling for him, he will still be aware on some level that his reward is unearned. He will eventually have to deal with a host of psychological demons including guilt (at possessing something that he knows he is not worthy of), anxiety (at having to maintain a false image), and lack of respect for the “hot” woman (who has subverted her standards for someone who has not earned her respect).

      #3. We Think You’re Conspiring With Our Boners to Ruin Us

      When that happens, when we get that boner at the funeral, we get mad at the girl showing the cleavage. Because we, ourselves, our own rational personality that knows right from wrong and appropriate from inappropriate, knows this is a bad place to get a boner. So it comes off like cleavage girl is conspiring with our penis to screw us over.

      Reworded: I resent that moral constraints prevent me from acting on my desire for immediate gratification. I resent the fact that in order to stay alive I must be responsible, plan, and behave civilly at funerals. Being a Man means I can’t act like a drooling incompetent baby, yet I’m so immature and lazy that I’d really rather be a drooling incompetent baby than a Man. I know this is disgusting, so I’m going to attempt to deflect my self-hatred onto the target of my desires (women).

      #2. We Feel Like Manhood Was Stolen from Us at Some Point

      We are fed this idea that at one time, this is how the world was — all of these impulses that have been getting us grounded and sent to detention from kindergarten on used to be not only allowed, but celebrated.

      And then at some point, women took it all away.

      A once-great world of heroes and strength and warriors and cigars and crude jokes has been replaced by this world of grumpy female supervisors looming over our cubicle to hand us a memo about sending off-color jokes via email. …

      The result is a combination of frustration and humiliation and powerlessness that makes us want to get it back in the only way we know how: with petty, immature acts of meanness.

      See #3.

      I’m too cowardly to acquire adult life skills, so instead I’ll direct my self-loathing into women-loathing. Sure, I work at an uninspiring, unheroic, 9-to-5 job that I hate, but that’s not really my fault for giving up my dreams—you see, women imposed this social structure.

      Alas, the person who is warped enough to even semi-seriously consider such a thing is subverting any chance he has at developing self-esteem and loving his life.

      #1. We Feel Powerless

      Every car being driven by a man was designed and built and bought and sold with you in mind. The only reason why small, fuel-efficient or electric cars don’t dominate the roads is because we want to look cool in our cars, to impress you.

      First, it is incorrect to believe that women are impressed by “cool” cars. Second, it is incorrect to assume that women who are impressed by cool cars are worthy of impressing. Third, being other-focused and doing things for the sake of impressing others is not impressive. A Man who is proud of his uncool car is far cooler than a man who is awkward in his cool car. The only people attracted to false coolness are those who are themselves putting on false coolness.

      Go look at a city skyline. All those skyscrapers? We built those to impress you, too. All those sports you see on TV? All of those guys learned to play purely because in school, playing sports gets you laid. All the music you hear on the radio? All of those guys learned to sing and play guitar because as a teenager, they figured out that absolutely nothing gets women out of their pants faster. It’s the same reason all of the actors got into acting.

      There are so many mixed ideas here that I scarcely know where to begin, so I’ll chose the example most significant to me: the city skyline. If this author understood anything about productivity, he’d know that creation is done for oneself, with others only as secondary beneficiaries. Nothing so grand as a skyscraper could be motivated by anything other than the desire to attain the greatest happiness imaginable: seeing one’s own thoughts manifest in physical reality for one’s own pleasure and self-esteem. The effort required for magnificent achievements is entirely self-motivated.

      Ironically, seeking to impress others by obtaining power is a sure path to attracting bad people. Achieving something great for one’s own sake is the surest way to attract a virtuous partner.

      There is one great paragraph from the article:

      This is why no amount of male domination will ever be enough, why no level of control or privilege or female submission will ever satisfy us. We can put you under a burqa, we can force you out of the workplace — it won’t matter. You’re still all we think about, and that gives you power over us. And we resent you for it.

      As an adult I’ve been involved with several self-esteem and assertiveness building programs for younger girls. The worse programs focus on body image, beauty myths, etc. The better programs focus on developing independent identity through sports, crafts, music, academics, etc. But here we have a non-Man man stating the real issue quite clearly: the more empowered and confident women become, the more the non-Men will feel threatened. As their self-esteem sinks lower (for they’ve been shown up by a woman, of all things), the more they will hate themselves and the more vocally they will attempt to direct that loathsome feeling toward someone other than themselves. Ultimately, they hate a woman who has the courage to be a better Man than they are.

      And yet it’s all so silly and unnecessary to engage in such self-induced and self-defeating misery, for happiness is available to all…

      • jjoxman says:

        Carrie,

        That was excellent. More more eloquent than I could ever be. The only disappointment was that you don’t have blog linked through your name so I can read more good thoughts from you!

        • Carrie says:

          !
          Thank you. I don’t have a public blog, but will continue to comment here on occasion.

  3. Jonathan MF Catalan says:

    I thought the Keynesian argument was closer to this:

    Investors don’t want to borrow credit and use it towards productive activities, because the marginal efficiency of capital is too low (and interest rates are too high, relative the MEC). Given that the returns on lending are so low and given heightened uncertainty, so gloomy expectations, people rather save by buying treasuries. These treasuries are then used by the U.S. Government to pay people to dig holes (or, being serious, public investments). So, U.S. Treasuries are great, because they allow the government to do what the private sector doesn’t want to do, because the private sector doesn’t expect a high enough return on investment.

    • Bob Murphy says:

      Jonathan right, nothing you said contradicts my post. You’ve just explained why Keynesians think the UST should borrow more. Right, great. But I’m asking, shouldn’t the Keynesians want Bernanke to stop lending to the UST? If the big macro problem is that (at 0% or higher nominal interest rates, and at full-employment levels of income) there would be an excess of saving over borrowing, then isn’t Bernanke’s $1 trillion of new savings making the problem much worse?

      • Jonathan MF Catalan says:

        I’m not sure it makes it worse. Let’s say that government spending is constrained by public expectations (i.e. burden of debt). If the government can assuage some of these expectations by having the Fed pay for some of the debt, it can then create a greater effective demand since it can now spend more.

        It’s also not all about socialization of investment. Let’s say that through monetization of the debt the price level begins to rise, and inflationary expectations pick up. This leads to greater private investment. Doesn’t this kill two birds with one stone? You have a temporary rise in G, and you also create incentives for a rise in I. It’s a two-prong attack on the problem of deficient aggregate demand.

        • Bob Murphy says:

          OK Jonathan let’s back up. Let’s say a company says, “We have $1 billion in profits that we’re not sure what to with. We can either (a) invest them in buying one-year Treasury securities, or (b) invest them in hiring workers to expand our factories.” You’re telling me the Keynesian won’t have a clear-cut answer as to which option is better to promoting recovery?

          Now change it from a company to the Federal Reserve. Assume for the sake of argument that they’re already committed to creating an extra $1 billion in reserves out of thin air, and now the issue is what they’re going to do with it. I claim that buying Treasury securities is the worst possible thing, from a Keynesian perspective.

          • Jonathan MF Catalan says:

            The Keynesian will prefer option b, but I don’t get how the example is relevant.

            With regards to the Federal Reserve, I don’t see the difference. You have (a) disperse this money through the private sector (the banking industry as an intermediary) or (b) let the U.S. government spend the money. If the private sector isn’t using the money it’s being given, then it’s a worse option than letting the government spend the money.

            • Bob Murphy says:

              OK Jonathan then I think you just “proved” that it’s better for the company to invest the $1 billion in Treasury securities, rather than spending it hiring workers to expand their factories. After all, if the company lends the $1 billion to the government, it knows it will be spent. But those workers will probably save at least 2 percent of it.

              • Jonathan M.F. Catalán says:

                I honestly don’t see how “the company” is relevant to anything. I think it obscures the Keynesian argument.

          • Jonathan MF Catalan says:

            Let me just add to my reply above. The real Keynesian objective, as I see it, is to employ a certain amount of real resources; the employment of these resources will lead to a recovery in aggregate demand. You can do this by giving the means to the private sector to use the resources, or if this doesn’t work (liquidity trap!) the government can do it through the socialization of investment.

  4. Max says:

    Investors price assets based on how much profit they think they’ll make. If the Fed makes treasuries more profitable at current prices by tightening, then naturally the price will have to increase to clear the market.

    Now maybe a sudden unloading of treasuries would cause a *temporary* price drop if it overwhelms the willingness of market makers to hold inventory. But probably not, because treasuries are very liquid.

    • Bob Murphy says:

      OK Max so let’s not beat around the bush: Your prediction is that if the Fed dumped $1 trillion of Treasury securities on the market, let’s say over the next two weeks, then you think 3 months from now, the yield on Treasury securities would be even closer to zero % than it is right now?

      I’m not saying you’re insane, I just want you to say it explicitly.

  5. Major_Freedom says:

    Market monetarists are conflicted between having to always ensure that every economic phenomena comes back to NGDP in some way such as “If NGDP is higher, then interest rates should be higher, and if NGDP is lower, then interest rates should be lower”, and ensuring that this primary, aggregate driven worldview is reconciled with the more individualistic, micro foundations, such as “The Fed can lower interest rates via the “liquidity effect” of flooding banks with new money”.

    So if you say:

    “If I understand Scott Sumner’s worldview, he is saying that our ultra-low interest rates right now are a sign of “tight money.” So let’s say starting Monday, the Fed began selling off $1 trillion of its Treasury holdings, and Bernanke promised that he wouldn’t let the Fed’s balance sheet rise more than a 3% rate per year, thereafter. Does Scott think yields on Treasury securities would go down because of this move? In other words, does Scott actually think if the Fed suddenly dumped one trillion dollars (at current prices) of an asset onto the market, and promised that it wouldn’t buy it back anytime soon, that the new market price for this asset would go up?”

    The likely answer will be

    “If the Fed suddenly dumped $1 trillion worth of assets on the market, then this is the equivalent of removing $1 trillion in money from “circulation.” This would cause NGDP to fall, and that will LOWER yields, it won’t raise them.”

    The above is the “Protect NGDP worldview at all costs” view.

    In reality of course, the liquidity effect would overwhelmingly dominate, and with $1 trillion taken out of the banking system, a liquidity crunch would ensue, and interest rates would (temporarily) go up as you strongly suspect they will (since you’re basing your arguments on a micro-foundation). This would be the case even if NGDP collapses. Businesses would scramble to borrow, and would refrain from lending.

  6. Major_Freedom says:

    “Let me also turn this question over to the Keynesians: If I understand them, they are saying that the big problem right now is that people are trying to save (particularly in safe assets like Treasury securities) way more than people want to borrow. The only way to get that market to clear, at full employment, would be to have a negative nominal interest rate. So from that perspective, the absolute worst thing the Fed could do, would be to buy up a trillion dollars of Treasury securities, right? I mean, injecting new reserves (through open market operations) per se might be OK, but it would be far far better if the Fed created money out of thin air in order to, say, hire people to dig ditches and fill them back up, right? But given that Bernanke is going to issue a new trillion dollars, the single worst thing (from a Keynesian perspective) he could do with that new money, is go buy U.S. Treasuries, right?”

    I made a similar but different point on Sumner’s blog. I said Sumner is a closet Keynesian, but not because he positively advocates for fiscal stimulus, but because his worldview implicitly requires it.

    He doesn’t believe fiscal stimulus works (or is not needed, depending on what day of the month the question is asked). Yet NGDP targeting implicitly rests on Keynesian style fiscal spending since he blindly believes the Fed has “the power” to maintain NGDP by buying up globs of government debt, which of course is just a backdoor method of expanding government spending. Without the Fed doing this, interest rates would, like you said, have otherwise gone way up, and that would have reduced the extent to which the government can spend by limiting its ability to borrow. That would have otherwise reduced NGDP in a world where investors want to wait for a longer period of time until all the garbage is cleaned out of the system, before investing again, and that requires falling prices for input factors, not stable prices.

  7. Max says:

    If dumping the bonds is interpreted by the markets as a commitment to a lower inflation rate, then yes, it’s good for long term treasuries (and bad for everything else, e.g. stocks).

    Note that there is no credit risk with treasuries because they are implicitly backed by the Fed. So the buyers don’t fear a depression; they fear prosperity.

  8. yahya says:

    Who here wishes there was a ‘dislike’ button on Facebook?

  9. Rob says:

    “in 2011 fully 61% of the new debt issued by the Treasury, was picked up by the Fed.”

    At first sight this seems to imply that we have got both monetary stimulus ( the fed created money to make the purchases) and fiscal stimulus (the treasury will spend the money raised on AD raising activities) without anyone noticing.

    Would not both Market Monetarist and Keynesian see something to cheer in this ?

    • Bob Murphy says:

      Too little, too late Rob. Unless unemployment had fallen to 2%, in which case, the massive monetary/fiscal stimulus would have done the trick. (I am not faulting them for adhering to counterfactuals, since we have to in economics. But I stand by my statement.)

      • Rob says:

        At least the Market Monetarists are clear what “too little” means – anything that leaves NGDP off its long turn trend. By the same token if their polices are ever followed it will be easy to see if they work or not.

        The Keynsisans leave themselves the flexibility to claim credit/call foul whichever way it turn out.

        • Bob Murphy says:

          Rob wrote:

          By the same token if their polices are ever followed it will be easy to see if they work or not.

          No, that’s not true. Sumner has explicitly said that if NGDP grows at his desired rate, and yet price inflation is 50% per year, he will regret nothing.

          (I’m making up the 50% number, but he really did say something like that. He picked something purposefully ludicrous, to get his point across.)

          • Rob says:

            I think he would argue that if one targets NGDP and a supply-shock causes RGDP to fall (and results in some inflation) then NGDP targeting still leads to optimal outcomes.

            But you are correct – it does give him a “get out jail free card” – if we get inflation then he can just blame a “supply shock”rather than the policy itself,

          • Major_Freedom says:

            You’re right, Sumner said 20% or -20% price inflation/deflation, and he won’t care.

            http://www.themoneyillusion.com/?p=13634

  10. Silas Barta says:

    That video linked by Tom Woods makes me a little a ashamed to report that a colleague’s project (in the program I just completed) is a website specifically centered around the idea of doing your activism by choosing a picture from your profile.

    Really, take a look at the site. It literally reads:

    Step 1: Pick a badge (profile picture)
    Step 2: Single click image update.
    Step 3: Change the world. [!!!]

    (If you’re interested, this was my group’s project — not the visual effects themselves, but the ability to make presentations with them so easily. Warning: it doesn’t work in IE or, usually, Firefox. Use Chrome or Safari.)

  11. Anonymous says:

    “Let me elaborate on this theme: If I understand Scott Sumner’s worldview, he is saying that our ultra-low interest rates right now are a sign of “tight money.” So let’s say starting Monday, the Fed began selling off $1 trillion of its Treasury holdings, and Bernanke promised that he wouldn’t let the Fed’s balance sheet rise more than a 3% rate per year, thereafter. Does Scott think yields on Treasury securities would go down because of this move? In other words, does Scott actually think if the Fed suddenly dumped one trillion dollars (at current prices) of an asset onto the market, and promised that it wouldn’t buy it back anytime soon, that the new market price for this asset would go up?”

    No.

    It is possible. Suppose the Fed announced it would engeneer a 25% unemployment rate at 10% annual deflation. If people believed the Fed could accomplish this, which is realitistic, then nominal intererest rates would fall.

    If the Fed just kept on promising 2% inflation and began selling government bonds, this would immediately raise interest rates. However, once this actually began to raise the unemployment rate and generate defatlion, and people began to realize that regardless of what the Fed was promising, the were going to get massive unemployment and deflation, then interest rates would fall.

    Of course, given sufficient perisistence in selling bonds, the Fed could keep them high. The Fed just has to keep ahead of expectations.

    Of course, market monetarists aren’t so interested in that sort of perverse scenario. The key to the positive scenario is a credit announcement of an increase of nominal GDP to a higher growth path. This could result in higher nominal interest rates and might require the Fed to sell off T-bills. On the other hand, if no one believes the Fed will try or can accomplish this, and the Fed tried to do it anyway, then the short run effect would be an increase in the quantity of money and lower market interest rates.

    The error you are making is ingoring that when the Fed sells securities, other people can buy more than the Fed sells, leading to lower interest rates (in the deflationary scenario.) Or, in the happy scenario, when the Fed creates money and buys bonds, other people can sell more than the Fed buys so interest rates rise. And, of course, if the demand to hold money falls, then the Fed would need to sell bonds to keep nominal spending on output from rising above target. Some of these considerations only apply when interest rates are low and the quantity of money is high because of expectations that output will remain low.

    “Let me also turn this question over to the Keynesians: If I understand them, they are saying that the big problem right now is that people are trying to save (particularly in safe assets like Treasury securities) way more than people want to borrow. The only way to get that market to clear, at full employment, would be to have a negative nominal interest rate. So from that perspective, the absolute worst thing the Fed could do, would be to buy up a trillion dollars of Treasury securities, right? I mean, injecting new reserves (through open market operations) per se might be OK, but it would be far far better if the Fed created money out of thin air in order to, say, hire people to dig ditches and fill them back up, right? But given that Bernanke is going to issue a new trillion dollars, the single worst thing (from a Keynesian perspective) he could do with that new money, is go buy U.S. Treasuries, right?”

    Wrong. Not the worse thing. Some of the back and forth almost recognized that if the Fed buys the bonds, then private firms won’t have the bonds to buy, and will buy capital goods instead. I do agree that in a liqudity trap, buying capital goods would be better. Renting them out to firms at really low rentals, I guess, would be something to do with them.

  12. Bill Woolsey says:

    About the Market Monetarists– No.

    It has to to with short run and long run, and more importantly, expected and unexpected.

    Keep in mind that if the Fed sells bonds, there could be other people buying more than the Fed sells based upon expecations of the long run effects.

    Similarly, market monetarists are more insterested in a happier scenario where the Fed buys bonds but other people sell more than the Fed buys based upon long run expecations.

    You seem to be ignoring the possiblity that the private market might trade the opposite of the Fed and overwhelm the direct effects of the Fed’s trades on interest rates.

    About the Keyensians–Not the worst thing.

    • Major_Freedom says:

      It has to to with short run and long run, and more importantly, expected and unexpected.

      With an activist Fed, we are always IN the short run when it comes to monetary policy.

      Keep in mind that if the Fed sells bonds, there could be other people buying more than the Fed sells based upon expecations of the long run effects.

      You’re failing to appreciate counter-factuals. You cannot just assume that if the Fed doesn’t buy the debt, that there will another buyer for the same price for the same supply of debt. The law of supply and demand isn’t just armchair semantics. If the Fed sells debt, then that will increase the supply of debt in the market. You can’t just assume that a magical increase in demand will accompany the increase in supply.

      The whole reason the Fed is buying all that debt is to keep the interest rates down on the debt, because the Fed knows the rates will rise if they don’t. The only way to get the primary dealers to pay an exaggerated price for debt is by the Fed promising them to buy the debt for slightly more right after. Do you honestly believe that the primary dealers would be pricing the newly issued debt as high as they are, if the Fed wasn’t there to buy the debt?

      Similarly, market monetarists are more insterested in a happier scenario where the Fed buys bonds but other people sell more than the Fed buys based upon long run expecations.

      Ergo market monetarists implicitly depend on Keynesian stimulus. When the Fed buys debt, that boosts the government’s ability to borrow and spend.

      You seem to be ignoring the possiblity that the private market might trade the opposite of the Fed and overwhelm the direct effects of the Fed’s trades on interest rates.

      Yes, I ignore magical fairy tales.

    • Bob Murphy says:

      Bill Woolsey wrote:

      You seem to be ignoring the possiblity that the private market might trade the opposite of the Fed and overwhelm the direct effects of the Fed’s trades on interest rates.

      Bill, so then why did you start out by saying, “About the Market Monetarists–No.” ?

      If we naively focus just on the Fed’s actions, then common sense says that dumping a bunch of bonds will make their yield go up.

      So then I said (paraphrasing), “Is Scott Sumner saying that something special happens to overwhelm these direct effects, and actually make the yield go down?”

      Then in response, I take you to be saying (paraphrasing), “No Bob, Scott doesn’t say that. You are ignoring that something special can happen to overwhelm these direct effects, and actually make the yield go down.”

      Since the above is how I’m parsing our exchange, Bill, you can see my confusion. What am I missing?

    • Bob Murphy says:

      And OK Bill I’ll bite on the Keynesian thing too. You said no, buying Treasury securities isn’t the worst thing the Fed could do with a trillion dollars in new money it creates out of thin air. OK, then, tell me: What’s the worst thing it could do? Just sit on the actual reserves? (I’m not being sarcastic.)

      • Max says:

        The worst thing the Fed could do would be to short the stock market. Buying treasuries is next worse. :-)

  13. Cody S says:

    A question:

    If it is logical for the Fed to stimulate the economy by giving money to banks, what is the Keynesian problem with people saving?

    They are doing the same thing the Fed is doing.

    If some random guy says “I’m not comfortable buying stuff with my income; I am saving more this year against future needs,” isn’t he basically saying, “I don’t want to spend all of my money on illiquid assets this year, so I am going to give money to the bank to lend out to people who are spending, and then I can redeem a claim on it (plus interest) later when I have need of it?”

    Why would a Keynesian Fed say to that guy, “No! All wrong! You shouldn’t be saving! The economy will collapse. I’ll tell you what I’m going to do. I am going to give money to the banks, to lend out. That will counterbalance your stupid, stupid act of giving money to the banks, to lend out.”

    Or are we to believe that when people save money, they are just hiding it in their walls, or making hats out of it?

  14. Scott Sumner says:

    Milton Friedman said that very low interest rates are a sign that money has been tight. Not is tight—has been tight. I agree.

    Long term interest rates often fall on contractionary moves by the Fed. How the sale of $1 trillion in securities would impact long rates depends on how the market interprets the signal. What is the implication for the future path of monetary policy? If it was interpreted as a highly contractionary policy switch then long term rates would probably fall.

    • Major_Freedom says:

      One should never reason from an interest rate change. Milton Friedman was wrong about this particular point (probably due to his unfortunate penchant for deferring to historical nominal data when his worldview is seriously challenged by those who are armed with economic principles that refute/contradict the school of Monetarism).

      Low nominal interest rates can mean tight money OR loose money, depending on what the market interest rates really are that the Fed is overruling with its monetary policy to get interest rates to that nomianl level.

      For example, a “low” nominal interest rate of 1% can mean either that monetary police is loose (if the market rate is otherwise higher and the Fed has to expand reserves faster to bring the rate down away from the market rate via the liquidity effect), or it could mean monetary policy is tight (if the market rate is otherwise lower still and the Fed has to expand reserves slower, or even reduce them outright to push the rate up away from the market rate via the liquidity effect).

      Humans aren’t robots. There is no such thing as a single particular interest rate that humans want all the time such that a nominal rate below it would require us to conclude money is only tight or only loose.

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