I’m not going to put in my trademark snarky comments in this post, because I’m being quite serious: I am reading some commentary, preparing to write an article on Monday talking about the Fed’s announcement. I had planned on launching a full-scale critique of Scott Sumner, who is being credited with inspiring this new move by the Fed. But I have to agree with Daniel Kuehn on this one–I just don’t see it. And I hope this doesn’t come off as jealousy or something: I want to link the Fed’s announcement to Sumner, so I can then plausibly criticize him. But I really don’t see how this has anything to do with what he’s been telling us his views are.
DISCLAIMER: I really do like Scott as a human being. When I first discovered his blog, I said (quoting a movie) something like, “At last, a man worth killing.” He told me thought that was hilarious. Fascination ensued. But on to my points:
==> First and foremost, the Fed is telling us it is going to keep interest rates “exceptionally low” through mid-2015. I learned from Scott Sumner himself that such announcements defeat the whole purpose of Fed action, because they are basically telling everyone, “The economy is going to suck at least through mid-2015.”
==> The Fed is buying the bonds of the US federal government, and mortgage-backed securities. In Scott’s ideal world, the Fed buys derivatives tied to NGDP itself. It doesn’t give a huge borrowing advantage to the most anti-U.S. business operation on earth, and try to inflate another housing bubble. Are microeconomics really that irrelevant in all of this? What if the Fed announced $40 billion in purchases from renewable energy companies and the Iranian government? Would that be market monetarism too? (Again, I’m not being snarky, I’m being dead serious. Teach me.)
==> The Fed isn’t doing a qualitative change in the nature of its policy. Before, say with QE2, Bernanke told us he was going to buy a bunch of bonds in an effort to help the economy. He didn’t say, “Now, when this round of purchases is over, we are DONE. I don’t care if the economy is fixed or still broken at that point, no more.” No, the implication was, after QE2 was over, the Fed would reevaluate and decide whether to continue buying more bonds to help the economy, or to stop because we were recovering. So how is that different from saying, “We are going to buy a bunch of bonds each month, until the economy is better, then we’ll stop”?
==> One of the big market monetarist arguments, deployed against the Austrians, was to say they wanted to shrink the Fed’s balance sheet. Bernanke was doing the wrong thing, just announcing how much money he was going to spend. No, the whole point (so we were told) was to change what his objective, to stop talking about inflation and unemployment and the size of purchases, and instead talk about doing whatever it took until the current expectation of future NGDP growth (or inflation or wages or whatever, depending on the market monetarist) is correct. So, the Fed now announces that it is going to spend a particular dollar amount per month buying bonds, and will keep doing so while carefully watching inflation and unemployment.
So again I ask: How in the world does this become Scott Sumner Day? What’s going to happen is that if it “works” (in the sense that everybody else means, not in the analogy-with-the-ocean-liner-captain way that Scott means “works”), then people will applaud the market monetarists. If it doesn’t work, then people will say, “Well, the Fed basically just did what it had been doing since 2008: Announcing it was going to buy more bonds, keep thinking in terms of a ‘dual mandate’ even though that’s stupid, foolishly paying interest on excess reserves, and for some idiotic reason, telling everybody interest rates would remain near 0% for another 3 years. I couldn’t have designed a worse policy at the time. If only people would have listened to Sumner.”