Tackling Ted Cruz
In my latest piece at Mises.org I take on the notion that the Fed’s announcement of “tight” money in the summer of 2008 is ultimately to blame for the financial crisis.
I am running around with holiday travel but hopefully by the weekend I will return to my earlier post (here on the blog) about Fed statements in the summer of 2008. In the meantime, this Mises.org article will give you fodder.
One thing right now, though: What you CANNOT do is think you are taking the Sumner/Beckworth/Cruz position by saying, “Bob, of course the collapsing housing market was causing major stress in the financial markets, and those firms sitting on MBS and related credit default swaps were in big trouble. We’re just saying that in the midst of that, when the Fed needed to be flooding the markets with money and instead was reluctant, you get the Great Recession.”
The reason you CAN’T say the above, is that that is what the standard mainstream economist position has been all along. That is saying the housing bubble was the real “cause” of the crisis, and the Fed didn’t do enough to cushion the blow. The whole point of Sumner starting his blog was to say no, the FED caused the crisis. Cruz didn’t merely ask Yellen, “Couldn’t the Fed have acted sooner?” No, Cruz was saying that it was the Fed’s summer 2008 announcement itself that caused the financial crisis.
I know Sumner uses analogies like a guy driving off a cliff instead of turning the wheel, and then asking, “Do we blame the driver or the road for veering right?” But I could come up with a bunch of analogies too. For example, if some dictator in Africa intentionally starves his people, and Sumner doesn’t send every last dime to give food to the kids over there, do we say Sumner killed those kids? I mean, he had the power to intervene and chose a “tight food policy.”
“Sumner/Beckworth/Cruz position”
Hm, but Beckworth’s position has significantly more overlap with the cliff notes version of your own that you gave in the article than you’re implying here.
Fair enough on Sumner. On Cruz, I’d like to see him articulate his views in more detail than a single question to Yellen, especially since it struck me that he was asking Yellen to reconcile her own views with Ben Bernanke’s, not necessarily expressing his own?
Sorry, Dr. Murphy, While I think I do see your point about the Root Cause of the…let call it the 2007-8 downturn, I’m still OK with Cruz or Sumner saying the Fed caused the Great Recession. To be clear, I believe the Fed turned the 2007-8 downturn into the Great recession. Here’s my logic:
1) Negative shocks can make financial institutions illiquid even though they may remain solvent. Everyone knows this is a possibility.
2) The Fed is expected to provide liquidity during the negative shocks. Everyone is expecting this to happen. (I was expecting the FDIC to keep my checking account balance safe)
3) In 2008 when the time came for the Fed to do what the market and the financial institutions expected, the Fed indicated its was going to act differently. So, I have an important meeting. I Leave home with lot of time to spare. On the way I get a flat, It happens, people get flats thats why we have spares. I have plenty of time to put on the spare but the spare is flat despite the fact that my mechanic said he would top up the spare when he changed the oil. So, what is the “cause” of my being late for the meeting. Was it the flat or was it the unexpected empty spare?
In the Wall Street Journal today there is a similar take on the “cause” of the Great Recession. http://www.wsj.com/articles/big-short-big-hooey-1450221609 Here’s a taste:
The truth is a lot more interesting. The global crisis was a manufactured event—manufactured out of radical uncertainty about how government would treat the biggest banks, 2% of whose assets consisted of suddenly illiquid but not worthless mortgage securities.
If you run into Rupert’s paywall try googling “big short big hooey” and clicking the google link. Rupert usually gives folks a one article pass when they get to his paper that way.
Again I express my consternation that intelligent market oriented economists choose to squabble among themselves instead of uniting against the evil Krugynesian Empire
“In 2008 when the time came for the Fed to do what the market and the financial institutions expected, the Fed indicated its was going to act differently.”
Right, $9 trillion in cumulative below market rate loans issued out of thin air, where the receivers were told to keep it secret, is definitely not what was expected. It was a lot more than expected.
Major,
I don’t see any contradiction between the $9 trillion loan program and my position. I say this because:
1) It’s my understanding that the program ended in May 2008 So, it doesn’t mean there was not a tightening later in 2008.
3) It was overnight money. Nine trillion is a lot of dough but there is a lot of churn that makes the headline number seem over the top. Before the Great Recession the Fed was churning something like $30Billion in Repos with the banksters. Over 90 days this comes out to $2.7 trillion. So the $9 Trillion is a 3x increase over what was going on in ordinary times. The Fed was doing this precisely because it was trying to ease monetary policy in that time frame. The Fed needed liquid agents in early 2008 to buy Treasuries and sell them to the Fed. Things were different later in 2008.
On the Mises.org piece. At first I thought the piece was heading in the direction of “Oh the Fed caused the Great Recession alright, but the cause goes back to loose monetary policy starting in 2002.” My ears are open to that line of inquiry. But I say the three Fed statements quiz is a trick question. The Feds “sticking with 2%” statement in mid-2008 has to be interpreted in the context of what they were saying earlier that year. Those earlier statements indicated the Fed was going to keep lowering rates till things got better. Then the Fed unexpectedly says “Nah, we’re good.”
…because the lowering of rates, among other actions, in the Fed’s opinion did make things better, so there was no unexpected “we’re good”.
Starting mid 2008 inflation expectations tanked. https://research.stlouisfed.org/fred2/graph/?g=2WAi This was happened right on the heels of the Fed June 25, 2008 press release saying “We’re good at 2%” I’m plagiarizing Beckworth with this analysis. Is it coincidence? Is it because the Fed was gaming the 5 year treasuries market? Was there a significant event at that time in the real economy? I’m open to such arguments if they come with supporting data.