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.”
Santa Needs Market Prices
Wow, it’s a good thing my latest FEE article is running in December. Otherwise it would just be weird.
On Paris Climate Deal (and Alleged Fate of Humanity), Show Your Work, Dr. Krugman
My latest post at IER. C’mon tell me this isn’t a good line:
Notice the absurdity, and we’re still in Krugman’s first two paragraphs. The existence of humanity itself is allegedly on the line—Krugman wonders if there will even be future historians—and yet this Paris meeting won’t solve the problem. Isn’t it weird that a handful of “deniers” in the United States apparently have the power to tell the whole world what to do with their economies? If this is such an open and shut scientific case, why won’t the Paris talks achieve anything beyond symbolism? Would Krugman be bestowing such honors and prestige on, say, the Captain and crew of the Titanic having a meeting where they agreed to start thinking about icebergs?
Tricking People Into Thinking Bible Verses Are From the Koran
I’m sure this will provoke a discussion I end up regretting, but if you go watch the video at this link (I can’t seem to get just the YouTube video) you’ll see two Dutch guys reading verses from the Bible, but telling people they’re from the Koran. The people recoil from the violence and repression of women, etc.
So go ahead and discuss the lesson the guys wanted you to draw from it; I get that. But what’s interesting is that there is an INCREDIBLY misleading edit done in the video. Who can spot it?
Krugman Says Economy Not So Bad
Tom and I discuss his column in Contra Krugman Episode 13.
A Quick History of the Climate Change Policy Debate
1) CHORUS: Look at the peer-reviewed literature, you evil deniers. 97% of scientists agree, we need massive carbon tax STAT!
2) BOB: Actually, neither the IPCC reports nor the Obama Administration’s chosen computer models support the policies that are being pushed in the name of “consensus.”
3) NOAH SMITH: Ha, you think we can trust the economic computer models? You dolt! The economists who make those models don’t trust them!
4) BOB to Twitter fans: And there you have it folks, an admission that these computer models–upon which rest the argument for trillions in new taxes–aren’t trustworthy.
5) NOAH: Ha ha you Luddite! ‘Me no trust computers, me dumb Austrian.’
6) NOAH (high-fiving fan who piled on): Exactly right! I guess Bob will use “praxeology” instead of empirical science. Idiot.
What have I missed, kids?
Science Is Prediction: Back-Testing the Market Monetarist-Endorsed Ted Cruz Explanation for the 2008 Crash
(Please don’t lecture me on the post title: I am making a wisecrack related to Dan’s very useful advice on a previous post.)
Recently Ted Cruz was grilling Janet Yellen. So far, so good. But then he said:
Senator Cruz: In the summer of 2008, responding to rising consumer prices, the Federal Reserve told markets that it was shifting to a tighter monetary policy. This in turn set off a scramble for cash, which caused the dollar to soar, asset prices to collapse, and CPI to fall below zero, which set the stage for the crisis. In his recent memoir, former Chairman Ben Bernanke says that the decision not to ease monetary policy at the September 2008 FOMC meeting was “In retrospect certainly a mistake.” Do you agree with Chairman Bernanke that the Fed should have eased in September of 2008 or earlier?
Scott Sumner and David Beckworth were both pleased with this line of questioning, and Scott also linked with approval to a Washington Examiner article saying Cruz’s questioning reflected Market Monetarist influence.
Now obviously, Scott and David are trained economists, and experts in Market Monetarism, so they would’ve been more nuanced if they had had the opportunity to grill Yellen. But if you read their commentary, I don’t see anything except a high-five for Cruz in this exchange. (They of course disavow his earlier support for the gold standard.)
All right then, with that background, to the point of my current post: I am wondering what kind of statement you guys think the Fed had to issue back in “the summer of 2008” that ultimately caused the financial crisis. Go look at Cruz’s statement above; he is definitely saying that the chain of events was that the Fed told markets something, and then this caused dominoes to start falling that ultimately led to the crisis in the fall.
In the comments (e.g. here) at various places where Cruz’s questioning was being discussed, I asked people for a link to the actual Fed statement in the summer of 2008 that Cruz had in mind. The only answer I saw (maybe someone answered after I stopped checking) was Scott himself, who said:
SCOTT SUMNER, EXPLAINING WHAT THE FED STATEMENT IN THE SUMMER OF 2008 WAS: “Bob, I’d guess he’s responding to Fed statements that they were increasingly worried about inflation, and likely to tighten in the future. (Which of course they did.)”
OK so now, without looking, I would like you guys–especially if you are fans of Sumner–to type out your guess as to what the Fed’s statement(s) in the summer of 2008 probably sounded like, to explain how the Ted Cruz / Market Monetarist theory is plausible, in that it was not underlying “real forces” but in fact the Fed pushing expectations through its statements/actions in the summer of 2008 that caused the global financial crisis a few months later.
So please, type out your guesses in the comments of this post. In a few days I’ll paste what the Fed actually said. But NO CHEATING: You are on your own intellectual honor, I want you to type out the type of Fed statement in the summer of 2008 that you think plausibly explains the global financial crisis.
One last thing: Even after you type out your own guess, and then if curiosity is killing you and you go look it up, please don’t spoil it for others by posting it here. Let’s keep this comment section reserved just for people’s guesses. And again, I want to stress that I’m hoping for fans of Market Monetarism to chime in here. I want you to tell me, off the top of your head (that’s important for this exercise), what type of thing the Fed said in the summer of 2008 that you think is a much better explanation for the subsequent financial crisis than the housing bubble or some other “real factor.”
Scott Sumner, the Rortyian Historian
Scott Sumner has flirted with the notion that there is no such thing as truth, that “truth” is whatever your colleagues let you get away with. (I’ve dug up this post of him merely talking about it, but I’m pretty sure there are others where it looks like Scott is receptive to the idea.) And he has also written that he used to use arguments to support his position that he knew were a little bit suspect, but thought he could get away with, until the sharp commenters on his blog forced him to raise the bar. (If someone can find that post–I think it was on EconLog–I’d appreciate it. People will think I’m putting words in his mouth, but no, Scott really did say that.)
So in that spirit, it occurs to me that maybe Scott doesn’t think anyone will bother to go read the text of the recently passed (in the House) Fed Oversight and Modernization Act (FORM Act). Now if you click the link, under the Definitions in the beginning you will find:
(9) Reference Policy Rule
The term “Reference Policy Rule” means a calculation of the nominal Federal funds rate as equal to the sum of the following:
(A) The rate of inflation over the previous four quarters.
(B) One-half of the percentage deviation of the real GDP from an estimate of potential GDP.
(C) One-half of the difference between the rate of inflation over the previous four quarters and two percent.
(D) Two percent.
OK, so if you’ve studied economics, you know that the above is a version of the Taylor Rule, with equal weight placed on hitting the 2% price inflation target and in minimizing the output gap.
In contrast to the “Reference Policy Rule,” earlier in the text they define:
(2) Directive Policy Rule
The term “Directive Policy Rule” means a policy rule developed by the Federal Open Market Committee that meets the requirements of subsection (c) and that provides the basis for the Open Market Operations Directive.
OK, so the FORM Act lets the Fed come up with its own Policy Rule. However, the Fed can’t just issue any old rule, like, “We are going to try super duper hard to foster a good economy.” In the section of the bill explaining the requirements of an acceptable Policy Rule, it says:
(c) Requirements for a Directive Policy Rule
A Directive Policy Rule shall—
(1) identify the Policy Instrument the Directive Policy Rule is designed to target;
(2) describe the strategy or rule of the Federal Open Market Committee for the systematic quantitative adjustment of the Policy Instrument Target to respond to a change in the Intermediate Policy Inputs;
…
(5) describe the procedure for adjusting the supply of bank reserves to achieve the Policy Instrument Target;
(6) include a statement as to whether the Directive Policy Rule substantially conforms to the Reference Policy Rule and, if applicable—
(A) an explanation of the extent to which it departs from the Reference Policy Rule;
(B) a detailed justification for that departure; and
(C) a description of the circumstances under which the Directive Policy Rule may be amended in the future; …
In the block quotation above, I left out (3) and (4) for brevity, but I retained (1), (2), and (5) so you’d get the gist of it. Look now at (6). It is saying that if the Fed’s proposed rule differs from the Taylor Rule (with equal weights on inflation and output gap), then the Fed needs to justify to Congress in detail why they are doing so.
Because of this item, Narayana Kocherlakota–who isn’t some punk journalist at Bloomberg, but is the president of the Minneapolis Fed–recently said in a speech: “The U.S. House recently passed a measure, the Fed Oversight Reform and Modernization Act, that would enshrine the Taylor Rule as a key benchmark for monetary policy.”
Pretty straightforward commentary on the FORM Act, right? I mean, if you get a memo from your boss saying, “Employees are allowed to propose their own lunch hour, but anyone proposing a bloc different from 11:30am – 12:30pm must provide Human Resources with a detailed justification for departing from this time frame,” then your co-worker would quite reasonably conclude, “They are setting 11:30am – 12:30pm as the benchmark for lunch breaks.”
But Scott Sumner likes the FORM Act–it’s a move in the direction toward a “discretion-free, let-the-markets-target-NGDP-growth” rule–and so he doesn’t want anybody criticizing it. So in response to Kockerlakota’s statement, Sumner wrote:
Unfortunately, Kocherlakota is flat out wrong about the recent House bill, it does not “enshrine the Taylor Rule as a key benchmark for monetary policy”. Not even close. It asks the Fed to come up with an explicit monetary rule. I suggest NGDPLT, target the forecast.
Notice that Sumner didn’t merely say, “I quibble with such a strong term as ‘key benchmark.'”
No, Sumner he said it’s “not even close,” and that all the bill does is ask the Fed to explicitly say what its rule is. If you didn’t go read the bill yourself, and relied on Sumner to tell you what it says, you would be horribly misinformed.
Now those of you who think Bernanke was too tight, go ahead in the comments and tell me, “Come on Bob, all Scott is saying is…” But when Krugman does stuff like this, and I call him out on it, most of you give me a high-five.
Last thing: Part of the reason I’m making this point is that I’m going to soon review Scott’s book on the Great Depression. I’m sure it will be a fine piece of scholarship, and will present all sorts of evidence that others were too busy/lazy to research. But I am expecting that I will often have to go dig up the original sources on some key issues, rather than trusting Scott’s paraphrase of what “it means.” This episode with Kocherlakota is a good example of why I feel I have to do that.
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