The upshot of Ben Bernanke’s speech at the economic symposium at Jackson Hole, Wyoming, at least to most interested observers, is that the Federal Reserve will enact a new round of quantitative easing at their next policy meeting the week of September 10. This may be dependent on the jobs numbers that come out this coming Friday, but that’s the general consensus. One regional Fed President hinted that a “package” of measures could be enacted by the Fed, although this probably includes an extension of the communication on how long interest rates would remain close to zero (extending through to 2015) along with the new asset purchases.
So this would suggest that the Fed will take some steps to ease monetary policy. The problem is that, at the same policy symposium, leading monetary policy theorist Michael Woodford argued in a paper that the steps under consideration would be the exact wrong ones to take.
Mr Woodford’s 97-page paper is deeply sceptical about the efficacy of quantitative easing and endorses the idea of a central bank target path for nominal GDP. From his conclusion:
“Central bankers confronting the problem of the interest-rate lower bound have tended to be especially attracted to proposals that offer the prospect of additional monetary stimulus while (i) not requiring the central bank to commit itself with regard to future policy decisions, and (ii) purporting to alter general financial conditions in a way that should affect all parts of the economy relatively uniformly, so that the central bank can avoid involving itself in decisions about the allocation of credit. Unfortunately, the belief that methods exist that can be effective while satisfying these two desiderata seems to depend to a great extent on wishful thinking.”
Woodford prefers a series of more unconventional steps that have mainly to do with communicating different targets for monetary policy, and a commitment to adhere to those targets in the future. Just buying up some securities in an attempt to flatten out interest rates, an extension of the type of policy you would do under normal circumstances (only the basket of assets purchases changes because of the near-zero interest rate lower bound), doesn’t get you anywhere, according to Woodford. And once again, this is not some random economist entering the debate; this is someone who worked closely with other Fed Presidents on the matter, someone who worked with Ben Bernanke at Princeton, someone who has advised the New York Fed. It represents a policy argument at the highest level.
Paul Krugman further explains this.
I think I was the first to make a point (pdf) that Woodford and Gauti Eggertsson greatly expanded in 2003, namely, that the central bank can still gain traction if it can convince the public that it will pursue a more inflationary policy than previously expected after the economy recovers. As I wrote way back then, the central bank needs to credibly promise to be irresponsible [...]
But that isn’t what the Fed has mainly done, at least not explicitly. Instead, it has relied on purchases of nonconventional assets (misleadingly billed as quantitative easing or QE), especially long-term debt. Has this been effective? Woodford parses the evidence, and concludes tentatively that most of the apparent effects of QE actually come through the expectations channel — that is, that QE works, to the extent it does, largely because markets see it as a form of forward guidance.
So what should the Fed be doing? Woodford concludes that it needs to make a change in its basic policy pronouncements, so as to make them “history-dependent” — that is, it needs to promulgate a view of its intentions that would lead it to be slower to raise rates following a big slump than it would in other circumstances. And let me repeat the past tense: following a big slump, not just when you’re in it.
One of the ways the Fed could do this is through Nominal GDP targeting, which is essentially targeting a GDP rate without adjusting for inflation. This would extend the time in which the central bank would hold off on raising interest rates, because it allows inflation to rise without entering their targeting consideration. Another option would be to take up Chicago Fed President Charles Evans’ idea, committing to doing anything to lower unemployment under 7%, unless inflation rises above 3%. Since the Fed has provided inflation an effective ceiling of 2%, this would allow it to rise above that.
Woodford essentially is saying that the Fed’s insistence that they will fight inflation during and immediately following a recovery ruins the potential positive effects of their own policy. Just purchasing a bunch of assets does nothing; it’s the expectations channel that must be employed. This completely contradicts Bernanke’s speech, which largely defended quantitative easing and set the table for more of it.
Joe Weisenthal writes that this paper “may change the future of economics.” It also suggests that Bernanke, who isn’t so dense as to not have an understanding of Woodford’s findings, may have an ulterior motive in mind in purchasing all these assets, mostly old and often toxic mortgage-backed securities. The recent scooping up of foreclosed properties at bargain-basement prices by hedge funds actually plays a role here – they are closing out the properties as prices that could be lower than what the market will actually bear, generating major losses for the trusts that hold these properties. Who ultimately takes these losses? The Fed, if they decide to buy up all the private-label MBS out there. So there’s a backdoor bailout quality to this as well.




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So what should the Fed be doing? For starters, setting a mandate on the banks to lend at least half of the money they borrow at near 0% to small businesses in the form of long-term low interest loans and to ease credit requirements for doing so!
97 pages huh.
More useless pontificating, pretending the FRB hasn’t run out of ammo.
Bullshit. All this expectations stuff is stool. Give it up. It’s New Age clap trap.
Does anyone know how monetary policy used to work? It never was about expectations it was about the cost and availability of credit.
In terms of macro economics it’s show me the money. If credit is flowing people get confidence, not the other way around. And the idea that people will be ‘confident’ of inflation so will borrow now is either stupid, insane, or both come to think about it.
I know this is all Modern Monetary Theory stuff. Which in itself is the end game of economics. Worthless money backed by worthless credit is the road to wealth. OMG.
Total system credit has doubled and doubled again and then doubled again the past 30 years and where are we? On the cusp of great things if only more people borrow more? Yea, sure.
That this has become the liberal and progressive dogma is dispiriting.
It was the mad expansion of credit which accounted for Morning in America and the huge wealth transfer to the top by our oligarchs and overlords. More of the same will result in, you guessed it, more of the same.
Book Salon up with Danny Dorling’s The No-Nonsense Guide to Equality hosted by Jeremi Suri
Great post. I’ve made the same points here over and over again to no avail. You’d think DD would ask himself who’s gotten the gravy from the Greenspan/Bernanke (sl)easy money era. The question answers itself. Must be those Krugman beer goggles again.
At this point, I’d be more impressed with Ben B. holding up a nice big trout that he caught at Jackson Hole.
As for fixing the economy, it’s more of watching the rich get richer and everyone else getting it up the a$$.
This all bullshit proffered by fools and knaves .QE was never meant to help the real economy other than money illusion via ‘wealth effect’ .I could explain what B is doing but it entails the libor scam and will waste my unsolicited time .Suffice it to aver,,the Fed will never work for the U.S. economy and we need public banking .Otherwise ,we have too big to fail ensuring certain collapse via this corporate communism . I realize we have no power to change anything .but taking this claptrap seriously ,only prevents us from accepting our powerlessness and doing something about it .
The American people are extremely resourceful and productive, given the chance. So many of us have lost our capacity to compete because of losses and the dearth of capital.
President Obama and his advisers Summers & Geithner were loathe to seize the extraordinary opportunity in 2009 to nationalize the banks, outlaw the derivatives trade, revalue all mortgages, prosecute the fraudsters, and claw back the losses. This would have been the honest route to saving the economy.
What we have now is a “nanny state” feeding the insatiable habits of financier addicts who have no responsibility to society. Continuing along this path will lead to a worse collapse, which could cause a worldwide loss of confidence in and abandonment of the dollar.
I am no economist but I can see this is not sustainable, and it looks to me like the economists like Bernanke are using code speech, propping up a massive Ponzi scheme to rip off the public.
“QE”, otherwise know as money printing, has the well-know effect of redistributing wealth from poor people to rich people. So it’s kind of strange how so many “liberals” are always begging for it. Although probably not so strange when you consider that many self-described liberals are in the 1%.
At the risk of sounding simplistic : it’s a faith-based system. If you really believe that debt is the same as money, you have faith that 16 trillion dollars can be recovered. I don’t.
Overhaul monetary policy in the crisis? Hell, this is no crisis. This is an opportunity.
Debt and money are the same in the sense of leveraging the power of wealth .We are being impoverished by debt leveraged austerity. Jaime Dimon has extortive leverage over government via 90 trillion in credit swaps via Bernanke’s complicity .I believe austerity is a total scam created by G-22 banksters ,yet these broke-assed thugs still leveraged ‘to big to fail’ to turbocharge global austerity from the IMF loan sharks and its poor-nation prey .
One form of insanity is repeating the same behavior and expecting a different result.