Comments on: Attribution to the Fed

By: Matt Young

Matt Young — Mon, 03 Mar 2014 20:19:46 +0000

The economy is very sticky, as sticky as an oil tanker making a U turn. Unsticky money measures sticky things quite well, and thus get blamed, as in shoot the messenger.

By: Shayne Cook

Shayne Cook — Mon, 03 Mar 2014 15:05:25 +0000

Here is a statement, extracted from the Matt O’Brien article that Arnold linked to, that seems to epitomize the “Fed caused it” bias that dominates these sorts of discussions/conclusions:

“Consumers were cutting back [by August 5, 2008 FOMC meeting], especially on big-ticket items like cars, because they couldn’t get credit.” [Emphasis and insert, mine].

The ceteris parabus assumption is ALWAYS that “… they couldn’t get credit“, which, if true, could plausibly be traced back to Fed actions/mis-actions/inaction.

The problems I have with this is:
First, Consumers weren’t cutting back spending – (see http://www.bea.gov Table 1.1.5 NGDP data. Consumption spending increased, both in nominal dollar terms, and in percentage-of-NGDP terms constantly for the period 2006 through 2012 [the last full year of data I have].)
But, beginning late 2007/early 2008, Households were reducing household debt levels – a rather rare “de-leveraging” phenomena that is just now (last quarter 2013) beginning to reverse. That household debt “de leveraging” amounts to some $2 Trillion as of now, by the way.

Second, although it’s possible that the household debt “de-leveraging” cycle that began late 2007 (and most likely earlier) was due to reduction of credit availability (the Fed’s fault), I haven’t seen anything I would consider proof – other than unsubstantiated claims.

An equally possible, and I think vastly more probable, explanation for the household debt “de-leveraging” cycle is that it is/was nominally or even entirely voluntary action on the part of households – completely irrespective of credit availability, interest rates, or Fed action/mis-action/inaction. Somehow, I never read/hear the “… because they couldn’t get credit … (the Fed’s fault)” crowd ever mention or even consider that explanation. Have you?

I agree with you that the Fed is a very influential and powerful entity. But it’s NOT powerful enough to force households or businesses to take on new debt, or even avoid de-leveraging, any time it wants.

By: andrew'

andrew' — Mon, 03 Mar 2014 08:46:31 +0000

In my estimation there is too little discussion from the mmt contingent on the unsustainable path that made subsequent small errors more consequential. There may be a good reason they were worried about an unseen inflation problem if they had created it. Complaints about failure to bail out are valid but indicate an asymmetry of hindsight.

By: Al

Al — Sun, 02 Mar 2014 23:37:33 +0000

Monetary policy may be prone to misattribution for the same reason that it may be a robust “explanation”: every causal argument takes place in a monetary regime. Non-monetary arguments still imply a monetary environment that permits such effects.

By: F.F. Wiley

F.F. Wiley — Sun, 02 Mar 2014 22:04:29 +0000

Ah, I was thinking back to “Karl Smith’s Question” on monetary policy more generally and other posts – didn’t make the connection to the NGDP crowd on this one.

My mistake.

As for the other points, you (TravisV) have surely figured out from your comments on my site that I have no interest in discussing Scott Sumner’s ideas with you. No change there.

By: TravisV

TravisV — Sun, 02 Mar 2014 18:07:38 +0000

F.F. Wiley,

Arnold Kling is talking about the views of Scott Sumner, David Beckworth and other market monetarists, not your views.

Your view–which includes obsession with interest rates–is not very persuasive. And I’m sure Kling is too smart to agree with your view.

The idea that interest rates are “artificially low” right now doesn’t make sense.

If the Fed tightens aggressively, NGDP growth expectations and stock prices will fall. As a result, long-term interest rates will go down.

And if the Fed eases aggressively, NGDP growth expectations and stock prices will increase. As a result, long-term interest rates will increase.

In other words, the idea that interest rates are “artificially low” is exactly backwards. Understand? I’m sure Arnold Kling does.

By: Lord

Lord — Sun, 02 Mar 2014 17:23:33 +0000

I agree there is too much emphasis on single causes but that shouldn’t mean there are no causes and everything is irrelevant. What it highlights here I think is the need for increased automatic mechanisms to counteract instability. That is no small task as information arrives late and action can easily lead to overreaction, but the more we can create such mechanisms, especially those that work against institutional biases so there is less they need to do, the more effective they can be. It is possible these could encourage them to do even less or even counter them, but they already have this bias and we want them to do what they are already comfortable doing.

By: F.F. Wiley

F.F. Wiley — Sun, 02 Mar 2014 15:47:54 +0000

As someone who thinks the Fed was highly complicit in the boom/bust, I think you can hold that view without being a single-cause simpleton. It’s true that markets can get out of hand without monetary stimulus, and housing markets had an assist from govt. policies (of the left and right) as well, but the Fed is ultimately responsible for systemic risk and everything it did through Greenspan & Bernanke was in the direction of greater systemic risk. They consistently goosed up liquidity (and orchestrated bailouts) when markets faltered (the seeing-things-through-the-eyes-of-big-NY-institutions that you talk about); basically ignored the collapse in lending standards even as they were the only institution mandated to do something about it (via regulation); and held interest rates way below where they would be in a free market because of an inflation target and deflation phobia that caused them to completely misread the risks that were building.

If you went back to 1987 and populated the FOMC with folks who are sensitive to credit booms, bubbles and moral hazard (as opposed to kicking them off advisory committees as they reportedly did to Shiller), it’s hard to imagine that the last 25 years playing out as it did. Even adding people who understand that house prices can go down on a nationwide basis (Bernanke pretty much denied this) and that mortgage debt, too, can fall (Greenspan dismissed that one) should have made some difference.

BTW, I’m a huge fan of the site and adding my 2 cents only because I don’t follow your perspective on the Fed’s impact and potency. IMO an institution that can control interest rates, create all types of liquidity programs, regulate lending nationwide, oversee NY banks and set capital and reserve requirements is a pretty powerful institution.