Ryan Avent: Federal Reserve transcripts: The Great Recession! It’s right behind you! : “Was [Geithner] a villain or a hero?
More the latter if you ask me. But above all he was a human—experienced in global finance, yes, but even so—trying to assess the plausibility of the occurrence of an event well outside the lived experience of everyone in that room, and faring reasonably well all things considered…
Continue reading “Ryan Avent on Tim Geithner: Fed 2008 Transcript weblogging”
Having finally gotten to the end, I have one major reaction:
Janet Yellen looks really, really good–smart, coherent, convincing, polite, influential, effective, and with an eye on what the major risks and problems are. Maybe Eric Rosengren has a slight edge in terms of possessing the requisite degree of alarm. But the two of them are clearly head-and-shoulders above every single other member of the FOMC in their understanding of the looming crisis…
As I, at least, see it, there are four big questions in the debate over “Say’s Law”:
Four big questions. Five related posts in dialogue with each other that shed some light on them:
David Glasner: Who’s Afraid of Say’s Law?: “There were two famous objections made to Say’s Law:
first, current supply might be offered in order to save for future consumption, and, second, current supply might be offered in order to add to holdings of cash. In either case, there could be current supply that is not matched by current demand for output, so that total current demand would be insufficient to generate full employment…. The savings argument goes back to the nineteenth century, and the typical response was that… the shortfall in consumption demand would lead to an increase in investment demand driven by falling interest rates and rising asset prices…. Keynes proposed an argument about liquidity preference and a potential liquidity trap, suggesting a reason why the necessary adjustment in the rate of interest would not necessarily occur….
The argument that the existence of money implies that Say’s Law can be violated was widely accepted…. Oskar Lange… introduced a distinction between Walras’s Law and Say’s Law (“Say’s Law: A Restatement and Criticism”)…. Lange showed that Walras’s Law reduces to Say’s Law only in an economy without money. In an economy with money, Walras’s Law means that there could be an aggregate excess supply of all goods at some price vector, and the excess supply of goods would be matched by an equal excess demand for money. Aggregate demand would be deficient, and the result would be involuntary unemployment….
One of my regular commenters, Tom Brown, asked me recently whether I agreed with Nick Rowe’s statement: “the goal of good monetary policy is to try to make Say’s Law true.” I said that I wasn’t sure what the statement meant, thereby avoiding the need to go into a lengthy explanation about why I am not quite satisfied with that way of describing the goal of monetary policy.
There are at least two problems with Lange’s formulation of Say’s Law. The first was pointed out by Clower and Leijonhufvud…. Lange’s analysis was based on the absence of trading at disequilibrium prices…. In a real-time economy in which trading is routinely executed at disequilibrium prices, transactors may be unable to execute the trades that they planned to execute at the prevailing prices. But when planned trades cannot be executed, trading and output contract, because the volume of trade is constrained by the lesser of the amount supplied and the amount demanded…. If transactors do not succeed in supplying as much as they planned to supply at prevailing prices, then, depending on the condition of their balances sheets, and the condition of credit markets, transactors may have to curtail their demands in subsequent periods….
Paul Krugman puts this in the proper context:
Paul Krugman: The Urge To Tighten: “People are going through the Fed’s 2008 transcripts, and finding that most officials had no idea what was going down… really surprising… dismaying… a number of Fed officials were… focused on inflation… eager to raise rates…. A fair number… very much not, however, including Janet Yellen… would, if they could, have echoed the ECB’s big mistake. What’s… shocking… is that official Fed doctrine is to focus on core inflation… headline inflation has swung widely, while focusing on core inflation has been a much better (though not perfect) guide to appropriate policy. Were Fed officials just not on board with this doctrine?
But things are actually much stronger than Paul says: in the three decades since the start of the late lamented “Great Moderation”, of the 15 substantial divergences between core and headline inflation, core inflation is a better guide to what headline inflation will be in two years in 13 of the 15–and core inflation is a better guide to what core inflation will be in 2 years, and hence what headline inflation will be in 4, in 14 of the 15.
So we are surprised when somebody like Richard Fisher, President of the Dallas Fed, says things like: “whatever inflationary pressures were building up toward the end of the summer – and they were significant…” Did nobody on his staff teach him about the difference between core and headline inflation–and the superior reliability of core? Did the teaching just not take?
The distinction between core and headline inflation was a genuine and important macroeconomic insight, developed by Robert J. Gordon in 1975: Robert J. Gordon, (1975), <a href="http://www.brookings.edu/~/media/Projects/BPEA/1975%201/1975abpeagordon.PDF”>”Alternative Responses of Policy to External Supply Shocks”, Brookings Papers on Economic Activity 1975:1 (Spring), pp. 183–206. Yet it has apparently dropped out of at least one of the wings of macroeconomics–Chris House, for example, makes no reference to core inflation in his defense of Federal Reserve inflation hawks in 2008:
Chris House: The Fed in 2008: “There were people who were concerned about inflation.
This seems odd given what we know followed (and odd given that a bit more inflation would be welcome news today) but, at least to a small extent, it was part of the data at the time. Some commodity prices, and oil in particular, were both rising which seemed odd given what policy makers were hearing from lenders. Jim Bullard has an interesting recent presentation on this in which it seems like he is arguing that oil supply shocks may have shaped the Fed’s assessment of the problem that summer…
It is a mistake to take moves in headline inflation that are deviations of core inflation as signals of anything.
And it is only by looking at what we got wrong in the past that we can mark-our-beliefs-to-market and do better in the future. So we are even more alarmed when people like Fisher demand that people not engage in Monday-morning quarterbacking of 2008. How can you mark your beliefs to market if you do not compare what you thought to what was true?
Yet a great many FOMC meeting participants appear to have been unaware of the distinction between core and headline inflation in 2008:
Continue reading “Federal Reserve Fretting About Inflation in 2008: Monday Focus: February 24, 2014”
Kevin Drum: Walmart’s Core Customer Base Is Doing Poorly: “We may not officially be in a recession any more, but the poor are still hurting pretty badly. And that’s Walmart’s core customer base:
Wal-Mart Stores Inc forecast a lower full-year profit than analysts expect, as fewer food stamps, higher taxes and tighter credit erode its sales, news that sent its shares down 1 percent in premarket trading on Thursday…. A major factor in Wal-Mart’s U.S. performance was a “low-single-digit decline” in sales of groceries at stores open at least a year, which generate about half of its sales….Wal-Mart’s grocery sales have suffered from fewer food-stamp benefits resulting from U.S. federal budget cuts in November. One in five of its shoppers relies on food stamps, according to Cowen analyst Tal Lev.
I imagine that Walmart is now suffering from the failure to extend unemployment benefits too. And from the slowdown in economic activity and job losses caused by the sequester. And from our failure to increase the minimum wage. But then again, lots of people are suffering from all that. Walmart is just a very large canary in the coal mine.
Paul Krugman: The Urge To Tighten: “People are going through the Fed’s 2008 transcripts, and finding that most officials had no idea what was going down….
I’m a bit surprised, but that’s not the most surprising thing. What’s really surprising, and a bit dismaying, is the fact that a number of Fed officials were evidently focused on inflation, and some were eager to raise rates. That is, there were a fair number of people at the Fed — very much not, however, including Janet Yellen –who would, if they could, have echoed the ECB’s big mistake. What’s kind of shocking about this is that official Fed doctrine is to focus on core inflation, not react to short-run fluctuations in commodity prices. And the history of the past decade or so has showed that this is very much the right thing to do — headline inflation has swung widely, while focusing on core inflation has been a much better (though not perfect) guide…. Were Fed officials just not on board with this doctrine? Or was it part of a general urge to tighten, because central bankerly types just really dislike easy money?
The first part of our lesson for today consists of a piece based on his AEA presentation by the terrifyingly brilliant Lawrence Summers: Strategies for sustainable growth: “Last month I argued that the U.S. and global economies may be in a period… in which sluggish growth and output, and employment levels well below potential… coincide… with problematically low real interest rates….
Nathaniel Popper: As 2008 Crisis Loomed, Yellen Made Wry and Forceful Calls for Action: ‘Janet L. Yellen was not even a full voting member of the Federal Reserve’s policy-making committee, but she was not shy about admonishing her colleagues for not acting faster. “We need to do much more and the sooner the better,” Ms. Yellen said at a two-day meeting in late October…. After months in which some members of the Fed committee resisted taking steps to prop up the economy, Ms. Yellen lectured her colleagues: “Frankly, it is time for all hands on deck when it comes to our policy tools.”… What the transcripts show is a woman who was constantly pushing her peers — and also cleverly cajoling them — to do more to help ordinary households, not just financial institutions. At the same time, she urged her colleagues to look at the flaws in the banks that caused the crisis in the first place. “I don’t believe in gradualism in circumstances like these,” Ms. Yellen said in March 2008, months before the situation came to a boil…. At the end of October, the head of the regional Fed bank in Dallas, Richard W. Fisher, a member of the central bank known for his advocacy of higher interest rates, said that for one of the few times, he was following Ms. Yellen’s lead. “I will conclude with actually once again agreeing with President Yellen, as I think I have done twice in history,” Mr. Fisher said…. But even as the committee agreed to take ever more extraordinary actions, Ms. Yellen voiced her steady disappointment that her colleagues were not doing more to help the economy. “Historical precedents, such as the case of Japan, teach us that it is a mistake to act cautiously as the economy unravels,” she said in late October.’
Felix Salmon: Facebook’s Horrible, Stroke-of-Genius IPO: “The technology world moves fast, and companies need to be able to change or die…. Zuckerberg knew, circa Facebook’s IPO, that his company was not good at mobile… he knew that asking his existing corps of engineers to turn their attention to mobile would probably not work. But… he… [now had] a highly-valued acquisition currency in the form of Facebook stock. The world of mobile is in large part a lottery. The most successful products aren’t the best-made; they’re just the ones which managed to catch on…. Facebook bought Instagram for $1 billion in 2012 not because the product was particularly great, but because the product was insanely popular. The same when he offered $3 billion for Snapchat…. Facebook’s acquisition of WhatsApp sums up Zuckerberg’s strategy perfectly. WhatsApp is an ugly, clunky product with a juvenile name…. But… it’s also insanely popular… hundreds of millions of incredibly loyal users…. Issuing Facebook stock, especially if doing so buys you the future, in terms of a young global user base, costs Zuckerberg effectively nothing…. The WhatsApp acquisition is a statement by Zuckerberg that mobile matters more than money. He’s right about that. Without mobile, it doesn’t matter how much money Facebook has…. He’s playing large-stack poker, and he’s playing it in textbook manner. I, for one, wouldn’t want to be competing against him.”
Uki Goñi: Peso panic and rocketing prices shake the throne of Argentina’s Queen Cristina: “The economic panic… began in mid-January, when Argentina’s central bank reserves dipped below $30bn, forcing the government of President Cristina Fernández de Kirchner to drop its policy of injecting large quantities of dollars into the exchange market to shore up the overvalued peso. The sudden dollar scarcity on Argentina’s exchange market sent the peso’s official value crashing to eight pesos to the dollar, while the ‘blue’ illegal rate shot up to nearly 13…. The government has been quicker at naming culprits than finding solutions… Jorge Capitanich… televised verbal blast[s] at the perceived enemies of the ‘victorious decade’ presided over by the current president and her husband, the late Nestor Kirchner… ‘visible and invisible’ politicians, labour representatives, businessmen and journalists he blames for the sudden collapse of the peso and the explosive price increases… faceless foreign speculators, whom he accuses of a “strategy of domination” to gain control of Argentina’s oil and freshwater reserves, pandering to the widespread belief here, often underlined by the president in her speeches, that “vultures” of the leading industrial countries harbour secret plans to siphon off natural reserves…. Capitanich has also blamed ‘anti-patriotic’ farmers and large retailers… corruption-probing journalists… ‘generating psychological action of permanent destabilisation’…”
Richard Mayhew: Why the AFP Ads S—: “There are a couple of categories of people who are undeniably worse off under Obamacare…. (i) People earning over $250,000 per year in Modified Adjusted Gross Income who have employer sponsored health care or Medicare and are paying more in taxes (ii) Young single males with absolutely no health problems, no relatives with health problems and incomes over 250% Federal Poverty Line that previously had a $42 a month, $25,000 deductible plans that did not cover maternity or mental health needs. Those policies got cancelled…. Avik Roy has been trying to make this class sympathetic and failing miserably). Those are the two big classes of losers under the law. Neither are particularly sympathetic…”
Continue reading “Things to Read on the Afternoon of February 22, 2014”
Nathaniel Popper: As 2008 Crisis Loomed, Yellen Made Wry and Forceful Calls for Action: “Janet L. Yellen was not even a full voting member of the Federal Reserve’s policy-making committee, but she was not shy about admonishing her colleagues for not acting faster.
“We need to do much more and the sooner the better,” Ms. Yellen said at a two-day meeting in late October…. After months in which some members of the Fed committee resisted taking steps to prop up the economy, Ms. Yellen lectured her colleagues: “Frankly, it is time for all hands on deck when it comes to our policy tools.”… What the transcripts show is a woman who was constantly pushing her peers — and also cleverly cajoling them — to do more to help ordinary households, not just financial institutions. At the same time, she urged her colleagues to look at the flaws in the banks that caused the crisis in the first place. “I don’t believe in gradualism in circumstances like these,” Ms. Yellen said in March 2008, months before the situation came to a boil…. At the end of October, the head of the regional Fed bank in Dallas, Richard W. Fisher, a member of the central bank known for his advocacy of higher interest rates, said that for one of the few times, he was following Ms. Yellen’s lead. “I will conclude with actually once again agreeing with President Yellen, as I think I have done twice in history,” Mr. Fisher said…. But even as the committee agreed to take ever more extraordinary actions, Ms. Yellen voiced her steady disappointment that her colleagues were not doing more to help the economy. “Historical precedents, such as the case of Japan, teach us that it is a mistake to act cautiously as the economy unravels,” she said in late October.
Steven Perlberg: Tim Geithner January 2008 FOMC Minutes: “The World Is Still Looking Pretty Good”: “In January 2008–right as the U.S. economy entered a recession–the former Federal Reserve Vice Chairman (and later Treasury Secretary) was still very optimistic….
Here’s Geithner:
You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk, without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful. There’s a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we’re in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that’s the first time. It has been a long time since we’ve seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they’re right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. Having said that, though, I think it is quite dark still out there…. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential.
It was much darker than Geithner originally predicted.
Indeed…
What was he looking at in January 2008 to say that?