Things to Read at Night on December 19, 2014

Must- and Shall-Reads:

• Rick Mishkin and Eugene White:
  “We find that there were precedents for all of the unusual actions taken by the Fed. When these were successful… they followed contingent and target rules that permitted pre-emptive actions… but were combined with measures to mitigate moral hazard…”
• Barry Eichengreen:
  “The best thing the ECB could do to encourage fiscal consolidation and structural reform is to banish the specter of deflation… [by] full-bore quantitative easing can do that. Those who object that such audacity would discourage fiscal consolidation and structural reform should consider what deflation would do…”
• Robert Huebscher and Jeremy Siegel:
  Fair Value for the S&P 500 is 2,300
• Joshua M Brown:
  “They said the Fed couldn’t taper without massive market dislocations… ‘trapped’ and ‘backed into the corner’…. The FOMC has now removed itself from new bond-buying operations… Employment is strong… we’re starting to see quarterly GDP releases with a 4-handle… inflationary pressures are nowhere on the horizon for the time being…”
• Adair Turner:
  Festival of Economics 2014
• Neil Irwin:
  Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

1. Paul Krugman:
   Switzerland and the Inflation Hawks:
   “A lot of people have been predicting soaring inflation since 2009 if not earlier, and have refused to change their views…. Inflation truthers insist that the government is hiding the real numbers…. Normally sensible conservative economists… see the non-inflationary story as somehow the result of very special circumstances…. Martin Feldstein and others have claimed that it’s all about the 0.25 percent… interest rate the Fed has been paying on excess reserves. Without that… quantitative easing would indeed have produced… big inflation…. So, can we talk about Switzerland?… Never paid interest on reserves… [now] charging banks 0.25 percent…. So has the Swiss National Bank’s huge increase in the monetary base, which dwarfs what the Fed has done, produced inflation?… Monetary base up by a factor of eight. Money supply up by much less, because banks didn’t lend the funds out. And consumer prices flat, indeed flirting with deflation. This is all exactly what a basic liquidity trap model–the one I laid out in 1998–predicted…”
   

2. David Jolly:
   Swiss National Bank to Adopt a Negative Interest Rate:
   “Switzerland is introducing a negative interest rate on deposits held by lenders at its central bank, moving to hold down the value of the Swiss franc amid turmoil in global currency markets and expectations that deflation is at hand. The Swiss National Bank said in a statement from Zurich on Thursday that it would begin charging banks 0.25 percent interest on bank deposits exceeding a certain threshold, effective Jan. 22…”
   

3. Alan Blinder:
   ‘What’s the Matter with Economics?’: An Exchange:
   According to both Jeff Madrick and Arnie Packer, I claim ‘that except for some right-wingers outside the ‘mainstream’…little is the matter’ with economics…. But it’s not true. I think there is lots wrong…. My review explicitly agreed with Madrick that (a) ideological predispositions infect economists’ conclusions far too much; (b) economics has drifted to the right… and (c) some economists got carried away by the allure of the efficient markets hypothesis. I also added a few… we economists have failed to convey even the most basic economic principles to the public; and that some of our students turned Adam Smith’s invisible hand into Gordon Gekko’s ‘greed is good.’… the propensity to elevate modeling technique over substance… [and others that] (a) are not germane to policy, (b) are only slightly related to Madrick’s complaints, and (c) are very much ‘inside baseball’ stuff—and hence boring to readers of this Review…”

4. Edward Luce:
   Too big to resist: Wall Street’s comeback – FT.com:
   “It was right to let Citigroup stay in business in 2009, even though it was effectively bankrupt. But should it be so much larger than it was six years ago? Is it healthy that Citi lobbyists wrote the clause, almost word for word, that was tucked into last week’s spending bill? The question answers itself. It also points to two glaring deficiencies that will come back to haunt Washington when the next crisis strikes…. There has been no improvement in Wall Street’s culture–or in Washington’s revolving door habits. Bankers dismiss Elizabeth Warren, the Democratic senator from Massachusetts, as a populist. Perhaps they should listen to Bill Dudley, president of the New York Federal Reserve and a former Goldman Sachs partner…. At some point there will be another Wall Street crisis. It could be a decade away, or maybe next year. Markets run in psychological cycles in which fear gives way to greed and then hangover. Greed is once more in the ascendant. No law can stop the next bomb from detonating. No regulator can foresee it. But they could do much more to be ready for it when it comes. Here Mr Geithner’s moral fundamentalists have a point…”