Paul Krugman wrote:
A Brief Note on Macroeconomics and Ethics: What bothers me, and should bother you, about much of this [economic] debate is that it pretty clearly is not in good faith. Too many economists and commentators on economics are clearly playing for a political team; too many others are clearly playing professional reputation games. Their off-the-cuff reactions to policy issues were wrong and foolish, and I think they know in their hearts that they messed up; but instead of trying to remedy the fault, they’re trying to defend the property values of their intellectual capital. And that really is a sin…
Scott Sumner unearths evidence that Eugene Fama is neither (a) playing for Team Republican, nor (b) doubling down on failed intellectual reputational bets as he gambles for resurrection, but rather (c ) someone who has just never really looked at the asset markets.
He thinks that the gyrations of the Fed Funds rate after Paul Volcker became Fed Chair on August 6, 1979 were largely driven by forces unrelated to Paul Volcker's decision to fight inflation hard and reestablish the Federal Reserve's credibility as a guardian of relative price stability--that the Fed is just "tweak[ing the interest rate] a bit".
Plus--for a bonus--he thinks that the United States is a small open economy with a fixed exchange rate…
On one level, this is heartening. On another level, it is terrifying and depressing.
TheMoneyIllusion » Eugene Fama makes me look like an MMTer: Now from the sublime to the ridiculous. The interview continues….
Russ [Roberts]: Ben Bernanke is not a fool. If you could get him alone in a quiet place with nobody else listening and say: Ben, what were you thinking? What do you think he’d say?
[Eugene Fama]: I don’t know [what Bernanke would say], but [whatever Bernanke said] I wouldn’t believe it. In the sense that at most he could have thought he could twist the yield curve. Lower the long-term bond rate. Now I’m looking at the long-term bond market–it’s wide open. Even though they are doing big things, they are not that big relative to the size of the market…. [I]s it credible that in the early 1980s the Fed wanted the short term interest rate to be 13-14%?… Maybe they can tweak it a bit; they can do a lot with inflationary expectations. That will affect interest rates. Turn it around–all international banks think they can control interest rates; and at the same time they agree that international bond markets are open. Inconsistent.
And a few minutes earlier he said the following, just in case anyone doubts that he rejects the liquidity effect:
[Eugene Fama:] In the podcasts of this program that I’ve listened to, I’ve heard everybody talk about the Fed controlling the interest rates. That’s always escaped me how they can do that.
And then Scott begins to rave:
Now we know why Fama doesn’t believe in fiscal stimulus. If there is no liquidity effect at all, then wages and prices are flexible, which means fiscal stimulus would not work. So at least he’s consistent. But of course his assumption of complete wage price flexibility is wrong. Indeed I am confused as to how he could deny the liquidity effect; it seems obvious that central banks can raise or cut short term rates when they want to. So what’s the mechanism? Fama points to the expected inflation effect, but that can’t be right because all the other asset markets move in the “wrong” direction. If the Fed unexpectedly raises interest rates, and if Fama were right that they are only able to do so by raising their inflation target, then commodity and stock prices should respond to an unexpected interest rate boost as if it were an expansionary monetary policy. But those of us who get down in the trenches and actually follow market responses to policy surprises know that isn’t true. The Fed and other central banks are, in fact, able to generate a liquidity effect with unanticipated monetary policy announcements…. [Fama is] not a very good macroeconomist…
I feel his pain.