Liveblogging World War II: July 25, 1942
Jason LInkins Doesn't Like the Fact That Jackie Calmes Doesn't Like Neil Barofsky's "Bailout"

The Need for a Higher Rate of Increase in Prices: Sebastian Mallaby Is Forty Months Late Department

Back in the spring of 2009, when Sebastian Mallaby of the Council on Foreign Relations put together a symposium on the then-gathering depression, his idea of the kind of people whom he really needed to push up onto the stage were people like… John Cochrane, claiming that the "danger is not 1932; the danger is Argentina, a massive run from Treasury debt" and "this insane idea of fiscal stimulus".:

John Cochrane, March 30, 2009: The New Financial Deal: What Do the 1930s Teach About Reforming Today's Financial Markets?: [T]he danger now is inflation. And I would say it's a greater danger than most of the other people [who have mentioned it] have said. Our danger now is a run on Treasury debt. It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled "U.S. Government." The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don't want Treasury bills or money you're stuck.

Many things are depressingly the same [as in the Great Depression.] Policy is chaotic.  Who would invest in this climate?  [The problem is] not about toxic assets; [The problem is] about who wants to go in on a deal with Darth Vader [the government], who can change his mind at any moment?  That's the uncertainty that's keeping things from getting going and that's what's slowing the rebuilding of financial markets.  We're facing growth-destroying marginal tax rates, an excuse for the government takeover of large and completely unrelated sectors, class warfare, vindictive ex post taxations.  This is the chance for a credit crunch -- which normally resolves itself fairly quickly -- to turn into a Great Depression.  And perhaps most of all there is the danger of learning the wrong lessons; that our grandchildren will have to come back to the next meeting to say, what were the lessons -- the lessons mis-learned of the last time around?

My great hope is that the bounce-back will be quick before the quack medicine can be said to have worked.  (Chuckles.) Just as we sort of -- as people think that this insane idea of fiscal stimulus -- which I'll go on with later if I get a chance -- came from Roosevelt's experience with no reason why it should work, there is a danger of thinking all of the crazy stuff they're doing now will have caused the bounce-back, if that happens, in five years, but my only hope is that it happens quickly and doesn't leave us with another Great Depression…

I cannot think of a single sentence in that passage that makes John Cochrane look half-intelligent. Can you?

Today Sebastian Mallaby does not seem to be listening to the likes of John Cochrane any more:

Show some real audacity at the Fed: Mr Bernanke… last week… was rebuked by Republicans for his presumed recklessness, while Democrats appeared to feel he was pushing policy as far as he could. But there is nothing particularly wild about the Fed’s money printing. Its purpose is merely to effect a change in private balance sheets. Banks sell their Treasuries to the Fed in exchange for newly minted dollars (in the case of quantitative easing) or for shorter-term government securities (in the case of the current Operation Twist). Given that risk-free government securities are treated as cash equivalents by financial institutions, this is not radical.

Most assessments of quantitative easing find that it has worked…. But these positive verdicts conceal a less uplifting message. The first round of quantitative easing was most powerful – it was the largest, and its novelty inspired shock and awe. The second round, from November 2010 to June 2011, was less effective. The current Operation Twist is the limpest of all.

Unless the Fed can rekindle the shock value of the first round, more quantitative easing is unlikely to work. Success depends on a whole range of actors deciding that the Fed is determined to accelerate recovery rather than repeat a tired trick that they have seen before…. Quantitative easing that fails to spark risk-taking could actually make things worse….

With inflation below target and unemployment far above the neutral rate, there is a clear case for stimulus…. One possible measure is to cancel interest on excess reserves…. [T]he Fed could couple more quantitative easing with a formal announcement of a higher inflation target. Some Fed leaders are open to this. Charles Evans, the Chicago Fed president, has floated the idea of a 3 per cent target, effective until unemployment falls below 7 per cent…. Financiers would embrace risk assets rather than safe ones with real returns that would be clearly negative. Companies, expecting more growth, would step up investments…. The time has come for some fresh thinking. A Fed that can escape the myth of its audacity might be able to do more.

We really could have used this from him forty months ago, when it might have mattered.