Over at Project Syndicate: The Trouble with Interest Rates: Of all the strange and novel economic doctrines propounded since 2007, Stanford's John Taylor has a good claim to [propounding the strangest]: In his view, the low interest-rate, quantitative-easing, and forward-guidance policies of North Atlantic and Japanese central banks are like:
imposing an interest-rate ceiling on the longer-term market... much like the effect of a price ceiling in a [housing] rental market.... [This] decline in credit availability, reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence..."
When you think about it, this analogy makes no sense at all.
Taylor’s analogy fails to make sense at the most fundamental level. The reason that rent control is disliked is that it forbids transactions that would benefit both the renter and the landlord. When a government agency imposes a rent ceiling, it prohibits landlords from charging more than a set amount. This distorts the market, leaving empty apartments that landlords would be willing to rent at higher prices and preventing renters from offering what they are truly willing to pay. Support Project Syndicate’s mission Project Syndicate needs your help to provide readers everywhere equal access to the ideas and debates shaping their lives. LEARN MORE With the economic policies Taylor criticizes, this mechanism simply does not exist. When a central bank reduces long-term interest rates via current and expected future open-market operations, it does not prevent potential lenders from offering to lend at higher interest rates; nor does it stop borrowers from taking up such an offer. These transactions don’t take place for a simple reason: borrowers choose freely not to enter into them. So how does Taylor arrive at his analogy? My intuition is that his reasoning has become entangled with his beliefs about the free market. Taylor and others who share his view probably begin with a sense that current interest rates are too low. Given their belief that the free market cannot fail (it can only be failed), they naturally assume that some government action must be behind the unnaturally low rates. The goal then becomes to figure out what the government has done to make interest rates so wrong. And, because any argument that treats government action as appropriate can only be a red herring, the analogy to rent control emerges as one of the possible solutions. If my intuition is correct, Taylor and his fellow travelers will never be convinced that they are wrong. Accepting the idea that central bankers may be doing the best they can in a difficult situation would require entertaining the possibility that markets are imperfect and fallible. And that is one thing they will never do. We have seen this play out before. Five years ago, Taylor and his intellectual allies wrote an “Open Letter to Ben Bernanke,” warning that the quantitative easing planned by the Federal Reserve’s then-chairman risked “currency debasement and inflation.” But, although their prediction turned out to be spectacularly wrong, that has not led Taylor or any of the other signatories to rethink their theories or to consider that perhaps Bernanke knows something about monetary economics. Instead, Taylor seems to have settled on another theory – his rent-control analogy – for why the government is doing everything wrong. The only possible response is to point to logic and evidence. Given real economic conditions, European and American monetary policy is not too loose; if anything, it is too restrictive. The “natural” interest – what would be ground out by the Walrasian system of general equilibrium equations – is actually lower than what current monetary policy is producing. Yes, the inertial expectations of the economy have combined with monetary policy to distort interest and inflation rates, but not in the direction that Taylor is proposing. On the contrary, compared to what is needed (given the current state of the economy) or to what a free-market, flexible-price economy in proper equilibrium would deliver, interest rates are too high and inflation is too low. There is indeed something wrong with today’s interest rates. Why such low rates are appropriate for the economy and for how long they will continue to be appropriate are deep and unsettled questions; they call attention to what MIT’s Olivier Blanchard calls the “dark corners” of economics, where research has so far shed too little light. What Taylor and his ilk fail to understand is that the reason interest rates are wrong has little to do with the policies put in place by central bankers and everything to do with the situation that policymakers confront.
Read more at https://www.project-syndicate.org/commentary/the-trouble-with-interest-rates-by-j--bradford-delong-2015-11#9GvzJ3zlsR6uukbo.99
The Natural and Market Rates of Interest
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- 2015: Monday Smackdown: Hoisted from Archives from Five Years Ago: Economists Clueless About the Economy Weblogging
- 2015: What Is the Free-Market Solution to a Liquidity Trap? Higher Inflation!
- 2011: What Have We Unlearned from Our Great Recession?
- 2015: Secular Stagnation vs. Ben Bernanke
- 2015: Cracking the Hard Shell of the Macroeconomic Knut: "Keynesian", "Friedmanite", and "Wicksellian" Epistemes in Macroeconomics
- 2015: Secular Stagnation--That's My Title, of the Longer Version at Least...
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- 2015: A Reader's Guide to the Secular Stagnation Debate: The Honest Broker for the Week of October 12, 2015
- 2015: The Extremely-Sharp Tim Duy Sees the Fed Moving Away from Contractionary Policy
- 2015: Monday DeLong Smackdown: Kevin Drum Asks a Question About the Attainability of a 4%/Year Inflation Target
- 2015: I Really Really Do Not Understand the Mental Universe of Today's Federal Reserve ...
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- 2015: Is There a "Correct" Monetary Policy? Yes!
- 2015: What Do You Think the Chances Are that Jeffrey M. Lacker Is Right in 2015?
- 2015: The Arguments Being Put Forward for Raising Interest Rates Now Are Very Weak Indeed
- 2015: Why Don't Commercial Bankers Understand the Interests of Their Class Fraction?
- 2015: No, The Federal Reserve Should Not Be Tightening Right Now. Why Do You Ask?
- 2015: No, the Federal Reserve Is Not a Market Manipulator
- 2015: Project Syndicate: A Cautionary History of US Monetary Tightening
- 2015: Grifters and Goldbugs and Bears, Oh My!: Jackson Hole 2015 Weblogging
- 2015: None of Concerns About Inflation, Employment, Financial Stability, or Inequality Justify Raising Interest Rates Over the Next Year or So...
- 2015: What Strongly Suboptimal Fiscal Policy Means for the Inflation Target and Monetary Policy
- 2015: Europe: From the Financial Crisis to the Great Recession to the Lesser Depression to the Greater Depression
- 2015: Is "Secular Stagnation" a Monetary-Financial Problem or a Fundamental-Technological Problem?
- 2015: Depression's Advocates
- 2015: Stability of General Equilibrium and Monetary Policy: Baby Steps
- 2015: DeLong and Eichengreen: New Preface to Charles Kindleberger, "The World in Depression 1929-1939": Hoisted from the Archives
- 2015: In Which Paul Krugman Notices How Very Few Students Milton Friedman Has...
- 2015: More Musings on "Monetary Economics"
- 2015: How Long Is the Short Run This Time?
- 2015: Why Small Booms Can Cause Big Busts
- 2015: Bubbles, Leverage, and Depressions
- 2015: David Glasner on Monetary Régime Change
- 2015: Paul Krugman Was Right. I, Ken Rogoff, Marty Feldstein, and Many, Many Others Were Wrong
- New Economic Thinking, Hicks-Hansen-Wicksell Macro, and Blocking the Back Propagation Induction-Unraveling from the Long Run Omega Point: The Honest Broker for the Week of May 31, 2015
- 2015: Ben Bernanke vs. John Taylor: In Which I Give Up
- 2015: Thurday Musings on Macroeconomic Policy and "The Right"
- 2015: Optimal Control, Fiscal Austerity, and Monetary Policy
- 2015: The Great Depression and the Great Recession in the North Atlantic
- 2015: Over at Equitable Growth: The Macroeconomic Situation and Macroeconomic Policy: Insiders and Outsiders
- 2015: Over at Equitable Growth: John Plender: Bewitched by Mandarins of Central Banking
- 2015: On the Stupidity of Anti-Monetarist Economics: David K. Levine vs. Chris Sims as Refereed by Paul Krugman, with Additional Thoughts
- 2015: I Understand Where Martin Feldstein Starts: I Do Not Understand Where He Ends Up: Focus
- 2015: Allan Meltzer on Imminent Inflation, and Other Topics
- 2015: Just What Is John Taylor Thinking?
- 2015: Do You Really Want to Know How Ben Bernanke Thinks? Also Larry Summers and Paul Krugman
- 2014: Over at Equitable Growth: How Can We Build a Model in Which an Invisible Japanese Bond Vigilante Attack Is Contractionary?: Daily Focus
- 2014: Over at Equitable Growth: Is the Fed "Pretending"?: Daily Focus
- 2014: Over at Equitable Growth: A Question I Want to Ask Richard Koo: Daily Focus
- 2013: Moby Ben, or, The Washington Super-Whale: Hedge Fundies, the Federal Reserve, and Bernanke-Hatred
- 2012: On the Fed's Policy of Quantitative Easing Coupled with Promises Not to Let Prices Recover Any of the Ground Relative to Trend They Lost in the Recession... (DeLong: Long Form)
- SEARCH TERMS
- ON FOLD
- This file: http://www.bradford-delong.com/2015/12/a-powerful-intellectual-stumbling-block-the-belief-that-the-market-can-only-be-failed.html
- Edit: http://www.typepad.com/site/blogs/6a00e551f08003883400e551f080068834/post/6a00e551f08003883401b7c7f1a6a0970b/edit
- This storystream: http://www.bradford-delong.com/storystream-the-natural-and-market-rates-of-interest.html