Note to Self Why isn't the first rule of Federal Reserve policy "thou shalt not come even close to inverting the yield curve!"?
#notetoself #monetarypolicy #finance
I believe that there are four issues in this Summers-Krugman-Rogoff-Blanchard et al.-DeLong internet discussion of three years ago:
As far as we economists are concerned, are our models analysis pumps, or are they merely filing systems to remind us of experiential wisdom? In other words: Are our models to be taken seriously when they lead us to a conclusion that the great and good believe is unserious?
Do economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt need to fear banking and government solvency crises?
Can economies with exorbitant privilege in which the key leveraged financial institutions have little foreign-currency debt rely on their abilty to print their way to liquidity in an emergency and on market participants' recognition of that ability?
Can economists build models and conduct analyses assuming that business expectations are reasonable things, and will not push the economy to a position that is not close to a self-consistent near rational expectations equilibrium?
As near as I can see:
I think I should, sometime over the past three years, have written a really good piece about these questions based on the ten items below. But I regret that I have not:
Thinking how to talk about Schumpeter's "Ricardian Vice" and the extremely peculiar boosting by economists formerly of note and reputation of the Trump corporate tax cut, and so revisiting this https://www.bradford-delong.com/2013/05/niall-ferguson-is-wrong-to-say-that-he-is-doubly-stupid-why-did-keynes-write-in-the-long-run-we-are-all-dead-weblogging.html:
An Open Letter to the Harvard Community: Last week I said something stupid about John Maynard Keynes. Asked to comment on Keynes’ famous observation “In the long run we are all dead,” I suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’ wife Lydia miscarried.
Niall is wrong. His suggestion was not doubly stupid. There is more.
Niall speaks of Keynes's "In the long run we are all dead" as if it is a carpe diem argument--a "seize the day" argument, analogous to Marvell's "To His Coy Mistress" or Herrick's "To the Virgins"--and Ferguson sees his task as that of explaining why Keynes adopted this be-a-grasshopper-not-an-ant "party like we're gonna die young!" form of economics, or perhaps form of morality.
But that is not it at all.
John Maynard Keynes (1923): A Tract on Monetary Reform", pp. 80-82: "[T]he [Quantity] Theory [of Money] has often been expounded on the further assumption that a mere change in the quantity of the currency cannot affect k, r, and k',—that is to say, in mathematical parlance, that n is an independent variable in relation to these quantities. It would follow from this that an arbitrary doubling of n, since this in itself is assumed not to affect k, r, and k', must have the effect of raising p to double what it would have been otherwise. The Quantity Theory is often stated in this, or a similar, form...
Was the Great Recession More Damaging Than the Great Depression?: ...Your parents’—more likely your grandparents’—Great Depression opened with the then-biggest-ever stock market crash, continued with the largest-ever sustained decline in GDP, and ended with a near-decade of subnormal production and employment. Yet 11 years after the 1929 crash, national income per worker was 10 percent above its 1929 level. The next year, 12 years after, it was 28 percent above its 1929 level. The economy had fully recovered. And then came the boom of World War II, followed by the “thirty glorious years” of post-World War II prosperity. The Great Depression was a nightmare. But the economy then woke up—and it was not haunted thereafter.
Our “Great Recession” opened in 2007 with what appeared to be a containable financial crisis. The economy subsequently danced on a knife-edge of instability for a year. Then came the crash — in stock market values, employment and GDP. The experience of the Great Depression, however, gave policymakers the knowledge and running room to keep our depression-in-the-making an order of magnitude less severe than the Great Depression. That’s all true. But it’s not the whole story. The Great Recession has cast a very large shadow on America’s future prosperity. We are still haunted by it... Read MOAR at Project Syndicate
If you believe in the "plucking model", by which the economy when "plucked" into a state below normal employment by a negative shock then returns to normal, there is not strong reason to begin a recession watch until normal employment has resumed or has almost resumed. It has. So it is time to start a "what will cause the next recession?" watch. Tim Duy says: it will not be weakness in housing. I concur: the current weakness in housing is what the Federal Reserve wants to see, and is the intended effect of its raising interest rates—a little less employment in housing construction producing a little more room for higher employment in other sectors: Tim Duy: Decision Time: "Remember the recession calls in 2016 when manufacturing rolled over? The thinking was that every time industrial production falls by 2%, a recession followed, and this time would be no different. But it was different. Those calls did not play out because the shock was largely contained to that sector; recessions stems from shocks that hit the entire economy. And even if a recession could be boiled down to a single indicator, I would pick the yield curve over housing...
Fresh at Project Syndicate: Blame the Economists?: Ever since the 2008 financial crash and subsequent recession, economists have been pilloried for failing to foresee the crisis, and for not convincing policymakers of what needed to be done to address it. But the upheavals of the past decade were more a product of historical contingency than technocratic failure: BERKELEY—Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade. From the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives. Then came 2008, when everything changed. The goal of full employment dropped off Western leaders’ radar... Read MOAR at Project Syndicate
#projectsyndicate #economicsgonewrong #economicsgoneright #monetarypolicy #finance #politicaleconomy
Ricardo J. Caballero: Risk-Centric Macroeconomics and Safe Asset Shortages in the Global Economy: An Illustration of Mechanisms and Policies: "In these notes I summarize my research on the topic of risk-centric global macroeconomics. Collectively, this research makes the case that a risk-markets dislocations perspective of macroeconomics provides a unified framework to think about the mechanisms behind several of the main economic imbalances, crises, and structural fragilities observed in recent decades in the global economy. This perspective sheds light on the kind of policies, especially unconventional ones, that are likely to help the world economy navigate this tumultuous environment...
As Published: Self-Fulfilling Financial Crises: Many mistaken assumptions about the 2008 financial crisis remain in circulation. As long as policymakers believe the crisis was rooted in the housing bubble rather than human psychology, another crisis will be inevitable. | My Earlier Draft: The 2008 financial crisis and subsequent recession left the Global North 10% poorer than it otherwise would have been, based on 2005 forecasts. For those hoping to understand this episode better, for a while now I have been recommending four very good books on and about the financial crisis of 2008 and what has followed—the catastrophes that have left the Global North 10% poorer now than we confidently forecasted back in 2005 that we would be today. They are:
Now I want to add on a fifth book: Nicola Gennaioli and Andrei Shleifer's A Crisis of Beliefs: Investor Psychology and Financial Fragility https://books.google.com/books?isbn=0691184925. (Full disclosure: Shleifer was my roommate in college and graduate school; to this day, I credit him more than anybody else with whatever positive skills or reputation as an economist I may have.)
Hoisted from the Archives (October 2008): The Wrong Financial Crisis: Catastrophic failures of risk management throughout the entire banking sector multiplied a relatively minor collapse in housing prices into a paralysis of the global finance system not seen since the Great Depression. To fix it, governments should embark on a coordinated fiscal and monetary expansion and a coordinated bank recapitalisation:
All of us from Lawrence Summers to John Taylor were expecting a very different financial crisis. We were expecting the ‘Balance of Financial Terror’ between Asia and America to collapse and produce chaos. We are not having that financial crisis. Instead we are having a very different financial crisis. Catastrophic failures of risk management throughout the entire banking sector caused a relatively minor collapse in housing prices to freeze up global finance to a degree that has not been seen since the Great Depression.
Next time I give a "general macro-finance" talk, I should give this one—updated, of course. But how much updating is needed>: “Unknown Unknowns”: High Public Debt Levels and Other Sources of Risk in Today’s Macroeconomic Environment (NEEDS REVISION) https://www.icloud.com/keynote/0_py01Y-ZrGddLKba8Rl2r9eQ
It's alternative title is: Confusion: High Public Debt Levels and Other Sources of Risk in Today’s Macroeconomic Environment:
THE MUST-READ OF MUST-READS on the links between behavioral finance and macro: John Maynard Keynes (1936): The State of Long-Term Expectation: The General Theory of Employment, Interest and Money: Chapter 12: "If I may be allowed to appropriate the term _speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase...
Per Kurowski: Self-Fulfilling Financial Crises: "The risk weighted capital requirements for banks guarantee: 1. Especially large exposures to what’s perceived as especially safe, against especially little capital, which dooms or bank system to especially severe crises. 2. Especially low exposures to what is perceived as risky, like loans to entrepreneurs and SMEs, which dooms our economy to weakness and not being able to reach its potential. And that has yet not even been discussed, much less learned https://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html...
Alan Kirman is wise. Listen to him: Monday DeLong Smackdown: Alan Kirman: Self-Fulfilling Financial Crises: For the first time I feel moved to disagree with your assessment here Brad. The behavioral approach proposed by the authors suffers from the same disease as many that have been proposed earlier. It is the idea that one particular "bias" will help to understand and explain the causes and consequences of economic crises. This seems to me to be at odds with what really goes on. Already in 1900 Poincaré criticised Bachelier because he ignored the fact that people tend to behave like sheep. People do not simply receive their information independently and then act on it and in so doing reveal that information. Herd behaviour would suggest that people's beliefs change and are strongly influenced by those with whom they interact...
Nicola Gennaioli and Andrei Shleifer: Two Myths of the 2008 Meltdown: "The 2008 financial crisis was not the result only of moral hazard; nor was it unforeseeable. While too-big-to-fail banks believed–rightly, it turned out–that they would be bailed out, consumers, rating agencies, and policymakers all bet on housing as well, destabilizing the system.... Two misconceptions in the current retrospectives of the crisis. These misunderstandings may seem purely academic, but they are not. They have major consequences for the ability of policymakers to prevent future crises...
Bill Janeway: Doing Capitalism in the Innovation Economy 2.0 https://books.google.com/books?isbn=1108471277: "The innovation economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error: upstream exercises in research and invention and downstream experiments in exploiting the new economic space opened by innovation...
...Drawing on his professional experiences, William H. Janeway provides an accessible pathway for readers to appreciate the dynamics of the innovation economy. He combines personal reflections from a career spanning forty years in venture capital, with the development of an original theory of the role of asset bubbles in financing technological innovation and of the role of the state in playing an enabling role in the innovation process. Today, with the state frozen as an economic actor and access to the public equity markets only open to a minority, the innovation economy is stalled; learning the lessons from this book will contribute to its renewal...
"I now know it is a rising, not a setting, sun" --Benjamin Franklin, 1787
Scratch | HIGHLIGHTED ONLY | HIGHLIGHTED LIST | THE HONEST BROKER | EQUITABLE GROWTH | RSS FEED | Short Biography | Talks, Presentations, and Events | Edit Posts | Edit Pages | Edit Content | Berkeley Open Access | Subscribe to Grasping Reality's Feed... | Books Worth Reading | Discussions ||||
OTHER STREAMS: Readings and Reviews | DeLong FAQ | The Honest Broker | Ann Marie Marciarille | Across the Wide Missouri... | Liveblogging History | Storify | On Social Media | This.! | Mark Thoma | Paul Krugman | Noah Smith and Steve Randy Waldman | Zeynep Tufekci | Oliver Willis | Marginal Revolution | Cosma Shalizi | Worthwhile Canadian Initiative | Angry Bear | Antonio Fatas |