None of the ideas in this post have been proved and may never be. These are just speculative thoughts swirling around in my head that I don’t really have the time to flesh out.
1) Operation Twist is a case of the Emperor’s New Clothes
Last year I was mildly interested in the budget battles going on in congress, and while I did not watch every single committee hearing, I heard something in one of them that was held prior to the implementation of Operation Twist that perks my suspicions about that program. I can’t tell you which committee meeting it was, the date, or the names of the people on the panel, but the representative from the OMB, a woman with long dark hair, kept blaming the crisis and recession on the “rich” as a justification for taxing the crap out of them. It might have been the one in which Peter Schiff testified, but I cannot say exactly.
- I heard a recommendation that existing debt be restructured from short-term to long term.
- What makes me suspicious about this being the part of the impetus for OT was reading a paper written by Milton Friedman titled “The Demand for Money” where he says (boldface is my addition):
Along these lines, the changes in the real stock of money and in the income velocity of circulation reflect either (a) shifts along a relatively fixed demand schedule for money produced by changes in the variables entering into that schedule; (b) changes in the demand schedule itself; or (c) temporary departures from the schedule, that is, frictions that make the actual stock of money depart from the desired stock of money. The rest of this paper is an attempt to see to what extent we can reconcile the secular and cyclical behavior of velocity in terms of a alone without bringing in the more complicated phenomena that would be involved in b and c.
One way to do so would be to regard the cyclical changes in velocity as reflecting the influence of variables other than income. In order for this explanation to be satisfactory, these other variables would have to exert an influence opposite to that of income and also be sufficiently potent to dominate the movement of velocity. Our secular results render this implausible, for we there found that income appeared to be the dominant variable affecting the demand for real cash balances. Moreover, the other variables that come first to mind are interest rates, and these display cyclical patterns that seem most unlikely to account for the sizable, highly consistent, and roughly synchronous cyclical pattern in velocity. Long-term corporate interest rates fairly regularly reached their trough in mid-expansion and their peak in mid-contraction prior to World War I. Since then, the pattern is less regular and is characterized by shorter lags. Rates on short-term commercial paper also tend to lag at peaks and troughs, though by a briefer interval, and the lag has similarly shortened since 1921. Call-money rates come closer to being synchronous with the cycle, and this is true also of yields on long- and short-term government obligations for the six cycles for which they are available. Of the rates we have examined these are the only ones that have anything like the right timing pattern to account for the synchronous pattern in velocity. However, neither call-money rates nor government bond yields have been highly consistent in behavior from cycle to cycle. Even if they had been, it seems dubious that the effects of changes in these particular rates, or other unrecorded rates like them, would be sufficiently more important cyclically than secularly to offset the effects of countermovements both in other rates and in income. Furthermore, earlier studies that have attempted to explain velocity movements in these terms have had only limited success.
I admit that this paper is a bit above my proficiency level, and if I am mixing apples and oranges here, let me know. But it seems to me that he is saying that something like Operation Twist is not stimulative. If that is what he is saying, then why is Bernanke, et al, saying it’s some extraordinary accommodative measure, when he knows it isn’t? Is Bernanke really saying to the world by engaging in debt restructuring that the US does have a chance at being like the PIIGS? If he is, he needs to step down.
I found another place in this paper where Friedman implies that to lower the price level necessitates lowering nominal income, and I’m assuming that implies NGDP. Of which, I think is quite a dastardly thing for our central bank to have done in such a dramatic way and it gives me fodder for some real rude propaganda/satire. At least I never once knowingly turned millions of people out onto the streets, much less in violation of the law and for no real good reason, nor would I.
2) The spooky echoes between members of the FOMC and BIS really bother me, partly because I don’t know which institution is being echoed. My suspicion is that the FOMC is following in no small part the practices of the ECB. Why else would Hank Paulson have been running to congress to bailout the banks with fiscal measures European style instead of making the Fed do its job? I understand that AIG needed money, and congress would have had to take care of that, but all of the other things TARP was used for could well have been part of Fed operations – it had all the authority it needed. Why do they think European-like monetary policy is appropriate or even desirable for the US when everyone has been screaming about how terrible the economy is, and with good reason?
- Can someone please explain to me how the term “fiscal consolidation” applies to the US? Is the Federal government planning on taking over state budgets now? The use of that term in the context of the US boggles my mind, yet these Chatty Kathy regional Fed presidents throw it around as if it means something important. They are either demonstrating what mindless parrots they are, doing the spooky echo thing, or they are planning far more that is way-way-way outside their authority than just forcing the national government to clean up its budget.
That’s about it for now. I will likely use this post as a placeholder for other ideas I have floating around that I don’t have the time to do anything with as they come up.
[Update] Do we have a treaty that says we have to follow global consensus on monetary policy? Maybe I will try to follow the trail to and from Basel and see what I come up with – I think we have a far larger abuse of authority/hubris problem than just willful neglect of the Full Employment and Balanced Growth Act.