To be honest, I have no idea what this post is going to look like when I’m done. I just finished reading a speech given by former Fed Governor Mishkin in November of 2007 and I’m left feeling pretty incensed. Earlier, I read a paper sent to me by Marcus Nunes, “Living with Inflation” Tobin – 1971, and it pointed out to me how the “establishment” holds onto unworkable ideas, almost militant in their defense of them, when it is pretty obvious that the original intent of those ideas aren’t being delivered. They don’t seem to be able to hear alternative ideas because theirs aren’t wrong; and even if their ideas might be wrong, there is nothing better and we’ll just have to live with what they give us.
If anyone is wondering what the modernized science of monetary policy implemented by Bernanke and Mishkin was supposed to deliver, Mishkin tells us right here:
The modern science of monetary policy proceeds under the assumption that the central bank’s purpose is to maximize the well-being of households in the economy…. Those components of the objective function capture the essence of the Federal Reserve’s dual mandate to promote price stability and maximum employment, a mandate established by the Congress for the ultimate good of the public.
The intertemporal nature of these objectives is crucial, as the well-being of households depends not only on their consumption and leisure at the present moment but also on their expectations about how that standard of living will evolve over time. Thus, policies that are intended to maximize the well-being of households must reflect both the present state of the economy and its expected path in future periods.
In addition I am adding this tantalizing comment:
As I discussed in a recent speech, both inflation measures are important: Core inflation is a useful indicator of the underlying near-term trend of inflation, and overall inflation is what households and businesses ultimately care about (Mishkin, 2007c). Therefore, a significant aspect of the enhanced communication strategy is that the FOMC has added the overall inflation rate to its announced projections.
Now, looking at this, it boggles my mind how stabilizing prices all inclusive of headline inflation maximizes the wellbeing of households. Yes, average people do care about headline inflation, but what does, say, the price of oil have to do with monetary policy? Is it really welfare maximizing to tighten monetary policy when oil prices spike – to reduce AD enough and raise unemployment enough so that there is less demand for oil? Forced leisure on some so that the lucky ones who get to keep their jobs pay a little less for gasoline in the short run has got to be one of the most perverse assumptions of household welfare maximization I’ve seen in a very long time. It is simply sugarcoated bull crap.
It goes on to talk about how stabilizing prices allows households to make better spending decisions. But I wonder if they ever considered how well one can make decisions from a position of destitution. There’s more too, about market stability and overall economic stability and certainty. It really makes me want to vomit because we’ve had everything but stability and certainty since this modernized monetary policy communications process was introduced. The forecasts for inflation were wrong from the minute this policy was implemented and the whole thing collapsed like a house of cards, taking the economy with it. Oh but that couldn’t have happened because it was the banks that were naughty and it made their projections wrong. Perhaps those naughty bankers didn’t get the memo that they were supposed to be stable in this wonderful new policy environment that tightens downs the screws every time there’s a hiccup in the Middle East, some silly Nigerian rebels decide to commandeer an oil rig, or a hurricane ravages the Gulf of Mexico. Sure let’s just delegate responsibility for US monetary policy to Nigerian rebels and act surprised when they take us up on the deal. Morons.
So what about now after the economy has been “stabilized”? I’ve got to hand it to them there; their policy has stabilized the economy at the disaster level, with the inflation-targeter’s tourniquet tightened down so tight the patient can just barely breathe. Oh, but it must be our own fault we’re not growing, at least it’s someone else’s fault because their policy is supposed to make us prosper. We’ve obviously just overextended ourselves in the past– spent too much and lived too well – and we just can’t ever let that happen again.