In my last post, I refered to a comment made by the Fed Governor Mishkin in an FOMC meeting in September 2007 with the following sentence fragment highlighted.

“…if shocks occurred such that recession was going to occur and the only way we could stop a recession from occurring was to inflate the economy, we couldn’t allow that to happen.”

Standard rule of construction says that when interpreting an item of text, it should be done in a way that gives the rest of it meaning. Did I violate that rule and needlessly excoriate Mr. Mishkin?

Let’s see. Here is the quote (emphasis and reformatting mine):

I feel strongly that the one thing a central bank can never afford to do is to lose its nominal anchor.  If we do that, it’s a disaster.

With that viewpoint, I should say that, if shocks occurred such that recession was going to occur and the only way we could stop a recession from occurring was to inflate the economy, we couldn’t allow that to happen.

We actually have to preserve the nominal anchor because, in the long run, the pursuit of price stability is what makes good monetary policy and has been a key reason for the remarkable success of monetary policy by the central bankers throughout the world in recent years that I think nobody would have predicted.

Paraphrased:

With the viewpoint of having a central bank lose its nominal anchor would be a disaster, if shocks occurred such that recession was going to occur and the only way we could stop a recession from occurring was to inflate the economy, we couldn’t let that happen. We have to preserve the nominal anchor because, in the long run, the pursuit of price stability is what makes good monetary policy…

Starting from the back and working my way to the front:

The pursuit of price stability is what makes good monetary policy. I agree, in the context of an inflation-targeting CB that is facing a recession. Good monetary policy keeps whatever it is focused on stable. But is that what was happening? From the evidence we have, it wasn’t. NGDP growth started a decent from early 2006 and worked its way down until approximately late 2Q 2008 when it dropped like a stone pitched off a pier.

We couldn’t let “that” happen. What is the meaning of the word “that” here? It may be a transcription error, the presence of a comma between “economy” and “we” when there should have been a semi-colon. Having a semi-colon would change the inference somewhat to mean perhaps that they couldn’t allow the loss of the nominal anchor even if they had to inflate. But the conjunction of the view point with the idea that they should not allow the loss of the nominal anchor with the need to inflate to avoid a recession suggests that the comma is the punctuation that belongs; otherwise it would be sort meaningless gibberish.

Now if it had been a public statement, I would buy the meaningless gibberish argument. But this was something said behind closed doors among FOMC members as they were deciding what to do. Having the comma where it is, I think, is telling about the meaning and how it was understood by those who heard it.

I think it’s noble of some to point out that when Mishkin finally realized the trouble the Fed was in for in December 2007, he did say something. From there on out, perhaps the fact that he went along with what his colleagues did is understandable. I won’t ever see it that way, however.

I see Mishkin as playing a pivotal role in the creation of the Great Recession because of his stature and his leadership role in the shift toward explicit inflation targeting and the perverse incentives to do nothing when something is required without much solid thought about how to handle the exigencies – like oil price spikes and inherent unfairness of leveling out all prices to make up for it, or what to do at the ZLB, or… or… or…

It would be nice, especially for Mr. Mishkin, if his participation in the frame of mind of the Fed were brushed away with a few paragraphs of real economics on the eve of the crash. I am sure he is a really nice, well meaning guy. But it seems apparent to me that it wasn’t made over night,  and one “almost” dissent on a 25 basis-point rate cut vs. a 50 basis-point rate cut as they were all standing there peering over a cliff after sitting on their hands is not consequential. Markets reacted to the entire situation, not one event, knowing that the Fed was out of sync and going to be too little too late because it had been all along.

In summary, too little too late are what Mishkin’s December 2007 statements really were. And if anyone out there thinks I owe him an apology, I will happily admit error and offer my sincerest regrets if I am shown where my error lies. As for now I do not see it.

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