I think I have his snout! Well, at least it is long, coved with skin and damp at the end. It just can’t be the tail…
That’s the imagery that comes to mind when reading the reaction to Kocherlakota’s April 18th speech from various people.
For example, my “friend” (I use the term very loosely here – I don’t actually know her) from Bloomberg.com, Caroline Baum, who just last month was starting to buy into NGDPLT (as reported on Scott Sumner’s blog) after being a card-carrying bubble fear monger heeded Kocherlakota’s call pointing something out as the snout and latched right onto it with both hands in this article where she asks: Is the Fed’s Medicine Really Poison? I got the idea that she hasn’t quite figured out yet that it isn’t really the snout when she says:
It’s not every day that a central banker admits that his medicine for curing the last crisis may be laying the groundwork for the next. But that’s exactly what Narayana Kocherlakota, President of the Federal Reserve Bank of Minneapolis, said last week at the annual Hyman P. Minsky Conference at the Levy Economics Institute of Bard College.
Kocherlakota said low real interest rates are necessary to achieve the Fed’s dual mandate of maximum employment and stable prices. He also said that low real rates lead to inflated asset prices, volatile returns and increased merger activity, all of which are signs of financial market instability. Listen to what he calls his “key conclusion” — and what I’d call a true conundrum
But is it a “true conundrum” and was Kocherlakota admitting anything at all?
Looking at the following graph (courtesy of Marcus Nunes), I would say the answer to both questions is no. It is nearly impossible for low real interest rates to be having much stimulative effect when NGDP, the sum of nominal spending in the economy, is currently well below trend and last growing as slowly when Herbert Hoover was President. Besides, the Fed has little control over real interest rates, except for moderate influence in the very short-run.
Of course, that isn’t the end of the absurdities in Kocherlakota’s speech that are worth noting. I had to giggle when I read that the reason there is a shortage of safe assets is because people all of a sudden understood the fiscal position of the government and want to have enough savings to cover expenses in old age, fearing their benefits will be cut. I kid you not – I couldn’t make this stuff up; nor would I be so silly as to try to pull that one over when the net yield on 10-year Treasuries is currently negative. But I suppose we’re too stupid to figure that one out; just like we are too stupid, too much on the side of hapless to be trusted with money.
Here’s Kocherlakota making a spectacle of himself:
The federal fiscal situation is another key source of elevated uncertainty. The federal government faces a long-run disconnect between its overt commitments and the baseline path of federal tax collections. This disconnect can only be resolved by raising taxes and/or cutting the long-run arc of spending.
Of course, this tension between revenues and expenditures pre-dated the 2007 downturn. However, it is at least arguable that the fiscal debates of the past few years have made more Americans aware of the uncertainties associated with resolving this long-run disconnect. And these uncertainties affect the demand for safe assets. The prospect of higher future corporate profits taxes gives businesses an incentive to demand safe short-term financial assets as opposed to engaging in long-term investments. The prospect of reductions in Medicare, Medicaid or Social Security gives some households an incentive to demand more safe assets as a way of replacing those lost potential benefits.
I giggled at first; and then a profound sadness washed over me as my thoughts wandered back to the reality that this man is making monetary policy. It seems all he cares to do is make up fairytales about how the Fed is not responsible for this economic disaster and feels the need to cause a huge distraction over whether he is actually holding the elephant’s snout or some other part. His entire speech is nothing short of an abuse of power, a breach of professional acumen and public service ethics for which he should be deeply ashamed. Mr. Kocherlakota should do one of the following things: tell the truth, shut up and do what is needed to fix the problem, or resign – but for God’s sake, stop the BS already.
As Marcus Nunes pointed out today at least one person who is more in the mainstream than not understands the inherent conflict between the Fed’s choice of conduct for monetary policy and the law (thank God). I would hope that more people start to catch on and realize that Korcherlakota isn’t really holding the elephant’s snout – and the Fed needs to find some footing in the law or those in it need to go. We need a lot more than smiling elephants to turn this ship around.