I finally read the recent lecture given by Christina Romer (dated 10/23/13). There’s a lot in it to like. She advocates that Fed officials eject themselves from their ivory towers and spend their summers in a sort of community service function rather than hobnobbing amongst themselves, falling victim to group-think. She also hits the spot with monetary regime change to NGDPLT and monetary offset.
But nothing and no one is 100%. In much the same way many of the world’s central bankers are peevishly entrenched in fighting 1970s-style inflation, she hangs on to the idea of a non-zero fiscal multiplier despite the experience of our Japanese friends for it not being the case if the central bank is targeting inflation or NGDP. How odd it is, then, to suggest both.
But even more importantly, in her lecture, she provides a more rounded graph of the Fed’s assets from 2007-2013. It’s important because in my last post I accused the Bernanke Fed of conducting OMOs to contract the base during 2008-10, even as major institutions failed. But, according to the graph in her presentation, that accusation isn’t correct.
According to this graph, the Federal Reserve’s asset holdings remained nearly constant until approximately the tail end of 2008 when there was a sharp increase. The Fed’s share of Treasury securities declined as lending to institutions grew, keeping the overall level of holdings relatively flat. It looks like increased lending to financial institutions was sterilized until the tail end of 2008; I’m assuming that coincides with the implementation IOR.
So, the Bernanke Fed wasn’t nearly as rotten as the accusation I leveled at it. But if QTM is correct, and that is the reason officials at the Fed labored to save the financial institutions, does sterilization of increased financial institution lending in times of stress make sense? It doesn’t make sense to me because QTM isn’t about making sure banks don’t destroy base as they go down, as that is more or less a symptom of monetary disequilibrium that is already severe. It’s about maintaining equilibrium between demand and supply, and it predicts what happens when it is not maintained. While the Fed wasn’t actively destroying base with OMOs as I had imagined from the incomplete data I had, it was far from doing what should have been reasonably expected, erring on the side of generosity to avoid foisting downward price adjustments on the open economy.
Even though my accusation regarding base destruction was inaccurate, my other points about insincerity regarding the stance of monetary policy and interest rates are a lousy indicator of thereof still hold. While officials were insisting that slashing interest rates in early 2008 was an accommodative stance, it isn’t quite right. It isn’t right because it’s a rate peg, and the appropriate changes in the base are not apparent on this graph of asset holdings.
On the graph of M3, in fact, the opposite was taking place. And I’m not satisfied that it was indeed an error of omission. I have been on this topic on a self-study basis since 2009. I wanted to know what happened from the point of understanding it myself, at least at a basic level. I don’t have the history in academics or a pedigree that is miles long. AND I KNOW THIS IS WRONG! I also know that QTM isn’t the only theory that can predict what would and did happen when the central bank behaves as it did. Even Abraham Lincoln knew enough about deflation to recognize it and give a speech about it in 1839– I assume he read a lot of Hume.
At the risk of ranting, and I don’t particularly care, I am amply exhausted from having my intelligence insulted after having my life confiscated and sacrificed on the altar of hardcore inflation targeting. And I am particularly worn thin by people who know or should know what happened spreading the nonsense that the Fed’s job during a crisis is hard, or there’s nothing it could have done, or that there’s nothing it can do, or that bubbles are the harmful thing. I don’t particularly care about Fed officials having a tough life when the crisis is 100% avoidable; just try asking any one of the millions who have no job, no hope, and lost everything how hard things are. At least these Fed guys can go home and eat steak without worry about their own sphere of financial existence. I wish the excuses would stop, and sadly Christie Romer came no closer to granting that wish with her talk.