Prologue: When I stared this post I had an entirely different idea to communicate than what I ended with. For those of you who are interested in witnessing how I can “talk” myself out of an idea, this should be interesting for you. For the rest, no, I actually am not confused, just more agnostic toward some ideas than others.
While I was on-call and doing more operational work, unable to post much, my mind often wandered to my beliefs about monetary policy and some about politics in general.
It didn’t include profound rethinking, however. No, I think I’ve got the generalities down pretty well. But it was more in depth about accountability, with some of the rethinking spurred on by the response to the Beckworth/Ponnuru op-ed in the comments section. I imagined a scenario where nearly everyone has lost their minds, and in such a scenario, I would want the central bank to do the right thing despite political pressure to do otherwise.
In addition to the accountability issue, or rather as an extension to it, everywhere I look these days, especially considering the view points of the commenters, nearly everyone has the same flawed view of the Great Recession, unable to separate the rescission caused by the negative supply shock from oil prices and the mortgage problem from the monetary mistakes that put the Great into it. This phenomenon is apparent in the general overtone of the comments that the Fed didn’t cause the bad bank scenario to occur.
It’s true the Fed did not cause the mortgage mess – not even with “too low for too long.” For the cause of that, one would need to look at supply side policy. But once the mess was in full swing, the Fed did sterilize the emergency bank lending, sucking up generally available liquidity in order to inject it into the financial sector as general demand for dollar liquidity was soaring from stresses in other markets, foreign and domestic.
In a nutshell, the Fed was selling portfolio assets (reducing the base) in the thick of the crisis, which implies tightening of policy even in normal times, to raise cash for the banking system as policy was naturally tightening from market stresses and an oil-based negative supply shock. All of this was in addition to not signaling policy easing by missing the opportunity to lower the FF rate when conditions called for it.
Take a look at this graph of household checkable deposits and cash from the time period. It shows the kind of hoarding taking place, a level not seen as for long as this measure has been in existence, as these things the Fed was doing were going on. It is something the Fed is required to respond to (not cause) because that means some really bad news will be coming our way in the form of one serious disinflation. In short, the Fed was not keeping up with the demand for liquidity, which causes the value of the dollar to soar.
Perhaps the commenters don’t understand the hallmarks of deflation or that it causes serious debt deflation, spiking defaults because the burden of debt is greater especially in the midst of a demand shock, and sticky-wage unemployment. Or maybe they don’t understand that Fed policies caused the hoarding, or that disinflations and deflation are NOT price stability and failure to meet dollar demand is a guarantee of failing the price stability mandate and causing a demand shock.
The cyclical unemployment problem (economy wide, not isolated to the housing sector) of the Great Recession came from the Fed and persisted because of the Fed – there is no other way to put it that would be logically correct. A mortgage mess cannot cause an economy-wide demand shock and mass unemployment without tons of help from monetary policy.
At this point in my post, I’ve digressed from my original point a lot, so much so that I think I’ve talked myself out of perhaps providing the Bernanke Fed with some kind of pass for being crazy. There is no excuse for that kind of epic fail that trumps nearly every kind of epic fail except the one that caused the Great Depression.
We need accountability for the Fed, and we need it now.
In short, forget my point. I am not taking anything back.
“A better world”
Scott Sumner has a great new post on what a better [monetary] world looks like. I couldn’t do it justice by excerpting it so please read it.
Cruz’s Iowa win is almost meaningless. Iowa is not a bellwether state and almost never votes for the eventual nominee. Rick Santorum won Iowa in 2012, which I think speaks volumes about any perceived predictive qualities of Cruz’s win there.
Rubio’s showing there is of considerable interest, however. It could imply that both Jeb Bush and Chris Christie are done. If Trump is to be trumped for the nomination, it will more than likely be by Rubio, which I would consider to be a more favorable outcome (especially since I donated to the Rubio campaign).
Voter turnout on the GOP side was record-breaking. For Democrats, turnout was low. Generally speaking, Democrats don’t appear to be enthusiastic about their candidates which doesn’t seem to be a promising sign for the future. That may change in the general election if Trump is the GOP nominee, however. Keep an eye on turnout as the primary season progresses and the real contenders for the GOP nomination start to emerge.