Marc, you are in good company suggesting that QE3 might now be on the way. I said the same thing: http://bit.ly/O9x81D More importantly, so did St. Louis Fed President James Bullard: http://bloom.bg/NKXxGP
As a follow-up to this article, it is worth note that St. Louis Fed President Bullard said today that given the data since August 1 he does not think QE3 is warranted at this time. Bullard is one of the most moderate Fed officials and according to Macroeconomic Advisers his words moved markets most in 2011. Given that he is splitting the difference between hawk Dennis Lockhart and dove Charles Evans, his words support the possibility that QE3 is not coming in September.
Several comments have suggested that I have it backwards; if the ECB eases and the Fed does not, then the dollar should rise in relation to the Euro. Historically and theoretically, that is absolutely correct, but these are not normal times. The Fed not easing will mean the dollar remain relatively stable, but the ECB getting Germany on board a rescue effort will signal that the union will survive and the Euro will rise even though stimulus should devalue it. This means that in relation, the dollar falls and stocks should rise.
The bigger question is the one raised by Malkiel: is Germany just signalling a willingness to talk or substantive support? I suspect Draghi and the markets will treat this as a signal of full-fledged support at Jackson Hole, but if that proves not to be the case when the ECB meets on September 6, the market will likely correct rather sharply.
Pandering To Populism: How Auditing The Fed Hurts The U.S. Economy [View article]
Daryl, I completely agree that the Fed is not independent of the banks and they often act as a special interest group, but an audit would not change this. If anything, it would just incentivize banks to spend more to influence members of Congress who would then have more control over the Fed. The simple fact is that the proposed audit would change Fed policy in the wrong direction.
If you want to see a credible, independent central bank that makes policy geared at helping the middle class, it will take a series of significant reforms. In addition to the reform ideas I examine near the end of the article linked in my comment above, I also think reform might need to involve other sectors of the economy (besides banking) having a greater voice at the Fed and fixing the massive regional inequities associated with Fed districts drawn 100 years ago.
Finally, I never called Dr. Paul a conservative, I referred to his supporters as "conservative populists." From a historical standpoint, I believe this is a more accurate classification of most of his supporters than calling them libertarians.
This is an interesting take on how the Fed's 2% target is problematic, but I think the argument is even more robust than Professor Duy suggests. Justin Wolfers and Betsey Stevenson have recently pointed out that the 2% target is treated as an upper bound when it should probably be treated more like a target average. I don't necessarily agree, but I think that argument adds some nuance to Professor Duy's points.
I am a bit more cynical. While Dr. Duy's point that the 2% target was intended to free up the Fed's other policy options makes sense, I think that political considerations played a much larger role than policy considerations. The Fed wanted to simplify policy as much as possible in an effort to blunt political critiques and avoid increased pressure from Congress. My full argument can be found here: http://bit.ly/PD6rnV
Pandering To Populism: How Auditing The Fed Hurts The U.S. Economy [View article]
A number of comments have suggested that I am advocating no Fed audit at all, that is simply not the case. As I note in the article, the Fed has been subject to Congressional oversight through testimony and annual audit since reforms passed in 1977 and 1978. Congressman Paul's plan advocates a real-time audit of monetary policy by the GAO. Given that the GAO has a documented bias toward Congressional interests, this would create perverse incentives for the GAO to pressure the Fed to pursue monetary policy that appeases Congressional leaders. This would further corrupt monetary policy-making and create a lack of confidence in the stability of U.S. monetary policy without providing much new information to the public. Simply, there are better ways to pursue Fed transparency than an audit that infringes on central bank independence. I make some suggestions in this article: http://bit.ly/PD6rnV
Central Bankers Continue To Control Markets; Time To Audit The Fed [View article]
Thomas,
While I completely understand your fear about a an American oligarchy, I disagree that Fed personnel are behaving as the oligarchs. More importantly, the research indicates that a Fed audit beyond what is already done would simply shift the base of power from the Fed to Congress. Please see my article for a more complete explanation of how an audit of monetary policy would result in greater economic instability and devaluation of the dollar: http://bit.ly/NYtOYW
Mitt Romney, Paul Ryan And Economic Uncertainty [View article]
In case anyone is interested in a more comprehensive analysis of the Ryan plan, I just came across some work done by Macroeconomic Advisers last year. They are a non-partisan economic research group headed by former Fed Board Governor Larry Meyer. http://bit.ly/PeBCGm
Mitt Romney, Paul Ryan And Economic Uncertainty [View article]
Freddy, no confusion here; I repeatedly say "if implemented." In fact, it is only in the last two decades that we have even seen Presidents proposing their own budget, it used to all be in the hands of Congress to design and the President then signed or vetoed. That does not change the points made in that article about IF the proposed Ryan budget were implemented. Perhaps more important, I also make it clear that many of the proposed cuts to discretionary spending would be unlikely to get Congressional approval. This means that accounting for political realities, it is more likely to see the tax cuts portion of the Ryan plan implemented than the spending cuts; this would increase the deficit.
Romney's VP Choice: Good For Gold This Fall? [View article]
This is an interesting commentary, but it assumes weakness in the US dollar due to domestic policy, absent international pressures. If both the ECB and the People's Bank of China provide stimulus then it is highly unlikely that the dollar will weaken relative to the euro or rmb in the near future. This will limit any gains on gold by US investors.
I guess I can jump in here. Mark, you present some interesting ideas, but I am afraid none of them are politically feasible, except maybe #2. The trouble is that Bernanke has already expressed concern about reducing rates on bank reserves and I am unsure what he could have seen recently that would convince him otherwise. That said, it is an appealing idea because of its simplicity and the fact that a change to a rate of 0% would simply be a reversion to the pre-2008 policy. I think this article has some good commentary on this: http://bit.ly/NoKuXD
Larry, to your point about zero interest rate policy stimulating lending, it has not sufficiently worked so far. With a great deal of excess real estate and an entire generation wary of buying, stimulating lending is an important step to recovery. Add in the fact that it has the added benefit of actually utilizing the capital in the system rather than just adding more and it makes macroeconomic sense.
In some ways, the market today is like a camp fire and the Fed just keeps adding wood to the fire with QE. They hope that eventually the wood will catch, even if it is wet. Stimulating lending is like blowing on the fire to give the wood a chance to catch.
Lawrence, you make an excellent point that it would be preferable to induce borrowers to borrow, instead of lenders to lend, but those policies have been insufficient so far. The first time home buyers tax credit fell under this umbrella and it had some success until Congress decided not to renew it due to costs. Perhaps even more interesting is the fact that the mortgage interest deduction (an obvious incentive to borrow) appears to be on the chopping block in the tax reform discussion. So, if anything, our fiscal policy is pushing borrowers away from borrowing, not toward it.
Since the Fed does not have the capacity to influence borrowers and something must be done to increase the velocity of money, the only remaining choice is to influence lenders. This process could mean a potentially hazardous jump-starting to the mbs market, but in theory the new Dodd-Frank regulations SHOULD help keep lenders and borrowers from taking on unreasonable risk again...hopefully. As I think the article makes clear, this is a program fraught with potential hazards, but I still view it as superior to another straight capital injection (QE3) that further incentivizes hoarding of cash (businesses clearly see a safe low rate of return on a large amount of cash as preferable to a riskier high rate of return on a smaller amount of cash).
So, if the Fed is going to intervene in markets again over the next few months, I think it would be better to see a program like this (with appropriate oversight), rather than QE3.
Another Central Bank Driving Markets [View article]
Nightfly, you bring up an important point. An entire subset of cultural anthropologists studying finance has cropped up in the last few years. What I find most interesting in that research is the view that central bankers words actually make policy, not the actions. It seems like the market has picked up on this point and begun reacting to words, but when the actions don't come, the market reacts to that too.
Lawrence, admittedly the Fed has never made a statement indicating they are eying higher inflation to reduce the debt. That said, they have to avoid saying this because such a statement could spark inflation itself and they would earn the ire of holders of government debt. But I remain convinced they would be more tolerant of higher inflation now than at any point in the last 30 years; compatriots and coauthors of several Fed officials have indicated that this idea is in on mind of upper echelon macroeconomists. If you are interested in the idea and how much it has been considered by policy makers, take a look at the article by Chinn and Frieden explaining the benefits and drawbacks to higher inflation: http://bit.ly/P8yuNj
Lawrence, the economics community is not in agreement that 2% is the ideal rate to stimulate economic activity. Some studies even indicate that a near zero rate is sufficient: http://bit.ly/PI8OBO
That said, central banks have targeted a 2% rate as essentially an upper bound to make sure that we are safe from the hazards of deflation. If you look at statements from various central bankers when they exceed the 2% target they are concerned, but a rate between 1-2% satisfies them as safely away from deflation but not edging towards inflation.
You are correct to identify the needs of low, stable inflation to promote economic activity, but I am just pointing out that low and stable is not a set point of 2%, it could be lower. Moreover, as I said before, I really think the Fed would tolerate higher inflation right now to reduce the debt burden in real terms, especially if it helped the employment situation. In the long term though, the Fed clearly favors inflation safely below 2%; they do not treat inflation over 2% as functionally equivalent.
QE3 Is Not Inevitable [View article]
FOMC Minutes: QE3 Not A Sure Thing [View article]
Jackson Hole To Create Euro Rally [View article]
The bigger question is the one raised by Malkiel: is Germany just signalling a willingness to talk or substantive support? I suspect Draghi and the markets will treat this as a signal of full-fledged support at Jackson Hole, but if that proves not to be the case when the ECB meets on September 6, the market will likely correct rather sharply.
Pandering To Populism: How Auditing The Fed Hurts The U.S. Economy [View article]
If you want to see a credible, independent central bank that makes policy geared at helping the middle class, it will take a series of significant reforms. In addition to the reform ideas I examine near the end of the article linked in my comment above, I also think reform might need to involve other sectors of the economy (besides banking) having a greater voice at the Fed and fixing the massive regional inequities associated with Fed districts drawn 100 years ago.
Finally, I never called Dr. Paul a conservative, I referred to his supporters as "conservative populists." From a historical standpoint, I believe this is a more accurate classification of most of his supporters than calling them libertarians.
Bernanke's Cross Of Gold [View article]
I am a bit more cynical. While Dr. Duy's point that the 2% target was intended to free up the Fed's other policy options makes sense, I think that political considerations played a much larger role than policy considerations. The Fed wanted to simplify policy as much as possible in an effort to blunt political critiques and avoid increased pressure from Congress. My full argument can be found here: http://bit.ly/PD6rnV
Pandering To Populism: How Auditing The Fed Hurts The U.S. Economy [View article]
Central Bankers Continue To Control Markets; Time To Audit The Fed [View article]
While I completely understand your fear about a an American oligarchy, I disagree that Fed personnel are behaving as the oligarchs. More importantly, the research indicates that a Fed audit beyond what is already done would simply shift the base of power from the Fed to Congress. Please see my article for a more complete explanation of how an audit of monetary policy would result in greater economic instability and devaluation of the dollar: http://bit.ly/NYtOYW
Mitt Romney, Paul Ryan And Economic Uncertainty [View article]
Mitt Romney, Paul Ryan And Economic Uncertainty [View article]
Romney's VP Choice: Good For Gold This Fall? [View article]
The Fed Should Stimulate Lending [View article]
Larry, to your point about zero interest rate policy stimulating lending, it has not sufficiently worked so far. With a great deal of excess real estate and an entire generation wary of buying, stimulating lending is an important step to recovery. Add in the fact that it has the added benefit of actually utilizing the capital in the system rather than just adding more and it makes macroeconomic sense.
In some ways, the market today is like a camp fire and the Fed just keeps adding wood to the fire with QE. They hope that eventually the wood will catch, even if it is wet. Stimulating lending is like blowing on the fire to give the wood a chance to catch.
The Fed Should Stimulate Lending [View article]
Since the Fed does not have the capacity to influence borrowers and something must be done to increase the velocity of money, the only remaining choice is to influence lenders. This process could mean a potentially hazardous jump-starting to the mbs market, but in theory the new Dodd-Frank regulations SHOULD help keep lenders and borrowers from taking on unreasonable risk again...hopefully. As I think the article makes clear, this is a program fraught with potential hazards, but I still view it as superior to another straight capital injection (QE3) that further incentivizes hoarding of cash (businesses clearly see a safe low rate of return on a large amount of cash as preferable to a riskier high rate of return on a smaller amount of cash).
So, if the Fed is going to intervene in markets again over the next few months, I think it would be better to see a program like this (with appropriate oversight), rather than QE3.
Another Central Bank Driving Markets [View article]
Don't Blame Ben Bernanke [View article]
Don't Blame Ben Bernanke [View article]
That said, central banks have targeted a 2% rate as essentially an upper bound to make sure that we are safe from the hazards of deflation. If you look at statements from various central bankers when they exceed the 2% target they are concerned, but a rate between 1-2% satisfies them as safely away from deflation but not edging towards inflation.
You are correct to identify the needs of low, stable inflation to promote economic activity, but I am just pointing out that low and stable is not a set point of 2%, it could be lower. Moreover, as I said before, I really think the Fed would tolerate higher inflation right now to reduce the debt burden in real terms, especially if it helped the employment situation. In the long term though, the Fed clearly favors inflation safely below 2%; they do not treat inflation over 2% as functionally equivalent.