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Evan Schnidman  

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  • 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.
    Aug 9, 2012. 08:58 PM | 1 Like Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    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:
    Aug 9, 2012. 08:46 PM | Likes Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    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:

    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.
    Aug 9, 2012. 08:23 PM | 1 Like Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    I apologize for any confusion, I was not trying to say that the Fed wants near zero inflation right now. If anything, right now they would probably tolerate inflation well above the 2% target (as Rogoff and Reinhardt have been arguing) to diminish the U.S. debt load in real terms.

    I simply meant that if, in the long term, we could achieve the same growth rates with very low or nonexistent inflation, that is what they would shoot for. Since, as you point out, to assure investment and expenditure we need at least some, modest inflation, that is what central banks tend to target. The other benefit to inflation is that it keeps us away from deflation, which is obviously much more dangerous.

    All of that said, I think it is worth note that having higher inflation is not necessarily as insidious as some think. The real threat comes from erratic inflation; if inflation is consistently higher, that can be accounted for (to some extent) in contracts. Nevertheless, as virtually every model demonstrates, low and stable inflation results in the best growth outcomes.
    Aug 9, 2012. 05:59 PM | Likes Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    Lawrence, you are correct to point out that the Fed now explicitly targets 2% inflation and I publicly criticized the move to target in a Bloomberg News op-ed:

    That said, as Justin Wolfers and Betsey Stevenson have recently pointed out, the Fed does not treat inflation above 2% as functionally equivalent to inflation below 2%. In essence, this means that the Fed is actually targeting a range under 2% and I would bet that if they thought we could have growth at or near a 0% inflation rate, they would be thrilled with that.
    Aug 9, 2012. 05:20 PM | Likes Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    I understand your argument and how you come to the conclusion that the Fed is coercive, but I don't buy your premise. Your whole point is based on the assumption that central banks are constantly pursuing inflationary policy. In fact, central banks explicitly try to control inflation and numerous economic studies indicate that independent central banks do a good job of this.

    The trouble comes when politics is injected into monetary policy and central bankers are pressured to satisfy voters with increased money supply which leads to inflation. We saw this in the 1970s, particularly with President Nixon pressuring Arthur Burns in the run-up to the 1972 election. We also saw the opposite in the late 1970s and early 1980s when Paul Volcker acted independent of the Carter and Reagan administrations to bring inflation down. Since then, inflation has largely remained restrained in the U.S. thanks to Fed independence. The same story can be told for numerous other countries with independent central banks.

    Ultimately, it strikes me that your argument uses the Fed as a scapegoat rather than acknowledging the short-cited economic pressures in our political system. Maintaining central bank independence is crucial to avoiding these pressures in order to avoid the sequence of events that you provided.
    Aug 9, 2012. 04:37 PM | 1 Like Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    I really like your get away driver analogy, and you make a good point about rhetoric, but I disagree with your sentiment that the Fed is engaging in coercion or taxing the people. The Fed was created by legislation almost 100 years ago and is in need of reform, but that doesn't change the fact that they turn a profit based on open market operations that provide a public service by stabilizing the economy AND by aiding banks through interest payments on reserves that allow liquidity to remain in the market. Perhaps more importantly, it would be deeply disconcerting if the Fed did not turn a profit. That would indicate that they know less about the markets than a savvy investor and have less control than is necessary to implement monetary policy.

    Given that the Fed is basically the only part of the federal government that has done anything to aid the economy over the last couple years and they did it all without a cent in tax dollars (they even helped pay down the deficit), I can certainly see for better targets of hostility in our economic policymaking apparatus, perhaps none better than Congress.
    Aug 9, 2012. 03:33 PM | 1 Like Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    Net, sorry for not replying to this sooner, but you are actually wrong about the Fed's role with debt. The Fed actually helps pay down the debt! Every year the Fed generates a profit, they use some of that to fund operating expenses (they receive no appropriations money from Congress/tax revenue) and whatever remains is turned over to the Treasury to help reduce the deficit. The Fed has turned a profit every year since its inception and has therefore contributed to reducing the U.S. deficit each year, thereby (as you explained above) reducing the federal debt burden.

    Sorry for the econ lesson, it just bothers me that people don't realize that the Fed is helping pay down deficits, not create them.
    Aug 9, 2012. 01:48 PM | 3 Likes Like |Link to Comment
  • How The Fed And ECB Will Move Markets In August And September [View article]
    You make several interesting points here. I agree with the crux of your argument that monetary stimulus is not getting us very far and fiscal stimulus is much more likely to be productive in creating jobs at this point. That said, I think you oversimplified the timeline a bit.

    The first problem is that since Congress is gridlocked and that is not going to change with this election, we have to turn to a Treasury program. Since Treasury is unlikely to operate unilaterally, the most likely strategy is to pair with the Fed in some fashion. The tricky thing about a joint Fed-Treasury program is that Treasury will have turnover in leadership in January if Romney wins. Bernanke's term is not up until 2014, so Romney wouldn't have the opportunity to replace him until that point. This makes for a rocky partnership between Fed and Treasury in any ongoing program through 2013-2014. It also calls into question the Fed's low rate pledge if it is extended beyond 2014.

    On the Fed personnel side, it is interesting because the most likely choice by a Republican President is probably John Taylor, and he has been very critical of both QE and the initial fiscal stimulus package. Obviously his appointment (if he could survive Senate confirmation) would have major implications for the Fed's balance sheet and any ongoing stimulus programs. This is not to say Taylor is a lock to be a Republican nominee, I can certainly think of other qualified candidates, but it is a pretty open secret that he has been interested in the job for some time now and his appointment would represent a dramatic shift in Fed policy.
    Aug 8, 2012. 10:50 AM | 5 Likes Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    I am uncertain what you read as "bleeding heart" in my comments. I was simply pointing out that our electoral system is deeply flawed and Congress (as well as the President) has been unable to accomplish anything substantive in fiscal policy over the last couple years. Since the Fed has made more substantive policy moves than anyone else in the U.S. government, they deserve credit for pulling us back from the abyss even in the absence of fiscal policy aid. I also mentioned that it would be nice if our elected representatives could be bigger than their petty political ambitions and do the right thing for the U.S. economy. None of these should be controversial points, but rather a statement on the failures and inadequacies of our electoral current system that rewards partisanship over statesmanship.
    Aug 6, 2012. 11:59 PM | 3 Likes Like |Link to Comment
  • Don't Blame Ben Bernanke [View article]
    This is a great, concise article that highlights the modest success of monetary policy over the last few years and the epic failure of fiscal policy. What I find most disconcerting is that we have seen what happens when fiscal policy is even tighter (look at Britain's austerity measures at the height of the crisis) and it results in an outright recession. Nevertheless, this is what the majority of Congress is advocating and we have seen no genuine effort to compromise for the greater good of the U.S. (and global) economy. It strikes me that this indicates a serious flaw in our electoral system since elected representatives continuously fail to do their job while appointed representatives at the Fed try to pick up the slack.
    Aug 6, 2012. 02:47 PM | 5 Likes Like |Link to Comment
  • Fed Up With The Fed? Turn To Super Mario [View article]
    Thanks for the detailed comment and your earlier ones on the other article; I apologize for not replying sooner.

    As you you can probably tell, I think the Fed is setting up to do something aimed at increasing the velocity of money. We have lots of liquidity in the system, but it is stagnant as everyone sits on cash reserves. This hurts the housing market and really limits employment growth. If the Fed can step up with a program (probably jointly with Treasury as you alluded to) that induces increased lending and increases the velocity of money, that would strengthen the housing market and aid in employment growth without stoking inflation fears as much as QE3.

    Obviously this has some drawbacks both with regard to increasing risk by rebuilding the secondary debt markets and with regard to potentially not creating enough inflationary pressure. I will try to put together an article in the next week or so that details what I think the Fed has in mind and a couple possible timelines for action given what is happening with Europe, the election and the fiscal cliff.
    Aug 3, 2012. 12:12 AM | 1 Like Like |Link to Comment
  • The Fed May Act, But Not With QE3 [View article]
    I have been thinking about it all day and I really do think the Fed and Treasury are working on something to increase the velocity of money. In looking at some balance sheets this morning, I just don't see the need for more money in the system, we just need that money moving around. Unfortunately, the easiest ways to do that involve returning to some financial instruments that got us to the crisis to begin with. I suspect we will see some effort made to jump-start the secondary mortgage market very soon, but the question is whether we will see that with some accompanying new regulation.
    Aug 1, 2012. 04:22 PM | 1 Like Like |Link to Comment
  • 2 Ignored Economic Indicators That Should Not Be Ignored [View article]
    Interesting article, thanks. I think you are dead on about inflation, but I think they both factors you discuss could be altered with macro policy change. The capacity utilization issue is one that could be aided by some fiscal policy measures, but likely won't be due to Congressional gridlock. On the monetary side, I would guess that the FOMC is doing everything they can to figure out how to increase the velocity of money. An increase in velocity would likely have a better impact on the economy than pumping in more liquidity and it has less risk of eventual inflation (if velocity rises and we have even more liquidity in the system, it could be problematic).
    Aug 1, 2012. 01:47 PM | 1 Like Like |Link to Comment
  • The Fed May Act, But Not With QE3 [View article]
    Asbytec, great comments on the funding for lending program. In many ways it would be oriented at freeing up more liquidity, but with the express purpose of promoting lending. Given the cash reserves on hand, I don't think the liquidity portion is as important as the lending aspect right now. That said, you also highlight an interesting aspect of the plan, what makes for good collateral? This is why any step in this direction would need Treasury support (backstopping), since Fannie and Freddie are not really able to provide decent collateral at the moment. The other tricky part is how to explain to people that the best way to get liquidity back in the system involves the very thing that caused the crisis in the first place, collateralized debt being sold on the secondary market. The Fed would need to avoid saying this while simultaneously ensuring rules are written to regulate the sales of the debt.
    Aug 1, 2012. 01:22 PM | 1 Like Like |Link to Comment