Thursday, August 30, 2012

Tight Money and Fast Growth...

I'm back, and harping on the same strain again.

Today I thought I'd run Nominal GDP percent change per year against the Fed funds rate, expecting to see a negative correlation (lower Ffr = higher NGDP growth). What I saw instead suprised me:

A near-perfect positive correlation. I guess this means we should be raising rates to spur recovery, right? But in all seriousness, it's major evidence that high rates = loose money and fast growth, tight money = low rates and slow growth. Now I've made charts demonstrating that will both M2 AND the Ffr.

Nobel please.

P.S. here's the same thing but percent change from a year ago for Ffr. Similiar picture, same point.

Friday, August 17, 2012

Europe, NGDP, and the Euro-Crisis: the AEI's Cool Chart

James Pethokoukis, a blogger for the AEI, has a lengthy post about NGDP growth and the Euro crisis that I'm sure is good, but I was more interested in this awesome graph. Check it.

As expected, the slowdown in NGDP was accompanied by the ballooning of debt/GDP ratios. 

Wednesday, August 15, 2012

Crisis and Regulation, part three: Conclusion via Cochrane

A while back I did a two-parter on the financial crisis that I never finished with a conclusion (typical). The second post proved massively popular due to a graphic of the "securitization chain" that google decided was mine instead of the site I grabbed it from (awesome). 

In any event, I meant to end the series by saying that the solution to preventing another financial crisis would be to not only end "Too Big to Fail" as Bernanke says, but to re-structure the banking sector so that it is comprised of lots of small and medium sized banks, the failure of any one of which would not be consequential to the whole sector. In this way, the financial sector would be like any competitive industry we fetishize in our micoeconomic models, where market forces diseminate best practices, prices are at socially-maximizing equilibrium, and systemic risk is minimal to non-existent. 

And in a counter-intuitive fashion, I concluded that more government regulation of the sector could prove counter-productive to his end. Instead of going over the specifics of this, I found this handy quote for John Cochrane in the WSJ circa Dec. 2011 that sums it up better than I can: 

"The depressing scenario is that the six big banks will use this massive regulation as an anti-competitive fortress. We will have the same six big banks 30 years from now, spurred to even greater size with ontinuing subsidies, cheap Fed-provided financing, the government guarantee, and occasional bailouts. And a financial system as innovative as the phone company, circa 1965. The only hope I see is that nimble, new small-enough-to-fail competitors will spring up and rebuild the financial system. But this is faint hope in the face of the vast discretionary powers in last year's Dodd-Frank financial legislation and the Fed's rules, which allow the government to step in whenever they decide that a financial risk is "systemically important." What is not "systemically important?" How I can I build a new financial company that demonstrably causes no "systemic" danger—and is therefore not subject to the Fed's onslaught of regulation, discretionary supervision and "remediation"? How can I assure my creditors that they will receive the legal protections of bankruptcy court, and not be dragged into some arbitrary and politicized "resolution"?

Monday, August 13, 2012

Bernanke on the Stance of Monetary Policy

"Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman's advice to heart. Over the past two decades, inflation has fallen sharply and stabilized around the world, not only in the industrialized nations but in emerging-market economies and in even the poorest developing nations. Some central banks, so-called inflation targeters, have set explicit, quantitative targets for inflation; but all central banks, certainly including the Federal Reserve, have emphasized the importance of achieving and maintaining price stability. On the issue of inflation control, Friedman may be judged to have been a bit too pessimistic; his concerns that central banks would have neither the technical ability nor the correct incentives to control inflation led him to recommend his money-growth rule, for which a central bank could certainly be held accountable. Evidently, however, determined central banks can stabilize inflation directly, at least they have been able to do so thus far."

-Ben Bernake c. 2003

By his own defintion, the FOMC should be expanding; both inflation and NGDP are still running well below trend. 

Saturday, August 11, 2012

Monetary v. Financial Policy at the Fed (part 2)

Here's that quote from John Cochrane I alluded to earlier about how the Fed is doing more "financial" rather than traditional "monetary" policy: 

"Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt 
spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt. Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging ļ¬nancial policy."

The point is, when you couple this quote with pretty much everything Scott Sumner has ever said, you get a picture of an institution that is wildly off course. Instead of buying short term Treasury debt for cash and using this mechanism to boost nominal spending along its previous trend, the Fed is instead trying to coax a recovery by manipulating strategic asset prices and rates of return it thinks are crucial.  

This is both dangerous and ineffective. 

Paul Ryan: The Veep Who Loved Tight Money the name of my new spy novel.

Oh boy. So Romney picked his running mate and it's Paul Ryan. Ryan happens to be second only to Ron Paul in the House GOP caucus that loves to bash Bernanke for increasing the monetary base. Of course, Bernanke has not done nearly enough monetary stimulus to bring NGDP back to its previous trend path, but nevermind all that. The base is huge!

This whole thing is troubling because, should Romney and Ryan win, it will just mean more political pressure (this time from a higher place) against the doves at the Fed. And the those success of the doves at the FOMC is what the economy still desperately needs.

Prognosticator of prognosticators. 

Wednesday, August 8, 2012

As an Aside, Cow Tools

My favorite Gary Larson cartoon. It's obtuse nature reflects the way I feel when interpreting economic... (oh screw it its funny and I want to post it).

Home work question: which tool do you think the cow should work with to maximize the marginal product of his labor? 

Monetary v. Financial Policy at the Fed (part 1)

Nominal GDP growth as been slight to say the least over the past four years. In that time, however, the monetary base has roughly tripled. This implies that demand for base money has risen almost as much as the supply of base money, or that velocity has fallen roughly in tandem (Recalling that MV=PY).

Its not hard to figure out where this base demand is coming from: member banks have increased holdings of excess reserves at the Fed dramatically. See below.

Maybe it has something to do with the fact that the Fed is paying them 0.25% on those reserves. Accounts at the Fed are where money goes to die sit, not get lent out to businesses or circulated by consumers. Ordinarily, banks keep some reserves at the Fed to meet their reserve requirement, not stash hundreds of billions there.

Why, then, would Bernanke's regime implement such a contractionary policy? Its because the Fed has, since 2008, been much more interested in setting what John Cochrane called "financial policy" than monetary policy. While indicators such as below-trend inflation, high unemployment, and low NGDP growth would scream for more monetary expansion, the Fed has been intent to manipulate specific portions of financial markets. For example, below is the Fed's holdings of mortgage backed securities.

Monday, August 6, 2012

John Taylor on the Myth of Financial Crisis Recoveries

John Taylor has a fascinating new post on the weak recovery and compares it to severe recessions of the past. One frequent claim heard (and one I believed until I saw this post) is that recovery from recessions caused by financial crisis necessarily takes longer to recover from. But check out these time series and judge for yourself.

Clearly something is rotten in the United States.  

Saturday, August 4, 2012

Two Shades of Gray, and the Man Who Would be King

A modern art collage.

As the election season continues, we're going to be inundated with arguments from both sides claiming their public finance regimes will lead to faster job growth. But stand by to not hear about the importance of the third man in the room in determining nominal GDP.