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  • Chinn and Frieden on Conditional Inflation Targeting

    In the latest Foreign Policy , Menzie Chinn and Jeffry Frieden argue on behalf of conditional inflation targeting. A little inflation would be welcome, they say, in that it would "reduce the debt burden to more manageable levels." They write: Today our highest priority should be to stimulate investment, growth, and employment. Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems. To back up his assertion that a little inflation is not a threat, Chinn adds this graph of implied inflation at the Econbrowser blog. Do you agree with Chinn that fear of inflation is "unwarranted"? Read A Call for Action: Conditional Inflation Targetting here .

  • Stiglitz's 'Alternative Theory of the Depression'

    In a thought-provoking piece for the January issue of Vanity Fair , Joseph Stiglitz urges us to consider an important element of the Great Depression that has not received as much attention in the media as monetary policy, a troubled banking system, or political battling. Stiglitz points us to the shift away from agriculture in the late 1920s through the early 1930s as cause of the Depression. If we are to look more closely at that piece of history, then we may be able to extract important lessons for today, as we see so many Americans going through revolutionary changes in their work and in their workplaces. Citing resebarch that he has been doing with Bruce Greenwald , Stiglitz writes: The parallels between the story of the origin of the Great Depression and that of our Long Slump are strong. Back then we were moving from agriculture to manufacturing. Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic—from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity—the same dynamic that revolutionized agriculture and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology. (As Greenwald has pointed out, most of the job loss in the 1990s was related to productivity increases, not to globalization.) Whatever the specific cause, the inevitable result is precisely the same as it was 80 years ago: a decline in income and jobs. The millions of jobless former factory workers once employed in cities such as Youngstown and Birmingham and Gary and Detroit are the modern-day equivalent of the Depression’s doomed farmers. The consequences for consumer spending, and for the fundamental health of the economy—not to mention the appalling human cost—are obvious, though we were able to ignore them for a while. For a time, the bubbles in the housing and lending markets concealed the problem by creating artificial demand, which in turn created jobs in the financial sector and in construction and elsewhere. The bubble even made workers forget that their incomes were declining. They savored the possibility of wealth beyond their dreams, as the value of their houses soared and the value of their pensions, invested in the stock market, seemed to be doing likewise. But the jobs were temporary, fueled on vapor. Mainstream macro-economists argue that the true bogeyman in a downturn is not falling wages but rigid wages—if only wages were more flexible (that is, lower), downturns would correct themselves! But this wasn’t true during the Depression, and it isn’t true now. On the contrary, lower wages and incomes would simply reduce demand, weakening the economy further. Of four major service sectors—finance, real estate, health, and education—the first two were bloated before the current crisis set in. The other two, health and education, have traditionally received heavy government support. But government austerity at every level—that is, the slashing of budgets in the face of recession—has hit education especially hard, just as it has decimated the government sector as a whole. Nearly 700,000 state- and local-government jobs have disappeared during the past four years, mirroring what happened in the Depression. As in 1937, deficit hawks today call for balanced budgets and more and more cutbacks. Instead of pushing forward a structural transition that is inevitable—instead of investing in the right kinds of human capital, technology, and infrastructure, which will eventually pull us where we need to be—the government is holding back. Current strategies can have only one outcome: they will ensure that the Long Slump will be longer and deeper than it ever needed to be. Read The Book of Jobs here .

  • 'Extreme' Policy Moves of 2011

    Calling the Fed's latest maneuvering, dubbed operation twist , extreme policy might seem a little, well, extreme. But that is exactly what the folks at Central Bank News have done in adding it to the list of the most extreme policy moves of 2011. Here's the list: 1. Belarus Financial Crisis 2. The Twist 3. Swiss Franc Floor 4. ECB SMP and the Confidence Crisis 5. Bank of Japan Earthquake Response 6. Vietnamese Hyperinflation 7. Brazilian Rate Reversal 8. Kiwi Earthquake Insurance 9. Joint Liquidity Operations 10. 'Chindia' Tightening For details of each of the policy moves listed above, read Top 10 Most Extreme Monetary Policy Moves of 2011 here .

  • Strong Dollar Rhetoric, Weak Dollar Reality

    Politicians and policy makers in the US often talk a big game when it comes to the need for a strong dollar. But as Willem Buiter , Chief Economist of Citigroup, and Ebrahim Rahbari , an economist for Citigroup, write at VoxEU , "US strong-dollar rhetoric has contrasted sharply with a weak dollar reality." Buiter and Rahbari argue that current policy will keep the dollar relatively weak against other currencies. But they also see no viable alternative to the dollar as the key currency in global business. Stepping away from the rhetoric about the dollar, Buiter and Rahbari remind us of some of the reasons policymakers may be okay with the dollar not getting to strong too quickly: [A] low actual dollar exchange rate may be seen as a net benefit for the US, because, in the presence of nominal rigidities, a depreciation of the nominal dollar exchange rate implies a real depreciation and therefore an increase in the international competitiveness of the US tradables sectors. The US is quite an open economy today, with the ratio of trade (the sum of imports and exports) to GDP at around 30%, comparable to Japan (Figure 3). Net exports have also played a significant part in the slowly solidifying recent cyclical recovery in the US, though it is, of course, true that many factors affect the evolution of net exports besides the level of the (nominal or real) exchange rate. Read The ‘strong dollar’ policy of the US: Alice-in-Wonderland semantics vs. economic reality here .

  • Brad DeLong, Jim Grant on QE3

    With the Fed's second round of quantitative easing expiring, and few signs of stable recovery, Brad DeLong , professor of economics at the University of California, Berkeley, and Jim Grant , of Grant's Interest Rate Observer, debate whether the Fed should initiate another round, QE3 . DeLong starts things off by arguing that more quantitative easing is what Milton Friedman would recommend. From the Wall Street Journal :

  • Fed Getting 'Back to Basics'

    In his latest Fed Watch post, Tim Duy prepares us for what he expects is the next debate. With agreement among Fed officials that we are in for roughly 3.7% growth this year, one question is whether and when the Fed needs to adjust policies to moderate inflation. And decision, it seems will come down to how the Fed reads job figures. Duy writes: Whatever you think of the nature of the recovery, there appears to be general agreement that some recovery is in place, what the Fed describes as “firmer footing.” The pace of job creation in the last six months appears consistent growth a little above trend. I think we can consider this improvement as a general increase in aggregate demand. Note what occurs once demand rises sufficiently to pull output past the “kink” in the short run aggregate supply curve – there is suddenly room for upward pressure on prices. This appears consistnet with the general shift in risk away from deflation toward inflation. The situation could be somewhat more complicated if supply issues, particularly for oil, are putting upward pressure on the long run aggregate supply curve at the same time, but for the reasons given below this also does not need to impact our long run inflation story. Importantly, we need to expect such pressure to continue as the price level rises until output reaches its potential. In short, the rising prices can coexist with large output gaps. How does this translate into likely the likely path of inflation? The way I think about it is that prices return to their prerecession trend: This implies that reestablishing long-run equilibrium entails a period of relatively higher inflation. And that inflation will create significant unease among a certain group of policymakers (and investors, for that matter). Read Fed Watch:Back to Basics here .

  • Lehman CEO *** Fuld's Testimony at the FCIC

    The Financial Crisis Inquiry Commission began two days of what it is calling "Too big to fail" hearings yesterday, and the star was *** Fuld , CEO of Lehman Brothers when the firm collapsed two years ago. Fuld would not take blame, or place any blame on Lehman for the investment bank's failures, telling the commission that " Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments." And he pointed a finger at the Fed: In retrospect, one can now see that as 2007 progressed, the weakening in the U.S. housing market was worse than predicted and spread to other sectors of the financial system. Those adverse market conditions accelerated in March 2008 after Bear Stearns nearly failed. I believed then, and still do now, that had the Fed opened the financing window to investment banks just before the Bear Stearns problem, that decision might have provided the necessary liquidity to keep Bear Stearns operational and, more importantly, might have lessened the need for additional government intervention. Still, having acted, the intervention of the federal government set a precedent in the marketplace that impacted liquidity, capital formation and the expectations of creditors and stockholders for at least the next six months. At the same time, the federal government and the individual regulators involved were criticized for using taxpayers’ money to rescue a financial company, which then set another precedent of how “not” to handle the next problem. With Bear Stearns gone, L ehman, as the next smallest investment bank, became the focus of the marketplace and was subject to increasingly negative and inaccurate market rumors. Jacob Goldstein of NPR's Planet Money did a word count and found that out of the 1680 words in Fuld's opening testimony, " Fuld devotes exactly 15 words to what Lehman did wrong. " Ben Bernanke and FDIC Chair Sheila Bair testify before the FCIC today. You can find transcripts of all of yesterday's testimony here , and watch a video of the hearing here .

  • WSJ Interactive Graphic Tracks Fed's Assets

    While we're on the topic of the Federal Reserve (yet again), we need to share this new graphic from the folks at Wall Street Journal 's Real Time Economics . They have put together a very helpful visualization of the Fed's balance sheet, in order to help us, as Phil Izzo writes, "track the Fed's actions." It looks something like this: Click here to go to the Wall Street Journal's site and use the interactive graphic.

  • Bernanke: ''Economic outlook remains unusually uncertain"

    Federal Reserve Chair Ben Bernanke 's appearance before Congress yesterday seems to have had an effect on markets in the US and abroad . With the US economy as it now stands, Bernanke spoke in measured terms about recovery, with jobs and consumer spending as leading reasons for the üncertain"future": An important drag on household spending is the slow recovery in the labor market and the attendant uncertainty about job prospects. After two years of job losses, private payrolls expanded at an average of about 100,000 per month during the first half of this year, a pace insufficient to reduce the unemployment rate materially. In all likelihood, a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Moreover, nearly half of the unemployed have been out of work for longer than six months. Long-term unemployment not only imposes exceptional near-term hardships on workers and their families, it also erodes skills and may have long-lasting effects on workers' employment and earnings prospects. In the business sector, investment in equipment and software appears to have increased rapidly in the first half of the year, in part reflecting capital outlays that had been deferred during the downturn and the need of many businesses to replace aging equipment. In contrast, spending on nonresidential structures--weighed down by high vacancy rates and tight credit--has continued to contract, though some indicators suggest that the rate of decline may be slowing. Both U.S. exports and U.S. imports have been expanding, reflecting growth in the global economy and the recovery of world trade. Stronger exports have in turn helped foster growth in the U.S. manufacturing sector. Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers' unit labor costs. Read the full speech here .

  • Marketplace Whiteboard: Commercial Real Estate

    One of the biggest hurdles on the path to economic recovery is the commercial real estate sector. Some economists believe the Fed's decision to keep target interest rates at their near-zero level had a lot to do with fears that this sector is not out of the woods yet. Marketplace's Paddy Hirsch explains why commercial real estate is a key place for the Fed to focus right now: Watch out below! from Marketplace on Vimeo .

  • Bernanke Defends Fed's Record: Wessel Weighs In

    Fed Chair Ben Bernanke took to Capitol Hill yesterday to defend his record as the nation's top central banker. The White House nominated Bernanke for another term, and the Senate banking committee is his first stop in getting confirmation for another term by the Senate. He took a series of shots from Senators across the political spectrum. Jim Bunning (R-KY) told Bernanke "your time as Fed chairman has been a failure." Bernanke defended his record, and told the committee that the Fed's actions helped the nation avoid a much larger economic catastrophe: We played a central role in efforts to quell the financial turmoil, for example, through our joint efforts with other agencies and foreign authorities to avert a collapse of the global banking system last fall; by ensuring financial institutions adequate access to short-term funding when private funding sources dried up; and through our leadership of the comprehensive assessment of large U.S. banks conducted this past spring, an exercise that significantly increased public confidence in the banking system. We also created targeted lending programs that have helped to restart the flow of credit in a number of critical markets, including the commercial paper market and the market for securities backed by loans to households and small businesses. Indeed, we estimate that one of the targeted programs--the Term Asset-Backed Securities Loan Facility--has thus far helped finance 3.3 million loans to households (excluding credit card accounts), more than 100 million credit card accounts, 480,000 loans to small businesses, and 100,000 loans to larger businesses. And our purchases of longer-term securities have provided support to private credit markets and helped to reduce longer-term interest rates, such as mortgage rates. Taken together, the Federal Reserve’s actions have contributed substantially to the significant improvement in financial conditions and to what now appear to be the beginnings of a turnaround in both the U.S. and foreign economies. David Wessel , economics editor for the Wall Street Journal, has spent the last few years studying the Fed closely for his book, In Fed We Trust: Ben Bernanke’s War on the Great Panic. In a recent interview with Big Think , he spoke about how the Fed's response to the global economic crisis has largely worked, but still contains some risk and uncertainty: You can watch the full interview with Wessel here . And you can watch yesterday's Senate hearings here .

  • Economists Continue Optimistic Streak in WSJ Forecasting Survey; Also Think the Government Should Not Have Let Lehman Collapse

    Most economists surveyed for the Wall Street Journal 's monthly forecast see a net job increase coming over the course of the next 12 months. The Journal's Phil Izzo points out that this is the first time in over a year that they have projected job growth. As a group, the economists still expect unemployment to top 10%--so that job growth is going to take a little while and things are going to get worse in the labor market before they get better. The survey shows relative optimism for growth in the coming months, with a prediction of 3% growth in the current quarter. Here's a look at the GDP projections over the course of the recession: Click here for interactive versions of the Journal's helpful graphics and charts associated with the forecasting survey. Given that we are at the one-year anniversary of the collapse of Lehman Brothers, one of the more interesting questions on the latest forecasting survey was whether the government should have saved the investment banking giant. Most of the economists who responded to that question thought the government made a mistake. Kelly Evans and Phil Izzo discuss that and other aspects of the survey in this video: Read the accompanying article on the survey here .

  • Bernanke and the Fed's Independence

    Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .