• Prices, Inflation, and Unemployment

    The Producer Price Index for dropped 0.6 for finished goods and rose 0.2 percent for intermediate goods, according to the Bureau of Labor Statistics . Here's the monthly percent changes in the Producer Price Index for Finished Goods, seasonally adjusted: And here's the monthly percent changes in the Producer Price Index for Intermediate Goods, seasonally adjusted: You can read the full report here . Combine the PPI data with the Consumer Price Index data released earlier --the CPI rose 0.2 percent in September, and has fallen 1.3 percent over the last 12 months on a seasonally adjusted basis, according to the BLS--and it doesn't look like inflation is an issue at this point. James Hamilton suggests that we take a look at the price data in the context of high unemployment. And he concludes "the Federal Reserve is correct in thinking that high levels of unemployment are a factor that will put downward pressure on inflation over the next two years." He breaks down the relationship between unemployment and inflation at Econbrowser . Take a look here .

  • Fed Chooses to Keep Interest Rates Low

    The Federal Open Market Committee met today and decided to keep the federal fund rates at 0 to 0.25 percent. So while the FOMC stated that it sees positive signs in the economic data, it is not ready to forgo monetary policy measures designed to push recovery, and it is not concerned about inflation at this point. From the press release: In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted. Read the full release here .

  • Buffett Warns of Need to Control Greenback Gusher

    Warren Buffett writes in today's New York Times that we must not only be concerned with greenhouse emmissions, but with "greenback emmissions" as well. While Buffet applauds federal fiscal policymakers for pumping money into the economy last year--it played "an essential role in the rescue," he writes--now that recovery has begun, he warns that too much "monetary medicine," could pose a threat that "may be as ominous as that posed by the financial crisis itself": Unchecked carbon emissions will likely cause icebergs to melt. Unchecked greenback emissions will certainly cause the purchasing power of currency to melt. The dollar’s destiny lies with Congress. Read The Greenback Effect here .

  • The Case for Negative Interest Rates in the UK

    The European Central Bank and the Bank of England decided today to hold steady with their interest rates --1.0% and 0.5% respectively. That essentially means Europe's top bankers are taking a wait and see approach to give past monetary policy moves more time to work against unemployment and credit crunch woes. Edmund Conway , economics editor for The Telegraph , suggests that there is--or was--a move available to the Bank of England that is,at the least, interesting to consider: negative interest rates for banks. The goal: to get the banks lending. Conway points out that there is more money in the Bank of England reserves than there is out in the real world (in cash). Here's a graph from Conway: The negative interest rate idea comes from a former B of E policymaker, Charles Goodhart. Conway explains the idea: At the moment they receive interest on those reserves at the Bank rate (ie 0.5pc), which is hardly generous but then is no deterrent to leaving the cash safely in the bank. If, as Goodhart suggests, you charge them a 0.5pc fee on every pound above a certain amount, it would encourage them to go out and use that cash lending to businesses and people, hopefully combating the credit crunch. That, at least, is the theory. Novel, but not quite unprecedented: Sweden last month introduced a similar levy on bank reserves - though they haven’t embarked on QE (quantitative easing) in quite the way the UK has. Read Conway's post here .

  • Pushing Local Business with Local Currency

    Businesses and consumers in in Western Massachusetts have been conducting their own real life economic experiment since 2006 when they introduced Berkshares . Berkshares are an alternative local currency, designed to maximize "circulation of trade within a defined region." The Wall Street Journal 's Andy Jordan travelled to the Berkshires to see how the currency is faring:

  • Bernanke Town Meeting

    Federal Chair Ben Bernanke held a town meeting at the Kansas City Federal Reserve Bank on Sunday, and he explained the Fed's actions prior to the recession, and in reaction to the economic meltdown last year. Jim Lehrer moderated, and The Newshour with Jim Lehrer has now made video of the meeting available. Here's the first segment (of three) in which Bernanke defends the Fed's actions and answers questions from the audience: You can view segments two and three by clicking 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 .

  • Romer and Lessons from 1937

    Christina Romer , chair of the President's Council of Economic Advisers, has a guest article in the latest Economist. Romer, who has been bullish on the Obama Administration's economic recovery plan, writes that we need to look back to 1937 to understand why, in her view, the stimulus spending is the right antidote for this recession. During FDR's first four years in office, the economy rebounded from the Depression in "rapid" fashion--"annual GDP growth averaged 9%." Unemployment dropped significantly in that period. But come 1937, unemployment surged (see chart at right from the Economist), as the country went into a deeper downturn. Romer: ...The fundamental cause of this second recession was an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy. One source of the growth in 1936 was that Congress had overridden Mr Roosevelt’s veto and passed a large bonus for veterans of the first world war. In 1937, this fiscal stimulus disappeared. In addition, social-security taxes were collected for the first time. These factors reduced the deficit by roughly 2.5% of GDP, exerting significant contractionary pressure. Also important was an accidental switch to contractionary monetary policy. In 1936 the Federal Reserve began to worry about its “exit strategy”. After several years of relatively loose monetary policy, American banks were holding large quantities of reserves in excess of their legislated requirements. Monetary policymakers feared these excess reserves would make it difficult to tighten if inflation developed or if “speculative excess” began again on Wall Street. In July 1936 the Fed’s board of governors stated that existing excess reserves could “create an injurious credit expansion” and that it had “decided to lock up” those excess reserves “as a measure of prevention”. The Fed then doubled reserve requirements in a series of steps. Unfortunately it turned out that banks, still nervous after the financial panics of the early 1930s, wanted to hold excess reserves as a cushion. When that excess was legislated away, they scrambled to replace it by reducing lending. According to a classic study of the Depression by Milton Friedman and Anna Schwartz, the resulting monetary contraction was a central cause of the 1937-38 recession. Red the full article here .

  • George Soros Speaks with Reuters Staffers

    In his new book, The Crash of 2008 and What it Means , George Soros calls for an overhaul of the global financial system, proposing a set of policies to reframe regulatory systems and make sure that the mistakes that led to this "once in a lifetime event" are not repeated. Earlier this week, in speaking with Reuters staffers, he shared his concern that people might be too quick to ignore the lessons of the past, saying "There is a real danger that people don't understand the system was fundamentally flawed and there is no return to where we come from." Here are excerpts from that conversation:

  • Romer: Incredibly Confident in Obama Fiscal Policy

    Christine Romer , chair of the Council of Economic Advisers, continues to take questions about how she supports the Obama administration's fiscal policy response to the recession, when much of her past writing suggests that monetary policy has been the path toward recovery. Yesterday, Fox's Chris Wallace put the question to her in a new way: For background, you can read Christine and David Romer's 1994 paper, What Ends Recessions? here (paid content). This Minneapolis Fed interview with the Romers from 2008 is also instructive (and it is free).

  • Christina Romer Shares Lessons from The Great Depression

    When Council of Economics Advisers chair Christina Romer has studied the Great Depression in her work as a professor at UC-Berkeley. Yesterday, she drew on that past experience in a speech at the Brookings Institution, in which she talked about lessons that she and others working with and in the Obama Administration should take from the Great Depression, and from the Roosevelt Administration's response. While she took care to point out that the economic crises of today, as "severe" as they are, do not reach the "truly horrific conditions the previous generation of Americans endured and eventually triumphed over," her speech centered on the parrallels that do exist between then and now: This similarity of causes between the Depression and today's recession means that President Obama begins his presidency and his drive for recovery with many of the same challenges that Franklin Roosevelt faced in 1933. Our consumers and businesses are in no mood to spend or invest; our financial institutions are severely strained and hesitant to lend; short-term interest rates are effectively zero, leaving little room for conventional monetary policy; and world demand provides little hope for lifting the economy. Yet, the United States did recover from the Great Depression. Romer then laid out 6 lessons from the Great Depression that apply to today: 1) A small fiscal expansion has only small effects. 2) Monetary expansion can help to heal an economy even when interest rates are near zero. 3) Beware of cutting back on stimulus too soon. 4) Financial recovery and real recovery go together. 5) Worldwide expansionary policy shares the burdens and the benefits of recovery. 6) The final lesson: A key feature of the Great Depression is that it did eventually end. For details on the above lessons, read Romer's speech here .

  • Bernanke Defends Fed's Actions

    There has been plenty of bad news in recent days, from markets tumbling to scary figures about "underwater" mortgages , but Federal Reserve Chair Ben Bernanke says things would be worse if not for the Fed's actions over the last six months: The measures taken since September by the Federal Reserve, other U.S. government entities, and foreign governments have helped improve conditions in some financial markets. In particular, strains in short-term funding markets have eased notably since last fall, and London interbank offered rates, or Libor--which influence the interest rates faced by many U.S. households and businesses--have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds in September have been replaced by modest inflows. In the market for conforming mortgages, interest rates have fallen nearly 1 percentage point since the announcement of our intention to purchase agency debt and agency mortgage-backed securities. Corporate risk spreads have also declined somewhat from extraordinarily high levels, although bond spreads remain elevated by historical standards. Likely spurred by the improvements in pricing and liquidity, issuance of investment-grade corporate bonds has been strong, and speculative-grade issuance, which was near zero in the fourth quarter, has picked up somewhat more recently. Nevertheless, significant stresses persist in many markets. For example, most securitization markets remain closed, and some financial institutions remain under pressure. That is from Bernanke's testimony before the Senate Budget Committee yesterday. Here is his full opening statment: You can read a transcript of Bernanke's testimony here .

  • John Taylor: 'How Government Created the Financial Crisis'

    In an op-ed in today's Wall Street Journal , John Taylor, professor of economics at Stanford and a senior fellow at the Hoover Institution, says his research shows that the federal government should be getting the lion's share of the blame for the financial crisis, starting with the Fed: Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom. Taylor has a book on the subject coming out soon. He is also the author of this economics text book . You can read the full op-ed here .

  • Freakonomics: 'The Failure of Macroeconomics'

    The econonoblogosphere is ripe with healthy debate of late over macroeconomic theory and fiscal stimulus. And frankly, sometimes even when economists seem to agree, they still disagree. Over at the Freakonomics blog, Justin Wolfers of Wharton makes an argument that we are relatively unprepared to understand fiscal stimulus because macroeconomic theorizing on the subject has evolved so little over the last half century. If you took your first economics class 50 years ago, you’ll recognize all this talk about marginal propensities, multipliers, and crowding out. Fifty years later, it’s still the same debate, and it’s still unresolved. Why are we so reliant on mid-century macro for understanding our current predicament? And why haven’t we developed better answers? Monetary policy, it seems, has been in the driver's seat. Wolfers plugged the numbers and found that since 1970, economic papers published on monetary policy have outpaced papers on fiscal policy 3 to 1. I’m not sure why fiscal policy is the ugly stepsister. Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role. Or perhaps there are just too many temptations for young economists — monetary policy research pays off because there’s a comfortable career path running from monetary research to the money markets. Wolfers goes on to suggest that part of the reason for the imbalance is because of funding. With a dozen Fed branches, funding for monetary policy research has many rich uncles, while there are far fewer funders for fiscal policy research. Might we expect some change there given that fiscal policy discussions are now the rage--and for good reason? You can read the full post here .

  • The Ongoing Monetary Policy Debate

    Ben Bernanke is still chair of the Federal Reserve for at least another week, and yesterday he spoke out about US banks' need for more money. So as the debate over fiscal policy and the stimulus package continues to rage, monetary policy is still part of the game. Bernanke says he is in favor of a massive stimulus package, and he is supporting President Bush's call--in cooperation with President-elect Obama--for Congress to release the remaining funds in TARP. But he warns that the federal government needs to aid the banks, regardless of how unpopular that may be. From the New York Times : Though the Fed chairman acknowledged that people in many countries were “understandably concerned” about pumping government money into the financial industry while often turning a cold shoulder to other sectors, he defended the effort as unpleasant but necess ary. “This disparate treatment, unappealing as it is, appears unavoidable,” he said. “Our economic system is critically dependent on the free flow of credit, and the consequences for the broader economy of financial instability are thus powerful and quickly felt.” So as much as it seems there is a battle between a monetary policy camp and a fiscal policy camp--see Daniel Gross's Moneybox column today at Slate--Bernanke reminds us that we may not be able to have one without the other. Martin Wolf's Economists Forum over at the Financial Times has provided great insight into understanding monetary policy tools. Today Wolf goes Down Under for some thoughts on Zero Interest Policy (ZIP) from Stephen Greenville of the Lowy Institute in Sydney. Greenville is a former deputy-governor of the Australia Fed and he looks at the question of whether , with central bank rates at or near zero, monetary policy has "become impotent in the US and Japan?" While the zero bound leaves no room for further shift in interest rates, at the same time it removes a constraint on central bank operations. Normally they have to balance the money market each day through open market operations, supplying the public with the currency it wants to hold and giving the banks a comfortable level of reserves. This is usually a fairly routine process, supporting the official interest rate setting. But with interest rates at zero, the authorities can push out as much base money as they want to - quantitative easing (QE) is the name of the game. In itself, more base money may not do much: it just accumulates in bank balance sheets (as happened in Japan in 2001-2005 and is happening now in the US). But the central bank can use base money to buy longer-dated government paper, pushing down the yield curve, partially addressing the first problem mentioned above. More powerfully, it can buy private sector assets. Buying undervalued assets not only helps to unclog illiquid markets, it also adds capital to the balance sheets of those who hold these undervalued assets, as the price is bid up. That said, don't put Greenville in the camp that thinks monetary policy has enough juice to be effective at this stage. Certainly, let’s use the opportunity to fix infrastructure through fiscal expansion. But how do you shrink the house-of-cards which is the financial sector, without bringing the whole lot down? While this necessary contraction is happening, how to maintain the flow of essential funding to good enterprise? How to distinguish between good and toxic assets, when the “lemons” problem is ubiquitous? All this requires micro-level banking analytical skills, which seem to have atrophied. At the macro level, using ZIP to signal that money has no time value might be appropriate, but it doesn’t do much to address these micro-issues. A zero interest rate (or even one with a risk premium on top of this) is a low hurdle-rate for new investment proposals to jump. Whatever is holding back demand now, it isn’t the level of interest rates: we shouldn’t waste too much energy regretting America’s inability to lower interest rates further. You can read Greenville's full article here .