"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"

- Tyrion Lannister

"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."

- Jorah Mormont

"These bad people are what I'm good at. Out talking them. Out thinking them."

- Tyrion Lannister

"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."

- Michael Barone

Thursday, July 31, 2014


Collective Punishment in Gaza by Rashid Khalidi



Barry Eichengreen: The ECB Tries Again: "In June the European Central Bank announced a sers of new steps to counter deflation....
...Rather than bemoaning the failure of President Draghi & Co. to move earlier, it is more productive at this stage to ask: are the central bank's measures now up to the task?... The ECB's conventional measures, reducing its benchmark interest rate from 0.25 to 0.15 per cent and charging commercial banks 0.1 per cent on the money they deposit with the central bank, will make little difference.... Conventional monetary policy has run its course.... Thus, if policy is going to make a difference, policy will have to be unconventional. Here the ECB unveiled... one and a half... initiatives in June... 'Targeted Long-Term Refinancing Operation'... €400 billion, or some US$550 billion, cumulatively over four months. Recall that the Federal Reserve, under QE3, had been injecting $85 billion a month into U.S. financial markets before starting to taper in December. This makes TLTRO look like a substantial commitment.... The additional 'half an initiative' announced in June was that the ECB would study the possibility of security purchases.... These cautions should not be taken as a council of despair. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more...
Emphasis added.

Bundesbank shifts stance and backs unions’ push for big pay rises
The Bundesbank has backed the push by Germany’s trade unions for inflation-busting wage settlements, in a remarkable shift in stance from a central bank famed for its tough approach to keeping prices in check. 
Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent.

In an article published on Sunday, Mr Ulbrich said that recent wage trends were “moderate” given Germany’s relative economic strength and low levels of unemployment. His comments echo the views of Jens Weidmann, Bundesbank president, according to a senior central bank official. 
The push for higher pay underlines the heightened concern among even the most hawkish members of the ECB’s governing council over the eurozone’s low inflation and signs that the region’s fledgling recovery is stalling. On Monday, the Bundesbank acknowledged the German economy was unlikely to have grown at all over the three months to June.

Wednesday, July 30, 2014

Fed Watch: FOMC statement

Fed Watch: FOMC statement

meme events, inflation and expectations

[rough draft. need meme links and clean up.]

Does the phrase "price level" encapsulate both inflation and deflation.?

Meme events inspire me to make link lists. There's Piketty's K21. The Floor system and the billion dollar coin. German trade surpluses.

And now the Philips Curve with anchored inflation expectations. And the 70s stagflation, new classical revolution which failed in the 80s. A commenter noted how people with debt and little savings are constrained in their spending. They may see higher inflation with food and gas prices going up, but what does this translate into as expectations. Fox News may convince your Republicunt uncle that inflation is raging but what does this mean for his savings and investment decisions?

Stagflation and the Fall of Macroeconomics by Krugman

Methodological seduction by Simon Wren-Lewis

Financial Market Oversight, Economic Recoveries, and Full Employment: Some Crucial Linkages by Jared Bernstein

The Tradeoff between Inflation and Unemployment: What We Don’t Know Can Hurt Us by Jared Bernstein

On (Rational) Expectations by Chris Dillow

Defending rational expectations by Simon Wren-Lewis

Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman

James Tobin and Aggregate Supply (Implicitly Wonkish) by Krugman

The Neo-paleo-Keynesian Counter-counter-counterrevolution (Wonkish) by Krugman

Unanchored by Menzie Chinn

Phillips curves with anchored expectations by Robert Waldmann

Further thoughts on Phillips curves by Simon Wren-Lewis


Nominal wage rigidity. What do inflation expections do? What's the mechanism. Does it effect demand via investment and savings. Those with debt can't really adjust much and don't effect demand much unless they go bankrupt. Aggregate effects? The elderly Fox News crowd can adjust behavior. Give less to Sarah Palin and Ted Cruz?

Tuesday, July 29, 2014

the bets

Let's see if I remember these bets, I tend to lose focus and forget.

Inspired by DeLong, I'm betting - without them knowing - that Lambert and Shlaes are wrong.

She retweets
5-Year TIPS spreads have been anticipating increasing inflation since the end of last year.
Look at 5 year Treasury Inflation-Indexed Security, Constant Maturity

and she links to U.S. TIPS Sale Yields Least in a Year on Inflation Bets
"The U.S. sold $13 billion in 10-year TIPS at the last auction of the securities, on May 22, drawing a yield of 0.339 percent."
$13 billion doesn't sound like that much. Maybe it is for one month.

Let's so how that goes.

Also Edward Lambert at Angry Bear is predicting a resession by the end of the year because profits are supposedly topping off. Let's revisit that and see how that goes.


NLRB Decision Could Make McDonald's Liable for Labor Practices of Franchisees by Julie Jargon
The National Labor Relations Board has notified McDonald's Corp. MCD +0.04% that it will start allowing workers filing labor complaints to treat the fast-food giant as a "joint employer" with its franchisees, a decision that could make the company liable for the labor practices of the thousands of independent operators who own its franchises. 
McDonald's employees, through a campaign organized by the Service Employees International Union, have alleged that they were fired for joining labor unions and have filed several lawsuits alleging that they were underpaid or had expenses deducted that left them below state or federal minimum-wage levels. 
If the NLRB's preliminary decision holds, it could set a precedent for the largely franchised fast food industry, in which parent companies are currently not held liable for the labor practices of their franchisees. Approximately 90% of McDonald's more than 14,000 U.S. restaurants are owned by franchisees. 
"We believe there is no legal or factual basis for such a finding, and we will vigorously argue our case at the administrative trials and subsequent appeal processes which are likely to follow from the issuance of the complaints," McDonald's said in a memo sent on Tuesday to franchisees about the NLRB decision, which was seen by The Wall Street Journal.

I don't think so.

Inflation Hawks Have Been Wrong for Years. Should We Listen to Them Now? by Danny Vinik
Richard Fisher, the president of the Dallas Federal Reserve, has an op-ed in Monday’s Wall Street Journal warning that the Fed’s current policy risks sparking high inflation. “Given the rapidly improving employment picture, developments on the inflationary front and my own background as a banker and investment and hedge fund manager,” Fisher writes, “I am increasingly at odds with some of my respected colleagues at the policy table of the Federal Reserve as well as with the thinking of many notable economists.” 
This isn't the first time Fisher has been at odds with his colleagues. When the Fed undertook “Operation Twist” in 2011, Fisher was one of three members of the Federal Open Market Committee—the committee that decides Fed policy—to dissent. He's also been the committee’s staunchest inflation hawk, and Monday’s op-ed was just the latest of many warnings Fisher has issued over the past few years about supposed forthcoming inflation. Here are five examples since 2011: 

Richard Fisher:
"I'd rather see the Texification of the United States than the Californification. California's a beautiful place. I was born there, and I go out there often."
How it all turns out is anyone’s guess — maybe we eventually see a California scenario on a national basis, with the growing diversity of the electorate and the evident madness of the right delivering an overwhelming Democratic majority; maybe we see some exogenous event tip the balance back to the GOP despite what looks like a trend the other way. But what I don’t think we’ll see, even if there’s a Clinton in the White House, is another Clinton era in which liberalism is afraid to take a stand.

helicopter money and UBI

When is helicopter money optimal? by Nick Rowe

Universal Basic Income Recycling by Max Sawicky

"Why, sometimes I've believed as many as six impossible things before breakfast." Work that brain muscle.

The Gold Standard was an accident

The Gold Standard Was an Accident of History by David Beckworth

I recently reviewed Lewis E. Lehrman's book, Money, Gold, and History for the National Review. This book is a compilation of his essays where he calls for a return to an international gold standard. He takes a very sanguine view of its history and how it would work today. Though the classical gold standard of 1870-1914 did work relatively well, the history of gold as money is far more nuanced than portrayed by Lehrman. 
Here is an excerpt of my review where I touch on this point:
Consider, first, the history of the gold standard. Though Lehrman claims that the gold standard is “the historic common currency of civilization” and the “proven guarantor of one hundred years of price stability,” the history of gold is far more nuanced. Silver actually was the dominant metallic standard for hundreds of years before gold. The main reason it was displaced by gold is not that gold was inherently better, but that important countries, including the U.K. and the U.S., introduced bimetallism—legally minting silver and gold into money—and did so at exchange rates that inadvertently led to the undervaluation of silver. This undervaluation eventually drove silver out of circulation as money. Gold became the money standard largely by accident.

In the U.S., bimetallism was introduced in 1792. Soon afterward, changing market prices led to an overvaluation of silver at the mint and a de facto silver standard that lasted until 1834. Congress then changed the mint ratio and, in an instant, gold became overvalued, and would serve as the monetary standard from 1834 to 1861. This change was part of President Andrew Jackson’s famous war on the Second Bank of the United States, whose bills were backed by silver. There was nothing market-driven or natural about this switch from a silver standard to a gold standard. It was pure politics.

That gold was an accident of history is further evident in the contentious debate over a gold standard versus a bimetallic standard after the Civil War. Convertibility of dollars into metals had ended with the Civil War, and Congress had set 1879 as the year it would resume. Congress, however, failed to authorize the further coinage of silver. This meant that dollars would be convertible only into gold. Had silver still been coined at the mint, it would have become, by 1879, the de facto money standard, given market prices. This shift to gold irritated many, particularly those who thought gold was too deflationary; this was such a concern that it became the defining issue of the 1896 presidential election. Only with the Gold Standard Act of 1900 was the possibility of monetizing silver permanently put to rest. If gold was the “currency of civilization” for centuries, as Lehrman claims, why was its success an accident, and why has the U.S. money standard always been so contentious?

Lehrman also claims that politicians cannot manipulate a gold standard as they can fiat currency, because the gold supply depends on real-world gold production. But the above examples and others (such as the suspension of convertibility during the Civil War and FDR’s confiscation of gold in 1933) clearly show that even the gold standard is susceptible to manipulation.

That the U.S. gold standard was an accident of history and that its longest unchallenged, continuous run was only a quarter of a century suggests the question: Was it was the gold standard, per se, that created the long-run price stability of the 18th and 19th centuries, or was it a deeper political and institutional commitment to price stability?
I go on to make the case that it is not price stability per se we want, but monetary stability. I argue that is best accomplished by stabilizing the expected path of total dollar spending growth. You can read the rest of my review here.

(via Ritholtz)

Kalecki and fiscal policy

Why Not Fiscal Policy? by Chris Dillow
Simon Wren-Lewis suggests there might be “other motives at work“ than macroeconomic reasoning for the government’s refusal to consider using fiscal policy to combat rising unemployment. 
If he is anything like the Oxford macroeconomics lecturers of my day, he is hinting at Michal Kalecki’s 1943 paper, Political Aspects of Full Employment
Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence…This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis. But once the government learns the trick of increasing employment by its own purchases, this powerful controlling device loses its effectiveness... The social function of the doctrine of 'sound finance' is to make the level of employment dependent on the state of confidence…. 
'Discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system.
A lack of discipline in the factories and political instability should be valued more by the left than wage gains. That is, lasting full employment should be *the* priority.

The goal should be to allow "government to increase employment by its own purchases." The doctrine of "sound finance" should be fought root and branch.

Bundesbank, helicopter drop and wage inflation

Bundesbank shifts stance and backs unions’ push for big pay rises
The Bundesbank has backed the push by Germany’s trade unions for inflation-busting wage settlements, in a remarkable shift in stance from a central bank famed for its tough approach to keeping prices in check. 
Jens Ulbrich, the Bundesbank’s chief economist, told Spiegel, a German weekly, that recently agreed pay rises of more than 3 per cent were welcome, despite being above the European Central Bank’s inflation target of below but close to 2 per cent. 
In an article published on Sunday, Mr Ulbrich said that recent wage trends were “moderate” given Germany’s relative economic strength and low levels of unemployment. His comments echo the views of Jens Weidmann, Bundesbank president, according to a senior central bank official. 
The push for higher pay underlines the heightened concern among even the most hawkish members of the ECB’s governing council over the eurozone’s low inflation and signs that the region’s fledgling recovery is stalling. On Monday, the Bundesbank acknowledged the German economy was unlikely to have grown at all over the three months to June. 
The calls for higher wages by Germany’s central bank highlight one of the most puzzling conundrums to befall the eurozone’s economic powerhouse: why, despite record low unemployment, the average German worker’s wage has hardly risen over the past decade. The problem is important for the region as a whole, as economists view a pick-up in spending by Germans as a prerequisite of the eurozone’s economy returning to full strength. 
Ursula Engelen-Kefer, a lecturer at Hochschule der Bundesagentur für Arbeit university and former deputy chair of DGB, Germany’s confederation of trade unions, said she was “flabbergasted” by Mr Ulbrich’s remarks. 
“It goes to prove that even the central bank recognises that we can’t improve internal economic growth without wages,” she added. 
Stefan Körzell, a member of the DGB’s board said, while the confederation was “pleased” by the Bundesbank’s move, trade unions had done well without the central bank’s advice in the past and would continue to do so in the future. 
While German wage settlements this year were encouragingly strong, the central bank signalled the trend must continue if consumers in the eurozone’s largest economy are to provide the lift to demand that is so desperately needed. 
Until now, the German central bank has backed only the most modest rises in pay, and has often objected to measures to improve workers’ rights, including the planned introduction of a minimum wage and proposals to lower the retirement age for employees with more than 45 years in the labour market. 
The Bundesbank’s support for faster wage growth in Germany is also the latest in a series of moves towards the mainstream of ECB thinking. Mr Weidmann has in the past found himself in a minority of one on the governing council, including when the ECB pledged to buy government bonds of troubled countries. In June, however, the Bundesbank president backed the package of exceptional measures which the ECB unveiled to stave off the threat of deflation. 
At 0.5 per cent, inflation remains little more than a quarter of the ECB’s target. 
The weakness in price pressures in the eurozone is partly a positive development: it reflects an improvement in the competitiveness of workers in the bloc’s periphery, where productivity has traditionally lagged behind levels seen in economies such as Germany’s. However, even in the region’s strongest economies inflation is below target, with German prices rising by just 1 per cent in the year to June. 
Guntram Wolff, director of Bruegel, a Brussels-based think-tank and a former Bundesbank economist, said: “It’s a very good, very important sign from the Bundesbank. Not just of pragmatism, but of understanding that they are setting monetary policy for the entire eurozone. With that, comes the recognition that German wages have to rise at a faster pace.”

Sunday, July 27, 2014

Mad Max

When the next financial crisis hits, the odds are that there won't be bailouts. There won't be enough stimulus. The Fed won't quantitively ease beyond the mortgage market into corporate and municipal bonds. Then we'll be in Mad Max territory.

Negative outlook?

helicopter drops and the floor system

A quick note on “helicopter drops” by Steve Randy Waldman

(via Steve Roth)

A new link meme? The great synthesis.

DeLong objects.

And here.

This relates to the Floor system.

DeLong against the synthesis


open market operations

The continuum from monetary to fiscal by Nick Rowe
We normally think of open market operations, where the central bank buys government bonds, as a purely monetary policy. But if a government just happened to have a very small debt/GDP ratio, the central bank would soon run out of government bonds to buy, even if the shock were very small, or even if there were no shock at all. And if the inflation target were lower, or if the NGDP level path growth target were lower, that would also mean the central bank would run out of government bonds to buy sooner. What then? Maybe the central bank should buy (an index fund of) commercial bonds as well, or/then commercial shares, or/then land, or/then existing capital goods, or/then newly-produced capital goods, like bridges. 
Where exactly do you draw the line between monetary and fiscal? Does it matter? 
It might matter on micro public finance/public choice grounds (is this the sort of asset we would want the government-owned central bank to own?). But if you don't want the government-owned central bank owning all that stuff, then maybe you need to increase the inflation target or NGDP level path growth target, so you get a smaller central bank. (Too dedicated a pursuit of low inflation and the optimum quantity of money leads to communism, with government ownership of everything.)
How much money should the central bank print and buy things with? As much as is necessary, to hit the NGDP target. And if it runs out of other things to buy, like government bonds, or commercial bonds, or......, then it should buy newly-produced things, if necessary. And if that means it is buying too much, and getting too big, then raise the NGDP target and the implied inflation rate and the implied tax on holding currency.
What particular things should be bought and held on the asset side of the consolidated balance sheet of the government plus central bank? That is a micro public finance question. 
What particular things should be held on the unconsolidated central bank's balance sheet rather than on the government's balance sheet? That is a public choice question. If the central bank runs out of things to buy and needs to buy new bridges to hit its NGDP target, and if the government doesn't want the central bank owning bridges, the government should buy those bridges financed by issuing bonds, and let the central bank buy those bonds. 
I don't think there's anything left to argue about. Except a lot of micro public finance and public choice stuff. 
But I'm sure we will think of something.

Saturday, July 26, 2014

Thursday, July 24, 2014

This is the reason why they hate us.

Put the Fifty Shades Of Grey trailer inside you and say you like it

They hate our decadence and freedom. Or something. Nonetheless I'm a fan of Dakota Johnson. You may remember her from 21 Jump Street and The Social Network.

Baker on housing wealth effect

The basic story is straightforward. The run-up in house prices created by the bubble created $8 trillion in housing bubble wealth. Standard estimates of the housing wealth effect suggest that this would increase annual consumption by 5-7 percent of this amount, or $400 billion to $560 billion a year. This would have been equal to 3-4 percent of GDP.
Loose macroprudential policy gave the economy about a $500 billion / year stimulus which filled the output gap left by inadequate demand from trade and government spending. It was unsustainable.

The Problem Is Not Debt: Consumption Is High Not Low by Dean Baker
Economists and economic reporters continually try to make the problem of the weak economy and prolonged downturn appear more complicated than it is. After all, if it is very simple then these people would look foolish for not having seen it coming and figuring out a way around this catastrophe. Fortunately for us, if unfortunate for them, it is simple. 
One of the efforts to make it more complex than necessary is to assign an outsized role to the debt associated with the collapse of house prices. This is the argument that we heard on Morning Edition this morning. The argument is that when house prices plunged after the housing bubble burst in 2007, homeowners were left with large amounts of debt, pushing many of them underwater. This debt supposed discouraged them from spending, leading to a sharp falloff in consumption. 
There is a big problem with this story. Consumption is not low, it is actually still quite high. The graph below shows consumption as a share of GDP. It is actually higher than during the bubble years and essentially at an all-time peak. That makes it a bit hard to explain the downturn by weak consumption. (Some folks may recall hand wringing about inadequate savings for retirement, as in this NYT column by Gene Sperling yesterday. Too little savings and too little consumption are 180 degree opposite problems, sort of like being too heavy and too thin.) 
There would be a modest decline in consumption from the peak bubble years if it was shown as a share of disposable income (tax collections are lower today than in 2004-2007), but it would stiill be unusually high by this measure. The basic story is straightforward. The run-up in house prices created by the bubble created $8 trillion in housing bubble wealth. Standard estimates of the housing wealth effect suggest that this would increase annual consumption by 5-7 percent of this amount, or $400 billion to $560 billion a year. This would have been equal to 3-4 percent of GDP.

anchored perceived inflation

My http://angrybearblog.com/2014/07/anchored-perceived-inflation-or-how-fox-news-helped-obama.html has received more attention than I would have guessed. This should be a semi-serious post on the topic.
In any case there is clear evidence that a sudden drop in the price of petroleum does not cause respondents to forecast extremely low inflation in the future. In constrast sudden increases in the price of petroleum correspond to unusually high forecast inflation.
Only later and less dramatically is there the genuinely puzzling anomaly. Median forecast inflation was consistently higher than lagged inflation for the past two and a half years. This is suprising.
It is not. Using all the Michigan survey data, this coefficient is almost exactly zero and, in fact, slightly positive. There is no evidence that survey respondents place more weight on food and energy prices than on other prices.

The indicator for 2009 and later is strongly significant and corresponds to forecast inflation being higher than expected by about 0.85%.

This is not a huge anomaly, but it is quite important. Some prominent economists feared that the extremely slack demand at a time of already low inflation would cause deflation. The fact that inflation has continued with high unemplyment suggests that at extremely low inflation rates, expected inflation ceases to affect wage bargains. The idea is that actual reductions in dollar wages are avoided. With normal pressures for variation in relative wages, this means that some nominal wages increase. This is a very old story. The continued increase in hourly wages at a an annual rate varying from about 1% to about 2.5% can be explained this way.

However, it is also possible that high unemployment has caused workers to accept a fairly rapid decline in subjectively expected real wages on the order of one to two percent a year. The systematic over estimate of future inflation would mean that this corresponds to puzzlingly stable achieved real wages.

Now that I am being semi-serious, I have to admit that I can’t determine the cause of the anomalously high forecasts since 2009. In 2009 itself it is not easy to guess the effects of the then recent extreme fluctuations in the price of petroleum. More generally many things have changed. My first guess is that the combination of a Democrat in the White House and fully developed Fox News leads to high inflation illusion. However, I could fit the anomaly very well using an indicator of unconventional monetary policy — say the ratio of total Fed liabilities to GDP. It is certainly true that prominent commentators predicted that the huge expansion of high powered money would cause high inflation. There is no way to know if they would have made the same prediction with a Republican in the White House.

When discussing the effects of unconventionally monetary policy through expected inflation (the Krugman-Woodford story) I have been very skeptical for two reasons. First huge interventions were associated with tiny changes in bond prices (often of the wrong sign). Second the expectations which matter are not those of bond traders but of house builders. Bond traders pay obsessive attention to the FOMC of the Fed.

I now think these two criticisms might cancel out. Bond traders also look at official measures of inflation. This doesn’t mean they think the indices are good or correspond to the cost of living. They do this just because the Fed looks at those indices. However, this may mean that stories about how loose monetary policy is causing high inflation might have more effect on economic agents other than bond traders. This means that the loose money might have caused higher investment through lower subjective expected real interest rates even if it didn’t bring inflation up to target.

The Bridge

AV Club The Bridge: “Sorrowsworn”

With a cameo by John Cale of the Velvet Underground.

Wednesday, July 23, 2014

Tuesday, July 22, 2014

trade deficit

Dean Baker: 
The $500 billion trade deficit, coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.
Investment in Equipment (and Software): What Are Neil Irwin and Tyler Cowen Thinking? Tuesday Focus: July 22, 2014 by DeLong

anchored perceived inflation

I asked in comments for DeLong to add Waldmann's post on "anchored perceived inflation" and he did.

Menzie Chinn has a related post.

And here's DeLong's post on Chris House and Krugman from a week ago.

Phillips curves with anchored expectations by Robert Waldmann (from July 1st)

Fed as Dr. Benway

Steely Dan got their name from the talking dildo that appeared in Beat writer William Burrough's Naked Lunch. The book also has a character named Dr. Benway.

In a recent post J.W. Mason quoted Dr. Benway in reference to self-induced economic problems.
“Now, boys, you won’t see this operation performed very often and there’s a reason for that…. You see it has absolutely no medical value. No one knows what the purpose of it originally was or if it had a purpose at all. Personally I think it was a pure artistic creation from the beginning. 
“Just as a bull fighter with his skill and knowledge extricates himself from danger he has himself invoked, so in this operation the surgeon deliberately endangers his patient, and then, with incredible speed and celerity, rescues him from death at the last possible split second….
He imagines Larry Summers as in the Benway role:
Interestingly, Dr. Benway was worried about technological obsolescence too. “Soon we’ll be operating by remote control on patients we never see…. We’ll be nothing but button pushers,” etc. The Dr. Benways of finance like to fret about how robots will replace human labor. I wonder how much of that is a way of hiding from the knowledge that what cheap and abundant capital renders obsolete, is the capitalist?
EDIT: I'm really liking the idea of Larry Summers as Dr. Benway. It fits the way all the talk when he was being pushed for Fed chair was about how great he would be in a financial crisis. How would everyone known how smart he was -- how essential -- if he hadn't done so much to create a crisis to solve?
but I think the Federal Reserve Bank would be more accurate. As Frances Coppola tweeted:
Working my way through FOMC minutes from 2004 to 2008. Fascinating. The FOMC members primary concern is always exactly the same.
Their concern is always that core inflation will "fail to moderate" - even when staff projections are that it will fall.
But they are always really upbeat about growth, even when staff projections are that growth will fall. They ignore their own staff.
And they ignore markets, too. Investors were pricing in lower rates due to falling growth expectations from Jan 2007 onwards.
But the FOMC? Nah. Main risk in their view was inflation (even though it was falling). They kept interest rates elevated.
 Investors were rational in 2007, but turned irrational in the face of Obama. As Robert Waldmann writes:
I am assuming that, like inflation expectations, inflation perceptions have delinked from reality recently. I really really should find data on perceived inflation (which is out there somewhere). I also have to come up with a story for why this happened just in time to save us from deflation. 
I give the credit to Fox news. A large fraction of people in the US rely on Fox News (often indirectly as repeated by friends and relatives). They are out of touch with reality — there expectations and perceptions are what Roger Ailes wants them to be. He thinks inflation is bad even though in a depressed economy in the liquidity trap it is good. Therefore Fox News convinces people that inflation has been and will be high. The representative consumer is only partly living in the Fox bubble so perceived and expected inflation are moderate. Then finally actual inflation is low but positive.

federal exchanges set up for the states' benefit or state exchanges run by the feds

Sarah Kliff: Separate circuit court rules in favor of Obamacare subsidies: "The Fourth Circuit Court of Appeals...

ruled Tuesday afternoon that Obamacare subsidies could be offered through federally-run insurance marketplaces.
It is... clear that widely available tax credits are essential to fulfilling the Act’s primary goals and that Congress was aware of their importance when drafting the bill," the Fourth Circuit Court ruled. 
We'll have more coverage soon...."


Aggregate Demand, Aggregate Supply, and What We Know (Wonkish) by Krugman
Still, we try. New Keynesians do stuff like one-period-ahead price setting or Calvo pricing, in which prices are revised randomly. Practicing Keynesians have tended to rely on “accelerationist” Phillips curves in which unemployment determined the rate of change rather than the level of inflation. 
So what has happened since 2008 is that both of these approaches have been found wanting: inflation has dropped, but stayed positive despite high unemployment. What the data actually look like is an old-fashioned non-expectations Phillips curve. And there are a couple of popular stories about why: downward wage rigidity even in the long run, anchored expectations. 
The point, however, is that the price-setting side of the models has never been an integral part of Keynesian doctrine, and the surprising resilience of inflation hasn’t undermined the core insights. 
And it remains true that Keynesians have been hugely right on the effects of monetary and fiscal policy, while equilibrium macro types have been wrong about everything.

And Robert Waldmann's Fox News inflation-distortion bubble which isn't exactly anchored expectations. It boosts expected inflation rates.

fiscal stimulus

More Monetarism and the Great Depression.
The “spending hypothesis” attributes the Great Depression to a sudden collapse of spending which, in turn, is attributed to a collapse of consumer confidence resulting from the 1929 stock-market crash and a collapse of investment spending occasioned by a collapse of business confidence. The cause of the collapse in consumer and business confidence is not really specified, but somehow it has to do with the unstable economic and financial situation that characterized the developed world in the wake of World War I. In addition there was, at least according to some accounts, a perverse fiscal response, cuts in government spending and increases in taxes to keep the budget in balance. The latter notion that fiscal policy was contractionary evokes a contemptuous response from Scott, more or less justified, because nominal government spending actually rose in 1930 and 1931 and spending in real terms continued to rise in 1932. But the key point is that government spending in those days was too low to have made much difference; the spending hypothesis rises or falls on the notion that the trigger for the Great Depression was an autonomous collapse in private spending.

Glasner on market monetarism

Monetarism and the Great Depression by David Glasner
Scott is totally right, of course, to point out that the fall in interest rates and the increase in the real quantity of money do not contradict the “money hypothesis.” However, he is also being selective and unfair in making that criticism, because, in the three slides immediately following the one to which Scott takes such offense, Foote actually explains that the simple IS-LM analysis presented in the previous slide requires modification to take into account expected deflation, because the demand for money depends on the nominal rate of interest while the amount of investment spending depends on the real rate of interest. Here are the slides: 
Thus, expected deflation raises the real rate of interest and causes the IS curve to shift to the left but leaves the LM curve where it was. Thus, expected deflation explains a fall in both nominal and real income as well as in the nominal rate of interest; it also explains an increase in the real rate of interest. Scott seems to be emotionally committed to the notion that the IS-LM model must lead to a misunderstanding of the effects of monetary policy, but Foote actually shows that it can accommodate a correct understanding of the role of monetary policy in the Great Depression. 
The Great Depression was triggered by a deflationary scramble for gold associated with an uncoordinated restoration of the gold standard by the major European countries in the late 1920s, especially France and its insane central bank. On top of this, the Federal Reserve, succumbing to political pressure to stop stock market speculation, raised its discount rate to a near record 6.5%, adding to the pressure on gold reserves, thereby driving up the value of gold, and leading to expectations of further deflation. It was thus a rise in the value of gold, not a reduction in the money supply (and thus no shift in the LM curve), which was the source of the monetary shock that produced the Great Depression. IS-LM is not necessarily the best model with which to describe this monetary shock, but the basic story can be expressed in terms of the IS-LM model. 
So you may be asking yourself why, if I don’t think that Foote’s exposition of the IS-LM model seriously misrepresents what happened in the Great Depression, did I say at beginning of this post that Foote’s slides really annoy me? Well, the reason is simply that Foote seems to think that the only monetary explanation of the Great Depression is that of Milton Friedman: that the Great Depression was caused by an exogenous contraction in the US money supply. That is totally wrong. What caused the Great Depression was an international disturbance to the value of gold, caused by the independent actions of a number of central banks, most notably the insane Bank of France, which was maniacally trying to convert all its foreign exchange reserves into gold, and the Federal Reserve, which was obsessed with the suppression of a non-existent stock market bubble on Wall Street. It was a bubble only because the combined policies of the Bank of France and Fed wrecked the world economy and drove into Depression. The decline in the nominal quantity of money in the US, the great bugaboo of Milton Friedman, was truly an epiphenomenon. But as Ron Batchelder and I have shown, Gustav Cassel and Ralph Hawtrey had already diagnosed and explained the causes of the Great Depression fully a decade before it happened. Unfortunately whenever people think of a monetary explanation of the Great Depression, they think of Milton Friedman, not Hawtrey and Cassel. Scott Sumner understands all this, he’s even written a book – a wonderful book – about it. But he’s gets all worked up about IS-LM. I could not care less about IS-LM, it’s idea that monetary cause of the Great Depression was discovered by Milton Friedman that annoys the [redacted] out of me.


Blair's Legacy by Chris Dillow