How Ben Bernanke Could Solve Our Problems by Yglesias

Felix Salmon and Joe Weisenthal have recently launched attacks against the idea that an NGDP level target would be credible or effective that I think are worth a response.

In response to Salmon, I think that if you think about it step by step that the idea that the Fed Chairman can create a self-fulfilling prophesy just by talking is less crazy than it sounds. Consider a scenario in which Bernanke says “I want NGDP to grow faster than 5 percent but slower than 10 percent until it catches up with the pre-crash trend and I’m prepared to do crazy stuff to make it happen.” How do sophisticated investors and large firms react to this announcement? Maybe some people find it non-credible. Maybe most do. But nobody is going to lower their growth and inflation forecasts in response. Some people will raise them. And higher expected inflation and real growth will drive higher actual expected inflation and real growth. As long as Bernanke responds to that by saying “NGDP growth has accelerated exactly as I planned, now I continue to want NGDP to grow faster than 5 percent but slower than 10 percent until it catches up with the pre-crash trend” then the second time around some of the skeptics will become converts and the convergence will continue. The announcement doesn’t need to persuade everyone, or even most people, it just needs to push expectations in the right direction.

Weisenthal, operationally, says cheap loans can’t resolve the debt overhang: “People don’t want (and can’t utilize) cheaper loans: What people need is more income to pay off this debt.” Right now, I have a mortgage. The interest rate on it is pretty low. But it’s not 1 percent. If the Fed wanted to offer me a loan at a one percent interest rate that would be sufficient in scale to pay off my existing mortgage, that would reduce by debt burden just as easily as a higher income would. Thus far the Fed’s policies have been oriented toward giving free money to banks in hopes that this will circulate down to the little bit, and the circulation has been blocked by a lot of other issues. But a determined central banker can get around this. Direct provision of super-cheap credit would work fine.

Fed Fail

David Wessel tweets:

Total payroll employment now back to July 2004 levels. Lost 8.75 mm jobs in recession. Gained back 2.2 mm so far.

and:

Govt employment (state, local, federal) in Oct was 600k below Jan 2009.

Libya and the Left by Michael Berube

Pace Berube, my recollection is that the left and liberals were pretty quiet about the Arab Spring.* When Yglesias deigned to blog about it, he argued it was caused by rising commodity prices not freedom in Iraq. When the Green revolution was happening in Iran he actively trolled it. To me it wasn't entirely surprising because after Bush failed to find WMDs in Iraq he switched to the rationale of freedom and democracy in the Middle East.

 ---------------------
* one exception being Juan Cole.

The Velocity of Money Has Slowed
(or the beatings will continue until morale improves)

Bill Clinton, the Person Who Set the Economy on Its Bubble Driven Path, Has Economic Advice for the Country by Dean Baker

The Post reports on a new book by President Clinton which offers economic advice to the country. While the book notes in passing that Clinton's policies contributed to the economic crisis by deregulating Wall Street, it failed to point out that Clinton's policies were actually central to the disaster the economy is now facing.

Clinton promoted both the growth of the stock bubble and the over-valuation of the dollar. The latter came about when his administration organized the "saving" of East Asia following its financial crisis in 1997. The harsh terms of the bailout required the countries of the region to run huge trade surpluses in order to meet their payments. This meant raising the value of the dollar against their own currencies.

Other developing countries wanted to avoid ever being in this situation so they too began to accumulate reserves at a huge pace after 1997 by keeping down the value of their own currencies against the dollar. This led to the huge run-up in the dollar and therefore the large trade deficit that we saw in the last decade and continue to see today.

The demand gap created by the trade deficit was filled by the housing bubble in the last decade. With the bubble now burst it can only be filled by government budget deficits until the dollar falls enough to bring trade closer to balance. Given the enormous disaster that resulted from his economic mismanagament (which could have been reversed had anyone in the Bush administration been awake), it is highly ironic that President Clinton would write a book offering economic advice to the nation.

New York Times has a story also. He should be going around the country with George W. Bush apologizing. Bush gave us the tax cuts which worsened the fiscal picture. Wonder if Clinton admits he was wrong in reappointing Greenspan who admitted he was wrong about markets being self-regulating.

To me the story seems like a recurring one with slight variations. Let's arbitrarily start with The Latin American debt crisis.

In the 1960s and 1970s many Latin American countries, notably Brazil, Argentina, and Mexico, borrowed huge sums of money from international creditors for industrialization; especially infrastructure programs. These countries had soaring economies at the time so the creditors were happy to continue to provide loans. Between 1975 and 1982, Latin American debt to commercial banks increased at a cumulative annual rate of 20.4 percent. This heightened borrowing led Latin America to quadruple its external debt from $75 billion in 1975 to more than $315 billion in 1983, or 50 percent of the region's gross domestic product (GDP). Debt service (interest payments and the repayment of principal) grew even faster, reaching $66 billion in 1982, up from $12 billion in 1975.[1]

When the world economy went into recession in the 1970s and 80s, and oil prices skyrocketed, it created a breaking point for most countries in the region. Developing countries also found themselves in a desperate liquidity crunch. Petroleum exporting countries – flush with cash after the oil price increases of 1973-74 – invested their money with international banks, which 'recycled' a major portion of the capital as loans to Latin American governments. As interest rates increased in the United States of America and in Europe in 1979, debt payments also increased, making it harder for borrowing countries to pay back their debts.[2] Deterioration in the exchange rate with the US dollar meant that Latin American governments ended up owing tremendous quantities of their national currencies, as well as losing purchasing power.[3] The contraction of world trade in 1981 caused the prices of primary resources (Latin America's largest export) to fall.[3]

While the dangerous accumulation of foreign debt occurred over a number of years, the debt crisis began when the international capital markets became aware that Latin America would not be able to pay back its loans. This occurred in August 1982 when Mexico's Finance Minister, Jesus Silva-Herzog declared that Mexico would no longer be able to service its debt.[4] Mexico declared that it couldn't meet its payment due-dates, and announced unilaterally, a moratorium of 90 days; it also requested a renegotiation of payment periods and new loans in order to fulfill its prior obligations.[3]

In the wake of Mexico's default, most commercial banks reduced significantly or halted new lending to Latin America. As much of Latin America's loans were short-term, a crisis ensued when their refinancing was refused. Billions of dollars of loans that previously would have been refinanced, were now due immediately.

The debt crisis is one of the elements which contributed to the collapse of some authoritarian dictatorships in the region, such as Brazil's military regime and the Argentine bureaucratic-authoritarian regime.

Wikipedia entry on sovereign default. The Latin American debt crisis is a lot like our ongoing European Feedback Circle of Doom and the 1997 East Asian Financial Crisis.

After the Asian crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of about $11 per barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters. This reduction in oil revenue contributed to the 1998 Russian financial crisis, which in turn caused Long-Term Capital Management in the United States to collapse after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of New York organized a $3.625 billion bail-out. Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s (see Argentine debt crisis).^[38]

The crisis in general was part of a global backlash against the Washington Consensus and institutions such as the IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the anti-globalization movement in 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancún, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasingly turning toward regional or bilateral free trade agreements (FTAs) as an alternative to global institutions. Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency swaps were introduced in the event of another crisis. However, interestingly enough, such nations as Brazil, Russia, and India as well as most of East Asia began copying the Japanese model of weakening their currencies, restructuring their economies so as to create a current account surplus to build large foreign currency reserves. This has led to an ever increasing funding for US treasury bonds, allowing or aiding housing (in 2001–2005) and stock asset bubbles (in 1996–2000) to develop in the United States.

Fall of Suharto.

Emphasis added. I wonder if Clinton writes anything about the invisible bond vigilantes. His adviser James Carville said

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

Please the bond market and business and they're supposed to spawn the confidence fairy who will create jobs.

Clinton changed his budget in response to Treasury Secretary Rubin's advice about pleasing Greenspan and the bond market. Wonder if there are any nuggets about that.

What happened in Latin American, East Asia and the periphery of Europe is that nations had inflows of hot capital and credit during boom years which suddenly stopped and flowed out during panics. They ran current account deficits during the boom times.

In the U.S., after the panic of 2008, money flowed out of banks - many went under, others merged with stronger banks - and GDP declined as asset prices fell and businesses fired workers. The velocity of money slowed as the demand for safe asset rose. Aggregate demand fell.

Barack Obama’s Fatal Error: Monetary Policy by Yglesias

I really liked Ezra Klein’s review of Ron Suskind’s book in the NYRB for its wholesome focus on monetary policy errors as the most plausible way the Obama administration could have made things better. Nobody was stopping them from replacing Ben Bernanke with someone more committed to full employment, and it seems likely that they could have filled two existing Board of Governors vacancies with people more committed to full employment. If the chairman and those two empty seats all felt the way Charles Evans feels, we’d be in much better shape today. None of that is to deny that fiscal policy could have been better, but as Klein says the key blocking points on fiscal policy were in Congress.

That’s not to deny that other mistakes were made. There was a premature rhetorical pivot to the long-term budget deficit. The banking situation as not been handled optimally. One could go own. But the Federal Reserve is the U.S. government’s primary recession-fighting agency. You need to staff it with the right people if you want to fight recessions the right way.

Band Name Survey by cleek

Political Aspects of Full Employment by Michal Kalecki

(via DeLong)

Occupy Greg Mankiw! by Henry Farrell at Crooked Timber

Matt Taibbi on Mayor Bloomberg.

(via Krugman)

During Bernanke's press conference the dread MSM asked some good questions like about NGDP targeting and the Fed's poor forecasting track record.

Greg Ip of the Economist got at the conundrum of the Fed's policy stance with his question "what would the Fed have to see to consider more policy action?" which in other words would translate as follows. The Fed recognizes that the current trend of the economy is unsatisfactory. It's growing but not fast enough. Cyclical unemployment remains high and the longer it takes to bring down unemployment levels, the greater the chance that cyclical unemployment will turn structural and permanently damage the economy.

So, the state of the "unsatisfactory" but not "unsatisfactory" enough to warrant further action on the part of the FOMC. Ip asks specifically about what would make the state of the economy "unsatisfactory" enough to warrant the further action which Bernanke says the Fed is ready to take if necessary. Bernanke responded that a dip in the inflation rate would make the economy "unsatisfactory" to a degree that the FOMC would ease further. They seem to believe that the private sector economy has enough steam to push past the various headwinds and eventually provide catch-up growth.

Obama’s Flunking Economy: The Real Cause by Ezra Klein

(via DeLong)

Bernanke's "the current outlook is unsatisfactory, we could do more but we won't" is sort of a Buddhist kōan like "what's the sound of one hand clapping?" meant to confound the press and public.* It's unsatisfactory that they can't please everyone and the longer unemployment levels remain high, the more they do permanent damage to the economy and turn structural but the priority is maintaining "price stability" and keeping the bond market happy.

But what about the greater good?
------------------------
*like a Jedi Mind Trick

OWS crackdown?

Doug Henwood posts a letter whose author believes it's coming.

Department of "Huh?!": Ramesh Ponnuru Assumes That Fiscal Expansion Has No Effect on GDP... by DeLong

Ben Bernanke says that the economy needs more expansionary policies by other branches of the government to boost employment and production. He does not say that the economy is right-side up as far as aggregate demand is concerned. He does not say that he will respond to any expansionary fiscal policy moves by offsetting them with more contractionary monetary policy:

Ben Bernanke:

Bernanke news conference on Fed policy: With respect to the current economy we are currently continuing our accommodative monetary policy. We are trying to do our best to support economic growth and job creation. It would be helpful if we could get assistance from some other parts of the government to work with us to help create more jobs. But certainly we are doing our part to create more jobs, more opportunities in America…

If Ponnuru has any reason to believe that Bernanke is lying, I would like to see the evidence. If not, he should not claim that Federal Reserve policy is different from what Bernanke says it is.

My interpretation: playing for Team Republican simply rots your brain, and leaves you with no ability to think coherently at all.

That would be funny if Obama got some fiscal stimulus through and the FOMC statement from the following meeting read "Psyche! The committee decided to move to restrictive policy measures in light of the inflationary policies pursued by other branches of government. We understand we asked for help but didn't think they would go through with it."

If MMTers are right and the Fed can't do anything else they should say so, because that would put more pressure on Congress to do something.

Also contingency plans should be made in case the economy suffers a shock and the economy double-dips with the Fed out of bullets. The should be debated out in the open.

Binyamin Appelbaum of the New York Times was the journalist who asked Bernanke about NGDP level targeting. He didn't give his name. Neil Irwin of the Washington Post asked Bernanke the great question about the Fed's predictably downgradable forecasts. Impressive job by the dreaded MSM and I added these two to my Twitter list.

Irwin tweeted earlier about hoping someone would ask Bernanke about NGDP targeting.

Both Fed reporters exchanged tweets with Joe Weisenthal of the Business Insider.

Fed press conference from yesterday.

David Glasner in response to John Taylor, economist for the one percent:

In addition, “increasing the monetary base in Japan” was supposed to “get the growth rate of the money supply . . . back up . . . not to drive up temporarily the price of mortgage securities or stock prices, which is frequently used to justify quantitative easing by the Fed today.” Ahem, the purpose of getting the growth of the money supply back up in Japan was to stop deflation, thereby increasing output and employment. Increasing the money supply is just a means to accomplish that objective. The purpose of quantitative easing in the US is to increase the rate of nominal GDP (NGDP) growth, and thereby increase output and employment. That some people believe doing so would also have the beneficial side-effect of raising the prices of mortgage securities or stocks is just a red herring.

Emphasis added. I wish someone in the press would have asked Bernanke about commoditites inflation now caused by global demand and expansionary policies of Indian and China and not by U.S. monetary policy.

Bernanke Gives Push to Further Stimulus as Officials Lower Growth Outlook

Additional easing may occur by February and could coincide with possible actions by new European Central Bank President Mario Draghi to contain fallout from the continent’s sovereign- debt crisis, Soss said.

...
The vote for yesterday’s statement was 9-1. Chicago Fed President Charles Evans opposed the decision, the first dissent in favor of easier policy since Boston Fed President Eric Rosengren in December 2007. Evans favored “additional policy accommodation,” the Fed said without elaborating.
...
“They want to have that option in their back pocket, should the economy remain sluggish and should they fail to make progress with their objectives, especially unemployment,” said Roberto Perli, managing director for policy research at International Strategy & Investment Group in Washington. “They did Operation Twist recently, and they might want to assess whether that is working or not before expanding the balance sheet.”
...
“The FOMC is inclined toward a more accommodative policy,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. “It seems very clear that is where Bernanke and other policy makers think policy is headed.” 

I would argue that instead of keeping options "in their back pocket" they need to be proactive and get ahead of the curve. They need to bolster the economy to make it more resilient against any possible shocks which could bring on deflation given the weak recovery.

Tight Budgets, Loose Money: Why Both Liberals and Conservatives Are Wrong About How to Fix the Economy by David Beckworth and Ramesh Ponnuru

The Case for Rebuilding our Transportation Infrastructure by Mark Thoma

Dear Ben, It's Not 2007 Anymore by Krugman

The Federal Open Market Committee has spoken. It expects very high unemployment for at least the next three years, while it expects inflation to be below target. By any interpretation I can think of, the Fed therefore expects to fail to honor its dual mandate of price stability and full employment. To deal with this shortfall, it proposes doing ... nothing.

But that’s not what has me upset, since that’s been the way of things all along. What got me was Ben Bernanke’s response to a question about whether the Fed might adopt nominal GDP targeting, or more broadly change its policy framework in some way that might help us escape the Lesser Depression. And his answer was no, because the standard approach has demonstrated “its benefits in terms of macroeconomic stabilization”.

Oh, my. Look, here’s a crude calculation – the variance of the unemployment rate over the previous 10 years:

You can see the Great Moderation, which might have led the Fed to believe, circa 2007, that it had this stabilization thing under control. But now, after four years and counting of slump?

And anyway, we don’t want “stabilization” right now – we want an escape from a slump that is crushing our future. This is no time to be basing policy on hopes that one of these years we’ll find ourselves back in the Great Moderation.

I have always had the working assumption that Bernanke was being as dovish as he could manage given his board, that in private he understood just how much we need radical action. Maybe not – and that’s very bad news.

Yes maybe not. Joe Gagnon says that Bernanke would take the committee whichever way he thought was best even if Obama had filled the two vacancies with governors who agreed with Evans. Krugman is right about the "standard approach" not working. Bernanke himself admits it's not working. But then again he asserts price stability > trend growth or in other words the one percent trumps the 99 percent. So maybe the Fed needs to be democratized and reoriented to benefit the 99 percent and not just the one percent.

The Recovery the Fed Wants by Yglesias

Today’s Federal Reserve Open Market Committee statement is, I think, the clearest sign yet that the United States is currently enjoying (or “enjoying” as the case may be) roughly the recovery that the Fed wants. The economy is not in recession. It does not appear to be likely to enter a recession. Were we starting from a decent point, a growth rate of 2.5 percent would be perfectly respectable. Many developed economies would consider themselves quite fortunate to have continual 2.5 percent RGDP growth and moderate inflation. The FOMC says that it “continues to expect a moderate pace of economic growth over coming quarters,” which is generally about what you want.

Now of course we’re not starting from a decent point. We’re starting from a steep labor market recession. My view is that means we need to be aiming for a period of rapid catch-up growth to reduce unemployment and restore the economy to full capacity. But the FOMC meekly “anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate.” If the unemployment rate is not currently at a level consistent with the mandate and is also not converging rapidly toward a level consistent with the mandate, then in my view the FOMC ought to do something new and dramatic in order to fulfill its mandate. Instead, the FOMC is standing pat. They think 9.1 percent unemployment and moderate growth is fine and they don’t intend to do anything about it.

At Bernanke's press conference, a good question by Washington Post's Neil Irwin on the successive forecast downgrades by the Fed.

Good second question on NGDP targeting but Bernanke said they're not going to do it.

Good question by the Economist's Greg Ip about what would prompt further action and Bernanke answered that lower inflation than expected would be one thing.

Bernanke says Fed's forecasts for unemployment are unsatisfactory but kind of equivocated over the FOMC's future decisions on policy actions. In response to a second query on the subject he said that their tools for easing come with downside risks.

He mentioned Charlie Evans in response to a question about possible communication strategies.

Good answer from Bernanke in response to a question about people hurt by low interest rates like savers. He said savers will benefit from a growing economy by providing investment opportunities.

Evans is the lone dissenting vote as the FOMC decides against further action. Good for him.

All the bastards sanctimoniously warn of more inflation.

Oregon Office of Economic Analysis on NGDP Targeting 

(via Thoma)


Swiss Magic and Central Bank Price-Targeting by Kash Mansori

Ryan Avent on the case for NGDP level targeting.

This is a sort of upside-down view of what the new policy is designed to achieve. Low rates are not a policy goal; they are a means to an end: growth as stable as the Fed is capable of delivering. One criticism of inflation targeting is that it does this at an unnecessary one-step remove; rather than directly targeting macroeconomic stability, the Fed aims for stable inflation in the hopes that this will deliver stable growth. NGDP targeting cuts out the middleman by having the Fed directly target the broadest possible nominal aggregate. My colleague worries that this is a relatively ineffective way to influence interest rates, and I don't particularly disagree. I'm just not sure why that matters.

I agree. The Fed hasn't delivered much in the way of growth over the past 4 years. It took 15 quarters to get back to the pre-recession GDP peak, the worst performance since the Great Depression. If we had a decent free press, they would ask Bernanke about this today at his third press conference.

It's like the Fed is afraid growth is going to pop up out of nowhere and all of the sudden we're growing at 5, 6, 7 percent and inflation rears its head. But it hasn't happened and probably won't happen unless the Fed makes an concerted effort.

The problem is that during the crisis the Fed did a lot, but did too little. It's hard for people to wrap their heads around that seemingly contradictory notion.

This is mistaken; the Fed's forecasts strongly support my view of the crisis. In October of 2008, the Fed forecast an unemployment rate of around 7.5% in 2009. That's well above the natural rate of unemployment. Why didn't the Fed do significantly more to support the economy, such that its forecast was for something close to full employment? The numbers tell the tale; the Fed projected that inflation in 2009 would be between 1.5% and 2%—pretty close to its implicit target. NGDP, by the way, was forecast to rise at between 1.5% and 3%—well below the approximate 5% trend growth we'd expect. At the scheduled October meeting, the Fed reduced its fund rate target 50 basis points, to 1%. That's like throwing a snowball at a raging inferno.

It gets worse as the crisis continues. By January of 2009, the Fed is forecasting an unemployment rate for that year of near 9%, and a GDP contraction of up to 1.3%. Despite this major deterioration in the forecast, the Fed opted merely to maintain its planned asset purchases, which amounted to about half a trillion in mortgage-backed securities and agency debt. Not until March did the Fed opt to signficantly scale up its purchases and begin buying Treasuries. Of course, we can't just blame the Fed's costly timidity here on the choice of target. The Fed forecast 2009 inflation of around 1% for 2009. That's substantially below target, and it suggests that the Fed was constrained by an attack of excessive caution at the worst possible time. It's worth pointing out, however, that NGDP was forecast to be roughly zero or slightly negative. Different target; different sense of urgency. But what the forecasts clearly show is that the Fed consistently did too little, and would consistently have felt pressure to do more given an NGDP target.

Avent just went up in my book.

The Bastards

Great movie! I really like Michael Rispoli as Sala and Giovanni Ribisi as Moburg. (Rispoli and Ribisi?)

At one point Depp's Paul Kemp says the bastards know the "price of everything* and the value of nothing" an Oscar Wilde quote I learned via Hitchens who would mention it now and then.

Also the mid-trip talking lobster says something like "humans are the only creatures with a God who treat the world as if there wasn't one."

There's also some funny cock-fighting with one champion named "el Monstro." And Depp's Kemp and Sala watch the Nixon-Kennedy debates where Kemp takes an instant disliking to the "liar" and predicts the "Irish one" will win but they won't let him live.

And something I enjoy is that there's always something hyperbolic about the world of Hunter S. Thompson. For instance Depp's Kemp gets a job at a San Juan newspaper replacing the previous Astrologer who was "raped to death" at the docks and public toilets down where the sailors hang. "Raped to death???" an alarmed Depp responds when told. His editor and boss: "Yeah. You aren't arty, are you?" "No."

The movie captures Thompson's Dionysian, epicurean madness which is more thrilling because of the menancing, sometimes almost supernatural danger. And it's really funny because of his way with words and ability to find le mot juste. Again, a must see.

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*NGPD

You become vapid and bland when your heart is broken.

Enough Quirkiness! Why I Can’t Stand Zooey Deschanel. by Seyward Darby

Sorry this is wrong. Her new show is a hit. Darby:

With regard to Deschanel, I would argue that her persona not only wears thin very quickly, but her contentedness to present herself as so funky and thus harmless makes the actress herself seem vapid and bland. I suspect that she is neither, so I am troubled by the idea that she would be comfortable having her sharpness blunted—as both a woman and an artist. With regard to “New Girl,” it’s worth comparing Jess to Tina Fey’s character on the show “30 Rock.” Fey’s Liz Lemon is another quirky oddball, but she’s defined by much more than eccentricities—by her smarts, her career, and her relationships, for instance. With Jess, in contrast, we know little about her life outside of her breakup, apartment, roommates (all of which are new) and, most importantly, her kooky behavior. It doesn’t much matter why she loves being a teacher (her job, we’re told, which involves bringing home lots of popsicle sticks), or what she thinks about things other than, say, bubbles and unicorns (she loves them, of course). And heaven forbid we learn what she really hates—perhaps cheating boyfriends, although it’s not clear she thinks her ex is really such a bad guy.

I see her character Jess as being in a bit of daze because she was dumped. She's so heartbroken she's become sort of goofy. I love Fey too and would be reduced to a stuttering wreck if I met either her or Deschanel in person.

Deschanel's Jess has an intelligence and kindness behind her quirkiness and dorkiness which makes her compelling. She's why the show is a hit. The characters she plays in film and TV - see Mumford, Almost Famous, The Good Girl, Elf, The Hitchhiker's Guide to the Galaxy, The Go-Getter, Bridge to Terabithia*, The Assassination of Jesse James by the Coward Robert Ford, Tin Man, Gigantic, (500) Days of Summer - are all intelligent if not as out-going as Fey's characters. What's attractive about the two besides their looks is their mix of humor, smarts and confidence. Granted sometimes their characters aren't so confident - which is creating drama - but it seems realistic in their loss of confidence if that makes any sense. And of course their humor is about being likable and accessable to the audience which is why they are popular. They're not raging bitches.

I see what Darby is getting at but ultimately disagree. "Adorkable" may not be the most appealing or compelling trait - compared to a wise-cracking Fey or a manically goofy Poehler - but it seems more realistic than what is usually on offer. Many people are good-natured dorks and can identify with Jess which probably partly why the show is popular. And what if she's been "dorkified" because she's in mourning over being dumped. She could recover.

New Girl is okay as a sitcom - for me anything with Deschanel is good by definition - but what's interesting is that the roommate she's sort of connecting with because he was recently dumped too is played by Jake Johnson. Johnson was in Paper Heart a very clear-eyed, realistic mockumentary about comedian Charlyne Yi as a cynic who doesn't believe in love and goes around the country interviewing strangers about love, but in the end she falls in love with Michael Cera and has her heart broken. Maybe Deschanel and/or the creators of the New Girl liked that movie and wanted to bring it's realism and cynicism to a sitcom?
---------------
*one of my favorite movies of all time.

Eurodämmerung by Krugman

Dan Davies, whose Crooked Timber blogpost spawned the Occupy Wall Street protests which in turn sparked protests across the country and globe, twatted:

Just spoken to a couple of lads from MF Global. Am therefore not in mood for another round of "the bankers have not suffered!", thaksveymuch

I think he has a point. Bear Stearns gone. Lehman gone. Wachovia gone. Merrill Lynch* gone. Washington Mutual (Woot!) gone. Etc.

Wolfgang Schäuble, the German Federal Minister of Finance who Henry Farrell and John Quiggin applauded here for "floating the idea of real fiscal integration and accompanying democratic reforms of the EU," has recently come out for the EU to take the lead on a Tobin tax** although some people are skeptical that it will ever happen.

Plus it's heavy metal to have an umlaut in your name.***

Somewhat related: the Economist editor Zanny Minton Beddoes suggested on Charlie Rose that the German public isn't as Tea Party/NIMBYish as we've been led to believe.

Update: Looks like there was some skullduggery at MF Global. According to news accounts, Corzine made a bad bet and got caught in the Swirling European Vortex of Doom.

-----------------
*Margin Call's director's father spent forty years at Merrill Lynch.
**Financial Transaction Tax
***Fake Onion article on the topic.

Department of "Huh?!": What Is Bill Gross Saying? Edition by DeLong

If nominal GDP growth had just jumped from 4%/year to 7%/year and if the consequence had been the real growth had gone from 2.5 to 3.0%/year while core inflation had gone from 1.5% to 4.0%/year and nominal ten-year Treasury rates had gone from 2.5 to 6.0%/year, I would say that the market had spoken: thet too much (risky) debt could not be cured by issuing lots more (safe) debt. But if that is happening at all, it is happening in some alternative universe: not here, not now.

Here and now the principal immediate disease of the economy continues to be (in Wicksellian terms) that the natural rate of interest is lower than the market rate and is in fact less than zero, (in monetarist terms) that nominal GDP is too low and is expected to grow too slowly given the current level of wages and prices, (in Bagehot-Minsky-Kindleberger-Reinhart-Rogoff-Koo terms) that the risk tolerance of the market is too low given the still-extraordinary level of leverge, (in Bernanke-Gertler-Hubbard terms) that a wave of moral hazard and adverse selection has overwhelmed and broken the credit channel. All of these diagnoses are not quite identical, but the overlap between them is enormous. And they all admit of the same cure: Jubilee. A reduction in risky debt and its replacement in portfolios by an increase in safe debt. This can be accomplished through either guarantees of risky debt by the credit-worthy, by explicit write-downs and refis, or by the I-word. [Inflation - ed.]

Oh, there are other more chronic diseases of the American and the world economy: globalization one wrong, overfinancialization, overhealthcareadministrationization, rising inequality, financialunderregulationization, et cetera--and some of these played a role in setting up the current crisis. But you don't have to fix a tire through the puncture. And we shouldn't believe that we must.

Bill Gross is sort of an MMer. He believes creating demand is the way to go, but it's being blocked in all advanced nations. Although Gross did suggest the GSEs refinance unilaterally at the expense of the Chinese and rich investors.

If risky debt is replaced in portofolios (balance sheets) by safer debt, this will lead to more spending / investment.

DeLong writes "that the risk tolerance of the market is too low given the still-extraordinary level of leverge, (in Bernanke-Gertler-Hubbard terms) that a wave of moral hazard and adverse selection has overwhelmed and broken the credit channel."

Which is maybe why the Fed and Obama administration will hit the mortgage market with a jubilee at the expense of the Chinese and rich. Which is why higher inflation and targeting NGPD should be used at the Fed.

Why can't the Fed just say our long term goals are NGDP S18 trillion*/year and core inflation at 2 percent?

DeLong:

If nominal GDP growth had just jumped from 4%/year to 7%/year and if the consequence had been the real growth had gone from 2.5 to 3.0%/year while core inflation had gone from 1.5% to 4.0%/year and nominal ten-year Treasury rates had gone from 2.5 to 6.0%/year, I would say that the market had spoken: thet too much (risky) debt could not be cured by issuing lots more (safe) debt. But if that is happening at all, it is happening in some alternative universe: not here, not now.

This seems to be the question, whether QE can work or has worked. Does it need to be sustained to work? Did QE1 and 2 work?

--------------------------
* or whatever the trend rate of growth is for the economy running at capacity.

The ECB’s Battle against Central Banking by DeLong

(via Thoma)

Fed Plans Changes to Communication Strategy by Gavyn Davies

The case for introducing a target path for nominal GDP was well argued by Christina Romer in the New York Times yesterday. She compares the current crisis of high unemployment with the crisis of high inflation which faced the Fed in 1980. Then Paul Volcker broke the mould by introducing targets for the money supply, which made it easier for him to win a consensus on the FOMC for a continuous tightening in monetary policy over several years.

Now, Professor Romer says it is Ben Bernanke’s moment to change the rules of the game by adopting a target for the level of nominal GDP, with the intention of restoring it to the path which it would have followed from 2007 onwards in the absence of a recession. Because this target would focus on the level of money GDP, and not its annual rate of change, it would mean that any shortfall relative to target would have to be restored in future years. That would entail raising the current level of national income by around 10 per cent, a herculean task which would completely change the terms of the debate on the FOMC. It would also radically change the outlook for financial assets.

Although the idea has merit, and may well be discussed by the FOMC in future, it is not likely to emerge from this week’s meetings.  Ben Bernanke has discussed many radical actions for monetary policy in the past, notably relating to Japan a decade ago, but I do not recall him ever giving much attention to a nominal GDP target.  He has consistently focused on the advantages of adopting a clear and consistent target for the rate of inflation (note, not the level of prices, but their rate of change, so past shortfalls would not need to be restored), and in a recent speech on 18 October he said the following:

As a practical matter, the Federal Reserve’s  policy framework has many of the elements of flexible inflation targeting…The FOMC is committed to stabilising inflation over the medium term while retaining the flexibility to help offset cyclical fluctuations in economic activity and employment.

He went on to argue that inflation targeting had proven its worth in stabilising inflation expectations in both directions in recent years, and he concluded as follows:

My guess is that the current framework for monetary policy – with innovations, no doubt, to further improve the ability of central banks to communicate with the public – will remain the standard approach, as its benefits in terms of macroeconomic stabilisation have been demonstrated.

That does not sound like a Fed Chairman who is contemplating a major shift in the whole apparatus of monetary policy right now. Furthermore, recent speeches by Janet Yellen and Bill Dudley, the Chairman’s key lieutenants, have been gradualist in their approach.

How can you achieve catch up growth without a higher inflation rate? Fiscal stimulus? Will it cause inflation?

Fed Panel Is Divided on Direction by Binyamin Applebaum

A growing number of economists outside the Fed have advocated the more aggressive approach of permanently changing the central bank’s focus, from the level of inflation to a broader measure of growth — the present value of economic output — that would similarly make clear that the Fed was willing to tolerate a higher level of inflation in the short term. That approach, however, has gained little traction within the central bank.

...
“If this drift in inflation risk tolerance were to persist, or were expected to persist, it could give rise to a damaging increase in inflationary expectations,” one of the dissidents, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said earlier this month.

This position is embraced by many Republican members of Congress, and the candidates for the Republican presidential nomination, but the dissident Fed officials have not returned that embrace. Mr. Kocherlakota, in the same speech, described the Fed’s work as “a largely technocratic exercise that is fundamentally apolitical.”

???

High unemployment going into the 2012 election could easily cost Obama the election. Has there been a "drift in inflation risk tolerance"? Seems to me, that without higher inflation we can not achieve "catch-up" growth.

Charles L. Evans, president of the Federal Reserve Bank of Chicago, has proposed that the Fed should announce temporary boundaries for inflation and unemployment, pledging to keep short-term interest rates near zero until the unemployment rate drops below 7 percent from its current level above 9 percent, or the medium-term outlook for the rate of inflation rises above 3 percent. It is now somewhat below 2 percent, the maximum rate the Fed views as healthy.

“Given how badly we are doing on our employment mandate, we need to be willing to take a risk on inflation going modestly higher in the short run if that is a consequence of policies aimed at lowering unemployment,” Mr. Evans said in a recent speech.

“The Fed has done a good deal of thinking out of the box over the past four years,” he said. “I think it is time to do some more.”

Helpful policies could be QE / purchases of MBS coordinated with Obama adminstration efforts to help the mortgage market and bringing down the exchange rate by purchasing foreign currency. A "currency war" would help export sectors and add demand.

(links via Thoma)

Attention Must Be Paid: The Big (Structural) Jobs Question by Bernstein

4 percent employment growth in 2000-2007. And yet unemployment was low until the financial panic. What does that mean? Fewer job losses? Growth of the labor force is about 1 percent.

There's a scene in Ron Suskind's book where Obama is talking to Summers and Romer and mentions structural problems regarding jobs growth. Summers and Romer tell him no that the job losses are cyclical. Maybe Obama was referring to this.

EPIphenomena by Krugman

A Note: Prolegomenon to Any Useful Discussion of Modern American Finance by DeLong

Japan’s Yen Intervention by Yglesias

Those who doubt the power of a determined central bank to reflate a depressed economy should consider Japan’s intervention to counteract the recent rise in the price of the Yen. As ever, it seems relatively uncontroversial to state that determined central banks have essentially unlimited authority to depreciate the value of their own currency. After all, the Japanese government is a monopoly supplier of Yen and can also create Yen in unlimited quantities. So if Japan wants a Yen to be worth fewer dollars, Japan can make it happen.

This is, however, nothing but monetary expansion under a slightly different name. It’s true that exchange rate policy, per se, is a bigger lever when you’re talking about a small country like Sweden or Switzerland rather than a large country like the United States. But the principles are the same. It’s true that a bank could be non-credible like just about any other kind of agent, but there’s no reason to assume that major developed country central banks can’t credibly communicate their own intentions. They would just need to actually decide what their intentions are, and then determine to communicate them clearly.

Upright Citizens Brigade opens additional theater

But Saturday’s planned festivities were thrown for a further loop when rough weather prevented two of the founders, Matt Besser and Ian Roberts, from arriving in New York for the event (their plane from Los Angeles was diverted to Syracuse), leaving Ms. Poehler and the fourth member of the troupe, Matt Walsh, to handle M.C. duties for most of the night.

Some of the young faithful who turned out on Saturday night said it was actually a good omen that all four could not be together for the occasion. “It’s just too much explosive energy in one room,” said Cristina Cote, a sincere 24-year-old Manhattan resident and a student in the troupe’s improvisation and sketch-writing classes. “It would be like reuniting the Beatles.”

Instead, a sold-out 7:30 p.m. show featured Ms. Poehler, Mr. Walsh and Horatio Sanz, a “Saturday Night Live” alumnus, among a team of comedians who improvised sketches in response to monologues performed by the surprise guest Ian MacKaye, who formerly fronted the rock bands Fugazi and Minor Threat.

Responding to an audience member’s suggestion of the word “Medusa,” Mr. MacKaye recalled an incident when skinheads briefly overtook the stage at a rock show he played at a Chicago club called Medusa’s. That spawned skits about a janitor recruited to play Hamlet; an Appalachian folk band called American Taliban; and a balding middle-aged man who is mistaken for a skinhead. (“You people are strange,” Mr. MacKaye said from the stage.)

A second show at 9:30 offered a grab bag of acts that were, in theory, supposed to keep their sets to five to seven minutes. Sue Galloway, who plays an ambiguously accented comedy writer on “30 Rock,” performed a character piece about a drunken office worker singing an aggressive version of “I Will Follow Him” at a karaoke night; David Cross, the “Arrested Development” star, read remarks posted on the East Village blog EV Grieve that complained about the Upright Citizens Brigade’s arrival. (“Go back to campus, you new jack cornballs,” one outraged commenter demanded.)

Around midnight, when the show concluded, patrons and performers streamed into the bar to celebrate with fruit plates and bottled beer.

Mr. MacKaye, standing in the club’s narrow green room, seemed satisfied with his unlikely foray into comedy. “I’d never heard of it, I had no idea why I was asked,” he said of the Upright Citizens Brigade. “It was a very interesting, and, I think, healthy, pleasant experience. I was very happy to be invited. It totally felt natural, and it made sense to me.”

Upright Citizens Brigade TV episodes

Episode previews on Hulu

Commenting on Romer's article, Yglesias writes

But even though unemployment was still very high in 1938-39, it fell dramatically during the 1933-36 period thanks overwhelmingly to things that were done on the banking/monetary side. Fiscal policy during the early Roosevelt administration, somewhat like fiscal policy during the Obama years, largely served to offset ongoing fiscal contraction at the state and local levels. Today, additional aid to state and local governments to forestall the creation of new restructuring problems would be very welcome. But today, as in the 1930s, the monetary lever could be very powerful.

Well in the Eggertson paper Romer links to, he writes

By any measure, the increase in government spending was dramatic, but the spending spree clearly violated the prevailing policy dogma of small government. Table 1 records several measures of government spending. The federal government’s consumption and investment, for example, was 90 percent higher in 1934 (Roosevelt’s first full calendar year in office) than in 1932 (Hoover’s last).14 Other measures of federal spending also increased substantially. Table 1 also reports total government expenditures. This measure includes several transfer programs and the gold purchases of the Treasury that are not included in the consumption and investment statistic, but which had an important impact on the government budget.15 This spending campaign was financed not by new taxes but by running budget deficits, thus violating another important policy dogma of the time: the budget should be balanced. Deficit spending plays an important role in the model of the paper because it measures the change in the inflation incentive of the government, which is crucial to determining expectations about the future money supply. The deficit during Roosevelt’s first fiscal year is one of the highest in US history outside of wartime. This helped to make a permanent increase in the money supply credible, thus firming up inflation expectations, because it was a critical strategy to finance the government debt payments. The deficit is defined as the difference between the government’s expenditures and tax revenues. Table 1 shows three estimates of the deficit, further described in the Appendix C. The estimate that corresponds most closely to the deficit in the model is the third one.16 The deficit, according to this estimate, increased by 66 percent in the fiscal year June 1933 to June 1934 and stood at 9 percent of GDP in that fiscal year. The other estimates show a smaller, yet significant, increase. Leaving measurement issues aside, however, there is even stronger evidence for the regime change than reported in Table 1.

It is quite likely that fiscal policy played a key role in firming up inflation expectations, since it was well understood at the time that deficit financing could lead to future inflation. In fact, the belief that deficits caused inflation was a foundation of the balanced budget dogma. Many commentators at the time, especially in the conservative press, were worried that Roosevelt’s deficit spending would in fact be too inflationary.19 As proof, many “sound money men” pointed toward the deficits of several European countries after World War I and the resulting hyperinflation.20 

Right now the government is engaged in deficit spending so more actions by the Fed could change inflation expectations.  But it looks like the government did a lot of deficit spending during the Great Depression, but maybe Matt is right that it was offset by cuts at the state and local level.

With unemployment at 9.1 percent, government cutting back spending, and the mortgage market in the dumps, could it be that QE1 and 2 helped prevent deflation> Would we have 2.5 percent annualized growth in Q3 (granted it may be revised downwards later)?

Well the economy grew at 2.5 percent so there is demand. Maybe unorthodox monetary policy can help. It helped during the Great Depression.

European Doom Loop by Krugman

Also know as the European Feeback Cycle of Doom

Re-Targeting the Fed by Scott Sumner

Romer linked to this article. If Obama is re-elected, he should nominate Romer to replace Bernanke.

Thomas Friedman is shrill.

Our Congress today is a forum for legalized bribery. One consumer group using information from Opensecrets.org calculates that the financial services industry, including real estate, spent $2.3 billion on federal campaign contributions from 1990 to 2010, which was more than the health care, energy, defense, agriculture and transportation industries combined. Why are there 61 members on the House Committee on Financial Services? So many congressmen want to be in a position to sell votes to Wall Street.

We can’t afford this any longer. We need to focus on four reforms that don’t require new bureaucracies to implement. 1) If a bank is too big to fail, it is too big and needs to be broken up. We can’t risk another trillion-dollar bailout. 2) If your bank’s deposits are federally insured by U.S. taxpayers, you can’t do any proprietary trading with those deposits — period. 3) Derivatives have to be traded on transparent exchanges where we can see if another A.I.G. is building up enormous risk. 4) Finally, an idea from the blogosphere: U.S. congressmen should have to dress like Nascar drivers and wear the logos of all the banks, investment banks, insurance companies and real estate firms that they’re taking money from. The public needs to know.

Emphasis added.

25 years of EPI speaking up for the 99% by Steve Pearlstein

All think tanks have their blind spots, and EPI is no exception.

...

One of EPI’s earliest critics was economist Paul Krugman. Before he became a newspaper columnist and won the Nobel prize in economics, Krugman wrote a book, “Pop Internationalism,” in which he belittled those “policy entrepreneurs” at “Economic Whatever” institutes who, in the name of competitiveness and income equality, wanted to restrict trade and institute a government-led industrial policy. Among his explicit targets was the EPI crew, including Faux, Thurow (then his colleague in the MIT economics department) and Reich (then secretary of labor in the Clinton administration).

Krugman chided the group for peddling “economic nonsense” and analysis that was “crude and uninformed.” He called Thurow’s handling of numbers “eerily inept” while dismissing Reich as a “brilliant coiner of one-liners but not a serious thinker.” He portrayed himself as “playing the role of defender of civilized economics against the intellectual barbarians.”

Obviously a lot has happened in the past 20 years, in politics as well as economics, that might explain why views on globalization and economic policy have evolved. But it speaks to EPI’s foresight and steadfastness, as well as the respect it now has in economic and policy circles, that the keynote speaker at EPI’s anniversary gala on Tuesday night will be none other than Paul Krugman.

(via Baker)

The confidence fairy lives.

What about the bond vigilantes?

(via Krugman)

Is it NGDP level targeting or NGDP targeting? Waldman or Waldmann?

Nominal GDP Targeting: Is It Simply the Re-animation of Dead Tissue? by DeLong

I would say that I think Christy Romer has the best argument here. It seems to me that Eggertsson's and Woodford's argument is incomplete. To the extent that taxpayers are different from bondholders--and they are--portfolio-balance effects are real. Sufficiently large quantitative easing would make those portfolio-balance effects large enough to destroy the bad equilibrium--and then the economy would quickly transit to the good one. That is what Krugman means by "huge quantitative easing".

And, of course, once expectations coordinate on the good equilibrium, you don't need to do any quantitative easing at all--rather the reverse: the Fed will have to shrink its balance sheet relatively quickly in order to maintain a good and non-inflationary equilibrium.

The economy is growing at our current bad equilibrium because of accommodating policy of the Fed. Business investment is up. Exports are up. Government is pulling back. Consumer savings rates is down, but there is high unemployment which means missing demand and excess capacity. Deleveraging and a sluggish mortgage market is also holding the growth rate back and keeping the economy at the bad equilibrium.

We can get to a better equilibrium, one that would be more resilient to shocks like an unruly breakdown of the Euro. If we don't the Fed will have to engage in further periodic QEs to ward off deflation. Won't it? I guess the Fed hopes the private sector will pick up the growth baton and produce "catch-up" growth. But will the private sector be able to do this if high unemployment is creating deflationary headwinds that the Fed needs to "artificially" ward off with periodic QEs? Only by reaching the good equilibrium will the delflationary headwinds be eliminated and the Fed can scale back its accomodating policy accordingly.

A Volcker Moment Indeed (Slightly Wonkish) by Krugman

A commenter at DeLong's blog writes: 

dwb said...

one quibble, the support should be open ended - maybe 50 Bn is enough, but maybe its 25 or 100.

no one commented on the buried-deep-in-the-news-cycle news that Kocherlakota supports Evans:

"Once the central bank's policy-setting Federal Open Market Committee makes its goals clear, Kocherlakota said, it could safely allow inflation to temporarily rise above its long-term 2-percent target to help bring down unemployment."

huh? he wasn't against the policy action per se, just the inconsistency vis-a-vis last year.

http://www.reuters.com/article/2011/10/21/us-usa-fed-kocherlakota-idUSTRE79K5ME20111021

I'm trying to think of an analogy of the feeling of hope I'm having but the only thing that comes to mind is a scene from the fantasy genre: Lord of the Rings: the Two Towers. It's when Gandalf and Pippen light the warning beacons of Gondor, in essence sending up a S.O.S. flare to Rohan calling for help. Aragorn is at Rohan's hill fort capital Edoras and sees the beacons lit in the distance. He becomes very excited because he knows what it means even if no one around him does. There's still hope. He's so jacked up he sprints to the throne room, brushing past oblivious villagers, to tell King Théoden the news personally and convince him to ride to Gondor's aid. Sauron's victory would have been assured if the free people of Middle Earth remained divided. But it was not to be as the Rohirrim answered Gondor's plea* for help.

Contrast the eerie, sinking feeling of the risk analysts driving around Manhattan in Margin Call, or Billy Crudup's Geithner in HBO's Too Big To Fail where they talk about how weird it is that people have no idea of the disaster that is coming.




----------------------------
* NGDP level targeting is slightly deceptive for the right reasons (see Krugman) just as Gandalf had Pippen light the warning beacons of Gondor against the wishes of Denethor, the Steward of Gondor.

Christina Romer Joins Team NGDP Level Targeting by Yglesias

I like how Yglesias remembered to put "Level" in there.