tag:blogger.com,1999:blog-582368152716771238.post8744575514613497882..comments2024-03-18T07:59:05.430-05:00Comments on The Grumpy Economist: Woodford at Jackson HoleJohn H. Cochranehttp://www.blogger.com/profile/04842601651429471525noreply@blogger.comBlogger41125tag:blogger.com,1999:blog-582368152716771238.post-71530216891794064332012-09-14T14:15:26.454-05:002012-09-14T14:15:26.454-05:00The Fed being powerless to create inflation would ...The Fed being powerless to create inflation would be a tremendous boon, if it were true. They could buy and cancel the entire national debt without inflation budging! For better or worse, expected inflation does increase when the Fed does QE, even during "liquidity traps".Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-85326264467864751832012-09-08T15:29:39.695-05:002012-09-08T15:29:39.695-05:00Also, Professor Cochrane said:
Mike recognizes, a...Also, Professor Cochrane said:<br /><br />Mike recognizes, as I do, that the Fed can do nothing more to raise nominal GDP today. Rates are at zero. The Fed has did what it could. The trend line was not achievable.<br /><br />Bill Woolsey replies:<br /><br />Here is the relevant section of Woodford's paper:<br /><br />Standard New Keynesian models imply that <b>a higher level of expected real incomeor inflation in the future creates incentives for greater real expenditure and larger price increases now</b>; but in the case of a conventional interest-rate reaction function for the central bank, short-term interest rates should increase, and the disincentive that this provides to current expenditure will attenuate (without completely eliminating) the sensitivity of current conditions to expectations. <b>If nominal interest rates instead remain unchanged, the degree to which higher expected real income and inflation later produce higher real income and inflation now is amplified. If the situation is expected to persist for a period of time, the degree of amplification should increase <i>exponentially.</i></b> Hence it is precisely when the interest-rate lower bound is expected to be a binding constraint for some time to come that expectations about the conduct of policy after the constraint ceases to bind should have a particularly large effect on <b>current economic conditions</b>Samhttps://www.blogger.com/profile/03796339415643845682noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-58178945632320413882012-09-07T14:49:49.988-05:002012-09-07T14:49:49.988-05:00I know I requested a response to Sumner earlier, b...I know I requested a response to Sumner earlier, but <a href="http://uneasymoney.com/2012/09/06/john-cochrane-misunderestimates-the-fed/" rel="nofollow">David Glasner may be even better</a>.Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-45047431327617189992012-09-07T12:46:32.377-05:002012-09-07T12:46:32.377-05:00Wonks Anonymous:
"Please respond to Scott Su...Wonks Anonymous:<br /><br />"Please respond to Scott Sumner's response. As noted, he's defended you before, but it's sometimes tricky to figure out what your actual position/argument is."<br /><br />LOL<br /><br />I've suggested to Prof Cochrane that he read Scott Sumner.<br /> He hasn't, or he hasn't cared to challenge his own views by reading a REAL successor to Milton Friedman. We'll be waiting till next centuryEdwardnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-22730852791945010262012-09-07T07:16:57.006-05:002012-09-07T07:16:57.006-05:00Prof. Cochrane wrote:
You are correct, I am very ...Prof. Cochrane wrote:<br /><br />You are correct, I am very unlikely to advocate a 50% cancellation of all debts and massive inflation. Nobody will ever save or lend again if we do that.<br /><br />Prof. I did not advocate a direct cancellation of student and mortgage debt. I advocated that the Fed buy such debt and then cancel all student debt and part of the mortgage debt.<br /><br />Now this plan would not hurt any lender. <br /><br />In fact, it would do exactly what everyone, including you, have advocated for it would hold lenders harmless from their own bad decisions, which would only encourage lending.<br /><br />In sum, what I am proposing is that the Fed attack directly the underlying problem we have in the modern economy: we do not write off our bad debts fast enough. Instead of pretend and extend, which should find a mechanism that writes off bad debt the moment it appears.<br /><br />Our lenders are no better today than when lenders in the Old Testament were so bad at lending that a debt jubilee was necessary.<br /><br />You just cannot invert. <br /><br />This is one of those paradoxes, like thrift, that the Chicago school does not understand. If you want to encourage only the making of "good loans," you permit only non-recourse loans.<br /><br />We permit bad lending and ought to "man-up" about it. To believe that we can go such, on the scale we permit bad lending, and not pay more attention to prompt write-offs, that likely is the source of our current woe (and high oil prices)<br /><br />The SBA loan guarantee program encourages lending, for example, because of the put feature of the program.<br /><br />There is a second similar program that the Fed could undertake and that is to pay off maturing obligations with cash as well. In sum, everyone always talks about micro-foundations. The Fed has a way of getting cash directly into the economy and that is to print up billions in Franklins, put them on pallets and shrink wrap them, and send them back in the empty containers that liter our landscape.<br /><br />IOW, when the World demands safe assets, that is the time to instead give it cash. The Tai-Pan knew what he was doing and we should learn from him.Anonymoushttps://www.blogger.com/profile/07904132869021579763noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-39901555651233164542012-09-06T20:33:39.775-05:002012-09-06T20:33:39.775-05:00"So the case for "stimulus" must be..."So the case for "stimulus" must be that some other, unstated lack of "demand" is the problem, and that all "demand" is the same so that monetary "stimulus" will cure that problem."<br /><br />You hit the nail on the head. This idea that we have to keep GDP growing, irrespective of where the 'demand' comes from, is the underlying (and flawed) assumption of 'mainstream' thinking.Martin Boulangernoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-57578223986263047492012-09-06T16:06:32.383-05:002012-09-06T16:06:32.383-05:00First, the Fed's normal policy responses to a ...First, the Fed's normal policy responses to a lack of AD are not possible in the zero-bound world we live in today (pushing on the string). So all we are left with is the Fed accommodating fiscal policy by buying up huge amounts of government debt which allows the government to spend at a lower intertemporal cost. That seems to be what Woodford is advocating. What really strikes me about Woodford's policy prescription is that it completely ignores the micro issues of resource allocation. Is a "helicopter dump" via the Federal government an efficient (effective?) way to allocate resources? My reading of the evidence is that governments are pretty bad at such allocations (Solyndra?). But it seems that Woodford believes such allocation/efficiency issues are unimportant to the Macro economy (at least in the current environment). Is what we need just an AD increase regardless of the distributional issues? Aren't the distributional issues at the heart of the New Keynesian paradigm? Isn't that why frictions and adjustment costs at the micro level have important impacts at the macro level? Is the so-called spending multiplier not a function of allocation/efficiency at the micro level?<br /><br />The other issue that troubles me is the idea that inflation right now is an unambiguously good thing. Creating some inflation may have some beneficial effects on the economy but it surely is not through increasing AD, at least not directly through the normal liquidity/credit channels. One of these potentially beneficial effects of higher inflation is the reduction in real debt burdens, especially mortgage debt. But it should be clear to the readers/posters on this site that such an outcome is simply a wealth transfer from creditors to debtors. Is this benefit worth the associated costs? I don't know the answer, but it seems an important question to answer before we implement the policy.Bill Crowdernoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-70422232549387612482012-09-05T20:06:27.558-05:002012-09-05T20:06:27.558-05:00Inflation is up to 4%? That would be huge news to ...Inflation is up to 4%? That would be huge news to me. Do you have a cite for that claim?TGGPhttps://www.blogger.com/profile/11017651009634767649noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-1299030899164270792012-09-05T18:37:08.380-05:002012-09-05T18:37:08.380-05:00We haven't had 2% inflation in several years, ...We haven't had 2% inflation in several years, so it seems Treasury has been paying interest to bondholders. 3 years, I think, of sub 2% inflation, which makes the Fed inflation target non-credible. <br /><br />To be credible, should the Fed "catch-up" to the 2% trend line? $9,000,000,000 Write Offhttps://www.blogger.com/profile/14455548811771787363noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-87034666637645581532012-09-05T15:35:30.455-05:002012-09-05T15:35:30.455-05:00Another thought on this. Have we not already had ...Another thought on this. Have we not already had a helicopter drop (or drops)? In mid-2008 Congress approved a tax rebate plan that resulted in Treasury sending checks to most American taxpayers. Then, we had Congress extend the Bush tax cuts which resulted in Treasury sending larger checks to most taxpayers than what they would have otherwise gotten. Treasury had to borrow funds to finance this. More or less at the same time this was occurring, the Federal Reserve started buying up mortgage backed securities and then US Treasury obligations. <br /><br />The only element that seems to be missing here from the definition of a "helicopter drop" is the supposed lack of "coordination". Yet, who is to say that there was no "coordination". And, effectively, would "coordination" really be an essential element if these things happened simultaneously, as the above events more or less did?Vivian Darkbloomhttps://www.blogger.com/profile/18362419878968863283noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7680835926984864482012-09-05T14:43:51.239-05:002012-09-05T14:43:51.239-05:00So the Fed is powerless, but it would also be nice...So the Fed is powerless, but it would also be nice to hear about the negative consequences of QE and the Fed's commitment to keep rates low.<br /><br />It seems like there is a real-options story. Businesses and banks have many reasons to postpone investment until volatility decreases. A cost of waiting, however, is that financing rates could jump away from their historic lows today. The fear of higher future rates could induce investment today (assuming the higher rate is not strongly correlated with the project's profitability). <br /><br />So even if the Fed could commit to lower rates in the future, it is not clearly a good idea if it delays investment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-37631448297123355992012-09-05T14:32:34.234-05:002012-09-05T14:32:34.234-05:00You know so little about Hamilton
You forget that...You know so little about Hamilton<br /><br />You forget that his bonds were only payable in dollars which were silver, not gold coins, and that silver was readily available as a commodity, so available that we left the silver standard in the 1870s.<br /><br />You also need to read up on the Sante Fe trail, by which millions of ounces of silver flowed to the United States through St. Louis from New Mexico, all of which Hamilton foresaw<br /><br />In sum, he had confidence that he could always pay his bonds with "printed" or perhaps better "coined" money<br /><br />Mr. Bernanke is not concerned about paying his bonds, save an attempt by the GOP to cause the Lesser Depression to continue.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77699547421339116632012-09-05T14:21:05.203-05:002012-09-05T14:21:05.203-05:00Prof. Cochrane states that, "Nobody will ever...Prof. Cochrane states that, "Nobody will ever save or lend again if we do that."<br /><br />First, according the Bible there was a 7 year debt jubilee and people lent again.<br /><br />Second, bankers used to wait for people as they walked out of bankruptcy court with a fresh start.<br /><br />I could go on, but that really is a superficial response.<br /><br />My two cents has consistently been that "Nobody will ever save or lend again if we do" what he wants or if we do Martin Wolfe first advocated, the Helicopter drop.<br /><br />My repeated position has been that our situation is far worse and requires both a profound change in the re-thinking of the national government, a revilization of the national government to make it effective equivalent to the pitching of the Articles of Confederation for the Constitution and economics cleansed of 60 years of pitiful effort. On other blogs you have economists still unable to define money and finance, living in some Hayekian dream world. <br /><br />If we are not going to do that, then I favor a debt jubilee for our young people through cancelation of college debt. They will then have a chance to put their lives together. <br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-86285348924771580812012-09-05T13:01:51.668-05:002012-09-05T13:01:51.668-05:00You will have to have rampant inflation to get peo... You will have to have rampant inflation to get people to deplete their savings then borrow to spend.<br /><br />I don't that if the Fed triggered inlation, it would lead anyone to spend more money. If anything, I see that it would be create a negative shock for US growth.<br /><br />If the US runs higher inflation than other advanced economies without higher concomitant real growth, or real interst rates, US assets flow. Or overseas assets currently invested in the US return home.<br /><br />This will lead to an exchange rate adjustment, lower investment, lower growth, and eventually higher rates to stablize the situation.<br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-10234368305344546152012-09-05T12:22:11.282-05:002012-09-05T12:22:11.282-05:00'Second, drop money from helicopters, i.e. &qu...'Second, drop money from helicopters, i.e. "coordinated monetary-fiscal policy."<br /><br />When I asked you about this in an earlier post, you claimed helicopter drops were fiscal policy. Now it's 'coordinated monetary-fiscal policy'.<br /><br />'Basically, the Treasury borrows money, writes checks to voters ("helicpoters"), and the Fed buys the debt.'<br /><br />Isn't it, the Treasury issues bonds, the Fed buys them with bookkeeping entries, the Treasury somehow transforms those entries into currency and then showers that from helicopters which--like the gentle rain from heaven--falls on the voters and non-voters alike?<br /><br />Then, what prevents the lucky recipients from spending the money and stimulating GDP? Surely not low interest rates.Patrick Sullivanhttps://www.blogger.com/profile/14948365865741313524noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-76260994210982325832012-09-05T12:12:16.225-05:002012-09-05T12:12:16.225-05:00I tailed off when the whole idea banked on a two-f...I tailed off when the whole idea banked on a two-factor PCA model. All of these models go wrong exactly when you need them the most.<br /><br />The amount of philosophizing about policy is testament to how far we've veered off course.<br /><br />We need less Fed, not more. Less money printing and market intervention, not more.<br /><br />Time to shutdown Fed operations and let the market sort out the winners and losers. If your business model is not suppoortable at 4.5% interest, then let the market find one that is. <br />Public Libraryhttps://www.blogger.com/profile/00017383928897945054noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-78849618074472191512012-09-05T11:53:18.494-05:002012-09-05T11:53:18.494-05:00There is plenty of historical evidence suggesting ...There is plenty of historical evidence suggesting the cancelling of debt does not stop investors from taking the risk again. Everyone has a price; or yield I should say. This is exactly what sovereigns and banks do all the time. <br /><br />However, if the people were aware of this common practice among gentlemen then the party would no longer be a VIP event. Hence the opposition to write-offs. Why do that when you can force the taxpayers to foot the bill while the technocrats keep playing high stakes poker. I advocate to anyone >15% underwater on their mortgage to walk away. It is a sound business decision plain and simple. It makes even more sense if you are in sound financial condition with the current set of investment opportunities at these yields. <br /><br />Eventually, the banks will come hollering for you to borrow money because of your liquid situation. Especially compared to those who are underwater. There is no need to wait for technocrats to give the green light. Start beating them at their own game today.<br />Public Libraryhttps://www.blogger.com/profile/00017383928897945054noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-18249684491389891432012-09-05T11:33:00.734-05:002012-09-05T11:33:00.734-05:00Another thing: there can be a possible commitment ...Another thing: there can be a possible commitment problem if one rule is best in some situations, and another rule is better in other situations. But the market monetarist view is that interest rate or inflation targeting (or even a Taylor rule) is never better than level targetting. A rate target, if it is always applied correctly and never deviated from, might optimally work out the same as a level target. But once deviated from it becomes inferior to a level target, which makes up for prior mistakes. Furthermore, many popular targets do not distinguish between supply and demand. An inflation target treats a negative supply shock and a positive demand shock the same. A nominal GDP target has an opposite reaction to the two. That's why its advocates think it is always superior. I had not heard of Woodford & Eggertson's optimal policy, but if it is optimal then there is a risk the Fed might switch to it. But you don't seem to find that very likely!Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-38887790530998663582012-09-05T11:23:33.684-05:002012-09-05T11:23:33.684-05:00Please respond to Scott Sumner's response. As ...Please respond to <a href="http://www.themoneyillusion.com/?p=15999" rel="nofollow">Scott Sumner's response</a>. As noted, he's defended you before, but it's sometimes tricky to figure out what your actual position/argument is.<br /><br />Could the Fed simply print money and hand it over without the Treasury selling it debt? That would more credibly indicate that the monetary base was permanently expanded and that taxes would not be raised to pay off the debt (which wasn't really "borrowed" in the first place).Wonks Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-7423860046371551262012-09-05T10:30:20.513-05:002012-09-05T10:30:20.513-05:00It's interesting that you essentially agree wi...It's interesting that you essentially agree with Krugman as well as Woodward that QE is unlikely to help much, and also share Krugman's scepticism that the Fed really can credibly promise more inflation. That said, it is surely the case that more inflation in and of it self, were it possible for the Fed to engineer it, would help create more demand in the current economy for the simple reason that many of the home owners whose mortgages are underwater would be above water again. If rates could be kept low for a short time, this is turn should allow for a turnaround in the moribund home construction industry. As for helicopter drops, rational people just don't expect to pay all of the extra taxes in the next few years, and with 30 year rates at 2.7% I can't think of any reason why they would. They carrying cost on a trillion dollar loan is $30B/year which is small change in a $14T economy.Robert Weilernoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-8876458212570226452012-09-05T10:29:04.776-05:002012-09-05T10:29:04.776-05:00Treasury rates are at 50 year lows. The 10 year Tr...<i>Treasury rates are at 50 year lows. The 10 year Treasury rate is 1.5%. At 2% inflation, that's a negative 0.5% real rate. Yes, the economy is in the toilet, but surely too-high Treasury interest rates are not the crucial economic problem right now.<br /><br />So the case for "stimulus" must be that some other, unstated lack of "demand" is the problem, and that all "demand" is the same so that monetary "stimulus" will cure that problem. I disagree on that one.</i><br /><br />This is good rhetoric, but I don't find it very convincing. What gives you such an exact sense of the equilibrium real interest rate? Extrapolation from the historical record, as you do here, doesn't accomplish much; there are regime shifts all the time, and the fact that a certain price generally fell within certain bounds in the past doesn't mean that it will in the future. I think there is a very convincing case that a large shift in the real interest rate is necessary to equilibriate the economy. The financial crisis, unemployment, and resulting uncertainty (including, yes, government-induced uncertainty) have caused consumers and businesses to be far more reticent to spend and invest than in the past. Due to various real rigidities, a decrease of a few percentage points in the real interest rate doesn't increase demand by as much as a simple model might imply, particularly since one margin that is usually highly elastic (investment in structures) is current dysfunctional. This means that an even lower interest rate is necessary to bring supply and demand back into balance. (Conceptually, there is nothing fancy here: this is fairly standard Walrasian intuition.)<br /><br />Let's imagine a different situation. Suppose economic policy hasn't improved since the 70s, and we still have price controls. Some supply or demand shock causes the price for oil to skyrocket and hit a price ceiling, and we see widespread shortages. Many economists rightly blame the price ceiling for the shortages, and argue that we should increase or do away with it. Yet some left-wing economists say "Oil prices are at all-time highs. The spot price for Brent is $140. Yes, the oil market isn't working, but surely too-low price caps are not the crucial market problem right now." Of course, this argument is clearly wrong -- but to be honest, I'm not sure that it's much worse than your statement above. Both you and my hypothetical left-wing economist are using the fact that a price is outside its historical range to argue that it can't possibly be important to let the price move any further.<br /><br />Of course, the awkwardness of monetary policy is that the central bank is always controlling the nominal interest rate -- unlike the situation with oil price caps, there's no simple "get rid of the caps" free-market solution. Instead, we need some policy (possibly a rule, possibly not) that responds to various market signals so that the real interest rate comes as close as possible to the ideal Arrow-Debreu intertemporal price. This policy can take many forms -- some kind of inflation or nominal GDP target, a Taylor rule, etc. -- but whatever it is, I'm pretty sure that it doesn't involve handwaving about how historically low yields shouldn't go any lower.Grad studentnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-77450175240195551042012-09-05T10:16:15.066-05:002012-09-05T10:16:15.066-05:00"You are correct, I am very unlikely to advoc..."You are correct, I am very unlikely to advocate a 50% cancellation of all debts and massive inflation. Nobody will ever save or lend again if we do that."<br /><br />there doesn't need to be MASSIVE inflation Just a return to the previous price level before the crash. And You do agree that inflation helps reduce the burden of debt right Professor?<br /><br />On a somewhat separate note, I cannot BELIEVE you think the Fed is poweless. I would love to hear your answer to this question? What would happen, in your view, If the Fed bought the entire national debt up?<br /><br />Would it create:<br /><br />A Hyperinflation.<br /><br />B Recovery.<br /><br />C Above average inflation AND recovery, but not hyper inflation (Something like 20% nominal gdp grwoth with 10% inflation and 10% real growth)<br /><br />or<br /><br />D. Absolutely nothing.<br /><br />Let me try and understand you correctly, Are you saying D? Because even with the first three choices, The actions of the Fed will affect SOMETHING! Its one think to argue the classical view. (printing money affects prices only in the short and long run) its another to say the Fed is powerless to do ANYTHING, which seems like, (I'm sorry) an absurd opinionEdwardnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-34974369186438221422012-09-05T10:14:30.944-05:002012-09-05T10:14:30.944-05:00How unlike his namesake.How unlike his namesake.Fat Manhttps://www.blogger.com/profile/09554029467445000453noreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-25097197208624891092012-09-05T09:59:35.506-05:002012-09-05T09:59:35.506-05:00"The actual argument is that higher spending ..."The actual argument is that higher spending on output leads to higher inflation and higher output growth and higher output growth leads to higher employment growth and lower unemployment."<br /><br />I believe you are missing a step - inflation -> HIGHER PROFIT MARGINS -> higher output -> hire employment. <br /><br />However, profit margins are already at record highs. This doesn't add up.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-582368152716771238.post-52700478831555761472012-09-05T09:22:20.918-05:002012-09-05T09:22:20.918-05:00Yes, spending needs congress too. I added that to ...Yes, spending needs congress too. I added that to be clear. John H. Cochranehttps://www.blogger.com/profile/04842601651429471525noreply@blogger.com