Sumner Declares Delong for Market Monetaristism

     I give Sumner credit for his missionary zeal but it seems to me that he suffers from what the economists call 'confirmation bias.' Everything proves his point.

      "And no, he wasn’t talking about Paul Krugman!  Here’s the Fama comment about QE that set him off:

They’re basically neutral events. I don’t think they do very much.

     "Fama argued the Fed simply swapped low interest federal debt (reserves) for low interest federal debt (T-securities)"

      "DeLong insisted the market reaction showed that Fama was wrong in saying they don’t do very much:

The profound cluelessness as to what is going on in financial markets today is mind-numbing.

      "Something I’ve said about 862 times."

     "People, I’m not making this up.  You fell asleep last night in a world where market monetarism was a fringe theory and woke up in a world today where everything is topsy-turvy.  Arguments market monetarists have been making for years are suddenly conventional wisdom in the Keynesian community."

      "Quick!  Someone please dig up a quote where Krugman says QE is basically a neutral event, and that it doesn’t do very much."

     http://www.themoneyillusion.com/?p=24505

     Actually, the Fama-Santelli exchange was great. Whether or not Fama is clueless I don't think he was the most clueless in the room with Santelli there. Basically you have on guy saying it's a neutral event and the other one acting like it's been a catastrophe of epic proportions-all that money printing! 

     "Nobel prize winner Eugene Fama was on CNBC earlier today to discuss the Federal Reserve and its extraordinary monetary policy. Pragmatic Capitalism's Cullen Roche flagged this heated exchanged between Fama and CNBC's Rick Santelli. Santelli asked specifically about the effects of the Fed's quantitative easing program and the risks associated with it. [Fama answered:]

What they are doing... the effects are being greatly inflated by the accounts. What they've doing is issuing a lot of short-term debt--$85 billion a month--and using it to buyback long-term debt with the goal of lowering the interest on long-term debt. Now they take credit for lowering interest on short-term debt. But in fact what they've been doing should've raised rates on short-term debt.

     "The profound cluelessness as to what is going on in financial markets today is mind-numbing. I mean, we could understand a finance economist not understanding labor market institutions or events, or an industrial organization specialist not understanding monetary economics. But this is cluelessness about finance on the part of a finance economist."

     "It goes on."

     "Fama argued that the Fed was not affecting the economy that much. Santelli, however, continued to pursue the idea that there are risks associated with the Fed's actions. [But Fama:]

They're basically neutral events. I don't think they do very much.

But Santelli kept pursuing this line of questions, and tensions began to rise:

Let me interrupt you. If it's no big deal, then why don't all central banks just do this to the nth degree and make it a constant day to day week to week event where they purchase what's issued, keep interest low, and just target a low rate forever. Why won't that work then?

[Responded Fama:]

There's so much confusion in what you said it's difficult to answer.

      "Santelli's not too sophisticated."

      "But Santelli was watching financial markets in the spring, and registered the datum that when Ben Bernanke talked about shifting the future path of quantitative easing purchases, asset prices jumped. And Santelli is trying to incorporate this into his thinking--hence he sees Fama's claim that QE has no effect on interest rates as something so bizarre that it just doesn't register on his mind. Santelli is too reality based for it to even enter his mind that when Fama says "they are basically neutral events" he means not only that QE doesn't shift the chance of future disasters but also that QE doesn't affect interest rates today."

     "Fama, however, seems to have missed last spring--or, rather, Fama thinks that, by pure coincidence, at that exact moment when when Bernanke talked about the "taper", the market's underlying utility function shifted to be less patient and more averse to risk."

Dumbass.

     http://delong.typepad.com/sdj/2013/10/is-there-any-appropriate-reaction-to-this-on-the-part-of-eugene-fama.html

     Santelli certainly isn't too sophisticated-and is the father of the tea party to boot-Fama isn't wrong about his confusion. As Sumner mentioned Krugman it ought to be pointed out that he opposes taper of QE3 not because he thinks it does much-Sumner himself agrees with this-but just that in the absence of what he prefers-forward guidance-QE3 at least sends the right signals to the market. 

     Krugman has never expoused the idea of Santelli-Woodford for that matter-that QE could be positively harmful. His view is that indeed, QE doesn't really do much beyond what Fama said-swap one asset for another-but that:

     "On the whole, I’m sympathetic to skepticism about the effectiveness of QE, predictably. After all, I’ve been arguing for forward guidance instead for 15 years. On the other hand, right now investors are not making a clear distinction between QE and forward guidance; taper talk has been accompanied by a clear shift in expectations toward the notion that the Fed will raise short-term rates sooner rather than later. So I wouldn’t be tapering now — it sends a bad signal at a time when recovery remains very weak and fragile.:

      
    http://krugman.blogs.nytimes.com/2013/09/13/tobin-and-the-taper-wonkish/?_r=0

    Again, basically Sumner's view as well,