It's strange but the sun came out very bright only after Summers. I had to go there. Nevertheless, it's clear that there are two things the markets really liked.
A). Larry Summers dropping out of consideration
B). Bernanke 'tapering off on tapering itself.'
Reuters wrote a worrying line that this leaves his successor-who we know won't be Summers-with 'no road map.'
" Federal Reserve Chairman Ben Bernanke's shock announcement on Wednesday that the U.S. central bank was not ready to pare back its stimulus program could make it more difficult for his successor to navigate the Fed's way out of its extraordinarily aggressive policy."
http://www.reuters.com/article/2013/09/20/us-usa-fed-successor-idUSBRE98J00020130920
If you wonder what they mean when they say 'That's a feature not a bug', this is a great example of this. It's the idea that the Fed's 'extraordinarily aggressive policy' will be unwinded very much later rather than sooner is a big part of the market elation. The other part is that Summers won't be the one with this difficulty of navigation.
On the movement of interest rates, Sumner even feels charitable enough to throw 'Kenynesians' a bone. They may have been right about yields, but other non-Keynesian folks are more right, of course.
"Bond yields down. Yes, that goes against the view that the income and inflation effects usually trump the liquidity effects for long term bonds. But consider:
A). Larry Summers dropping out of consideration
B). Bernanke 'tapering off on tapering itself.'
Reuters wrote a worrying line that this leaves his successor-who we know won't be Summers-with 'no road map.'
" Federal Reserve Chairman Ben Bernanke's shock announcement on Wednesday that the U.S. central bank was not ready to pare back its stimulus program could make it more difficult for his successor to navigate the Fed's way out of its extraordinarily aggressive policy."
http://www.reuters.com/article/2013/09/20/us-usa-fed-successor-idUSBRE98J00020130920
If you wonder what they mean when they say 'That's a feature not a bug', this is a great example of this. It's the idea that the Fed's 'extraordinarily aggressive policy' will be unwinded very much later rather than sooner is a big part of the market elation. The other part is that Summers won't be the one with this difficulty of navigation.
On the movement of interest rates, Sumner even feels charitable enough to throw 'Kenynesians' a bone. They may have been right about yields, but other non-Keynesian folks are more right, of course.
"Bond yields down. Yes, that goes against the view that the income and inflation effects usually trump the liquidity effects for long term bonds. But consider:
a. "The level of the 10 year is still around 2.8%. (Update: 2.76%, down 10 basis points.) That’s the yield with no tapering at all. What does that tell us? It tells us that very little of the run-up in yields since last year is due to expectations of tapering. In other words, the Keynesians are right that QE means slightly lower yields right now, but people like Michael Darda are even more right; expectations about the future path of the economy are the major factor pushing up rates. That doesn’t necessarily mean higher real growth expectations (the composition of growth also matters) but it probably does at least to some extent. This was a big natural experiment, and we just found out that very little of the more than 100 basis point run-up in yields was due to fear of tapering."
b. "It’s possible that due to market segmentation the QE purchases have more of a liquidity effect on the 10 year that ordinary OMOs during normal times. But if so, doesn’t that mean QE is less likely to lead to a stock bubble than otherwise? I.e. if markets are segmented then the “distortions” are more likely to be in the asset classes directly purchased by the Fed. Or am I missing something? (The risk of instant reaction.)"
I can't help but notice that Sumner only ever believes bubbles are even possible long enough to argue that this or that phenomena is not a bubble or won't become a bubble.
Still I have no trouble hailing Ben Bernanke. And his successor who whatever else you can say about him-but it better be a her as Krugman warns the White House here
will not be Larry Summers. So let's Hail Ben Bernanke! and also Hail Ben Bernanke's successor! Whoever he will be. Though of course it will be a she. Her name will be Christina Romer.
O/T: more Sadowski vs Roche:
ReplyDeletehttp://pragcap.com/the-monetary-realism-matrix/comment-page-1#comment-155096
This is an interesting one:
ReplyDeletehttp://www.themoneyillusion.com/?p=23739
MMist Sumner saying Tyler Cowen is misleading when referring to traditional monetarist Cochrane's critique of NK ideas at the ZLB, thus demonstrating that Cochrane, according to Sumner is actually a bigger liquidity trap believer than Krugman. But then Sumner seems to endorse the Woodfordian (NKer) "forward guidance" stance on zero interest rates at the very end.
BTW, what camp does Tyler Cowen fall in? NKer? MMist? Traditional monetarist?
Also, if you do read that, this is interesting (statement from Sumner):
Delete"This means that any attempt at fiscal stimulus will simply be offset by less monetary stimulus. That’s the real reason fiscal multipliers are zero."
So fiscal multipliers are zero, not due to anything inherent about fiscal multipliers, but because of the CB's reaction to them (that he's implicitly assuming will always happen)?
I'd say Cowen straddles more than a few lines. He has that belief in the Great Stagnation Hypothesis that doesn't sound any kind of Monetarist to me-or even NKer. More like RBC.
DeleteOf course Cochrane is a RBCer. I found Cocrhane's statement full of chutzpah. I also find it hard to believe that he hasn't taken pay for anything he's ever said or written. Most of these economists have.
DeleteFor example Glen Hubbard-who was W Bush's chief econ adviser and then was Romney's in 2012 wrote a now infamous paper justifying CDOs which it turns out he was paid by the financial industry to write.
So Cochrane shouldn't beat his breasts too much.
Yes that's been Sumner's monetary offset narrative for a long time-that the Fed will simply offset anything. However, in a comment I notice he admitted that the Fed didn't offset the WWII spending. So it's ultimately a choice not a pure law of physics that this will always necessarily be the result.
DeleteCochraen is an RBCer?! .... the arch nemesis of Sadowski? (Sadowski claimed he'd never stop fighting them... "to the depts of hell" or some such... I posted his comment as a comment to one of your other posts).
DeleteI thought Cochrane was a traditional Monetarist, and that there's a difference between that and an RBCer.
I didn't say there's not a difference between a Monetarist and a RBCer. However, Cochrane is as close to the Father of RBC as you're going to get-other than Lucas.
Deletehttp://faculty.chicagobooth.edu/john.cochrane/research/papers/kpr2a.pdf
http://en.wikipedia.org/wiki/Real_business_cycle_theory
MInd you I could play devi's advocate with your question that Monetarism is so different than RBC Arguably the goalis actually common to both.
http://www.themoneyillusion.com/?p=14433
That put's Sadowski in an interesting position given these statement though doesn't it?:
Deletehttp://diaryofarepublicanhater.blogspot.com/2013/09/more-on-population-growth-as-cause-of.html?showComment=1378964363903#c1169757326573762086
Well in fact Sadowski has an interesting comment in that Sumner post you link to.
Very interesting discussion there Tom. Mr Sadowski seems a bit of a douche, a Sumner lite maybe?
ReplyDeleteProblem as I see it is that econ profession cant even agree on what gets called fiscal and what gets called monetary anymore (maybe they never did) Plus they cant even seem to agree that govt debt is a private sector asset. When everyone is evaluating things form completely different starting points, how do we have a chance.
"When everyone is evaluating things form completely different starting points, how do we have a chance."
DeleteGood points Greg. The Roche vs Sadowski encounter has been long and drawn out, with many ups and downs, but I confess I haven't followed it all in detail. It jumped from one blog post at pragcap to another, then over to themoneyillusion then back to pragcap. I'd love to compile the whole "debate" into a consolidated whole and go through it, looking at each of the charts papers and evidence each of them present... see what exactly is going on there. As you know Sadowski's posts in particular tend to be long and complicated.
The last few exchanges between them are more mellow... still some big disagreements I think, but more of a detente settling in possibly. Again, that's an impression I come away with from skimming more than anything else.
Back to my idea of consolidating the "debate" into a coherent whole... I wish I knew somebody that was into that sort of thing .... Ahem... Mike? You know anybody like that?... Lol.. I guess your response should be "Do you see that tip jar over to the right? I'm just sayin..."
It seems to me Greg that what gets called M or F is largely a political question. Sumner claims to be fine if the Fed buys up everything in the world. He'd think it was the end of the world if the Treasury did the same.
DeleteCowen is also-and I just learnt this-"Cowen also serves as general director of George Mason's Mercatus Center, a university research center that focuses on the market economy"-a pretty libertarian school.
Deletehttp://en.wikipedia.org/wiki/Tyler_Cowen
Mirowski lists him as part of the Neoliberal Thought Collective (NTC).
No question GM is a pretty libertarian school and doesn't rank so high in terms of economics-like say Harvard.
I read him with interest but I'd say he's to the Right of Monetarism.
Just started watching these lectures by Perry Mehrling
Deletehttps://class.coursera.org/money-001/class
Click "Video Lectures" over on left side
Outstanding stuff. A lot of overlap with MR/MMT/PKE but makes some interesting points about Monetarism. Basically he says that all the schools are right sometimes. That their models are correct under certain conditions which do not always exist. Understanding how and why conditions change is the challenge and Modern Central Banks are learning how to deal with Shadow Banking crisis on the fly. Shadow Banks were the source of our problems and no CB had any experience with the Shadow Bank balance sheet.
Really good stuff.
Sadowski is kind of like Sumner's Gorky or maybe his Carl Schmidt. He's actually the one who kind of cleans up some of his master's rhetorical excesses and makes it more appropriate.
ReplyDeleteHe's a true believer but he often makes the case better for Sumner than he does himself.
ReplyDeleteGotta watch out for those true believers!
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ReplyDelete