Matt has an amazing ability to compartmentalize. He doesn't seem to notice or care that this tweet, awesome though it is, completely conflicts with his beliefs about how monetary policy can work:
"Given that nobody in congress wants to do the sequester, why not just not do it? Don't let the stupid debt deal force our hand!"
Here Matt recognizes that future laws can just be repealed if, when the time comes, they are no longer in the best interest of Congress.
However, he absolutely refuses to acknowledge that this exact same idea holds equally well for the Fed and monetary policy.
Suppose it's February of 2014, and unemployment has fallen to 6.2% (through reductions in the numerator, not the denominator). Suppose core inflation is now running around 4.5%. Then consider the following Fed scenario.
"Given that none of us on the FOMC want to still keep the policy rate at zero, why not just not do it? Don't let the stupid previous forward guidance force our hand!"
Works just as well, if not better, because the Fed's process for "just not doing it" is much simpler than is Congress's process.
No policymaker who enjoys discretion can credibly commit to undertaking a future action that will likely not be in their best interest to undertake when the time comes!
Why do you think the Super-committee failed? Part of the reason was they didn't fully believe the doomsday cuts that accompanied failure would actually happen.
Monetary policy is no different. To the extent that policy effects depend on people believing the Fed will act against its own interest in the future, the policy just won't be very effective.
Now this new package of monetary policy actions may help. I'm in favor of trying more stuff like buying MBS. But if you think the Fed will not tighten when the economy recovers, there's an upcoming sequester I'd like to bet you about.
Showing posts with label promises promises. Show all posts
Showing posts with label promises promises. Show all posts
Friday, September 14, 2012
Monday, July 09, 2012
Monday, March 19, 2012
Prophets of the KPC?
I've been droning on (and on) about how the Fed has backed themselves into a weird position where if the economy keeps growing decently, they will have to backtrack on one of their two promises.
Promise #1 is 2% inflation. Promise #2 is a doozy: no short term interest rate hikes until the second half of 2014!
Increasingly, others are growing more skeptical of promise #2.
In CNBCs survey of "67 economists and equity and fixed income managers", it found that "nine out of 10 market participants don’t believe the Fed will wait that long. In fact, 54 percent believe the first Fed interest rate hike will come by 2013."
I wonder what The Bernank and crew are thinking? Are they banking on a recession to save their "credibility"? Do they think there is enough weasel room in the wording of promise #2 that they can claim compliance no matter when they raise rates? Do they regret getting pressured into making promise #2?
People, which is more likely to happen, the Fed keeping promise #2 or Congress allowing the planned sequestrations to go through without any changes?
Hat tip to LeBron.
Promise #1 is 2% inflation. Promise #2 is a doozy: no short term interest rate hikes until the second half of 2014!
Increasingly, others are growing more skeptical of promise #2.
In CNBCs survey of "67 economists and equity and fixed income managers", it found that "nine out of 10 market participants don’t believe the Fed will wait that long. In fact, 54 percent believe the first Fed interest rate hike will come by 2013."
I wonder what The Bernank and crew are thinking? Are they banking on a recession to save their "credibility"? Do they think there is enough weasel room in the wording of promise #2 that they can claim compliance no matter when they raise rates? Do they regret getting pressured into making promise #2?
People, which is more likely to happen, the Fed keeping promise #2 or Congress allowing the planned sequestrations to go through without any changes?
Hat tip to LeBron.
Thursday, March 08, 2012
Unicorns & Rainbows
Ezra Klein has identified why the government didn't "fix" the great recession; Politics:
The compromise was clean and obvious: Investments and tax cuts now, coupled with a much-larger deficit reduction package that would kick in once unemployment fell below, say, 7 percent.
What doomed this package wasn’t a theoretical divide. I spoke with many freshwater economists who thought a package like this would be sensible. Rather, it was politics wot (sic) done it.
This type of storyline refuses to recognize the simple brutal fact that current politicians cannot commit future politicians to a specific course of action. The proposed "package" was simply not credible because the back loaded pain is unenforceable.
Advocates of deficit reduction (I'm not saying that it's the right policy) could clearly see that the only policy that would actually happen for sure was a big increase in the deficit and were completely rational in opposing such a plan.
Absent a credible commitment mechanism, promises of future actions are basically worthless. This is an example of the "asynchronous exchange" issue Oliver Williamson has elucidated. Some call it the "St. Augustine problem" ("Lord grant me chastity, but not just yet")
The phenomenon doesn't rely on there being different politicians in place when the deficit reduction is supposed to kick in. The exact same politicians can simply decline to enforce their previous agreement.
Let's see what happens to the "automatic" sequestration.
If you really want deficit reduction (again, I'm not saying that it's the right policy), all you can do is try to get it done NOW.
The compromise was clean and obvious: Investments and tax cuts now, coupled with a much-larger deficit reduction package that would kick in once unemployment fell below, say, 7 percent.
What doomed this package wasn’t a theoretical divide. I spoke with many freshwater economists who thought a package like this would be sensible. Rather, it was politics wot (sic) done it.
This type of storyline refuses to recognize the simple brutal fact that current politicians cannot commit future politicians to a specific course of action. The proposed "package" was simply not credible because the back loaded pain is unenforceable.
Advocates of deficit reduction (I'm not saying that it's the right policy) could clearly see that the only policy that would actually happen for sure was a big increase in the deficit and were completely rational in opposing such a plan.
Absent a credible commitment mechanism, promises of future actions are basically worthless. This is an example of the "asynchronous exchange" issue Oliver Williamson has elucidated. Some call it the "St. Augustine problem" ("Lord grant me chastity, but not just yet")
The phenomenon doesn't rely on there being different politicians in place when the deficit reduction is supposed to kick in. The exact same politicians can simply decline to enforce their previous agreement.
Let's see what happens to the "automatic" sequestration.
If you really want deficit reduction (again, I'm not saying that it's the right policy), all you can do is try to get it done NOW.
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