This just in: Yellen and Fischer fight over the controls of a disconnected thermostat!

People!  Check out this quote,

“Michael Gapen, chief U.S. economist at Barclays Plc in New York, said Fischer’s comments “reflect an ongoing divergence of opinion” at the central bank. Fischer “doesn’t see much room for running the economy hot” while Yellen’s views “seem to provide a wide-open door to do that. You have a chair and a vice chair who see policy differently right now,” he said.”

After the events of the great recession, it’s just amazing to me that people think the economy is a steak, the Fed is a precision sous-vide machine, and all we have to decide is medium-rare or well-done.

For the millionth or so time, the models implying the Fed can do this, completely and utterly failed during the great recession. There is also evidence that a large part of the good outcomes credited to the Fed during the great moderation were actually due to exogenous forces (i.e. good luck).

Neither the Fed nor the President “runs” the economy. There is no stable, exploitable Phillips Curve / sous vide machine that lets us cook at a certain temperature.

This Fed worship is more religious than scientific. The past 10 years should be enough to convince anyone with an open mind that  the Fed’s power over the economy is quite limited and tenuous.

But I guess it’s comforting to think that the little old lady behind the curtain can fix things for us.

She can’t, Stan Fischer can’t, Bernanke couldn’t. Maybe the sous vide machine is unplugged?




Phone Call for Janet Yellen!

In the department of “what could possibly go wrong?” we have the following headline: “Zimbabwe is planning to print its own ‘U.S. dollars’”

Shockingly, given the great stewardship of President Mugabe, Zimbabwe is once again facing an economic crisis.  The article reports that “the government is asking for more than $1 billion to feed millions that are in dire need of food aid.”  Things have gotten so bad that the “government is selling wildlife from its national parks to game reserves to scrounge up some cash.” [I know where they could have found at least some of that money without selling wildlife. See here and here.]

Zimbabwe has a checkered history with monetary policy.  In 2008, inflation reached 89.7 sextillion percent a year!  In response, “the country has officially used nine currencies, including the U.S. dollar, the euro, the South African rand, the Indian rupee, the British pound and the Chinese yuan.”

So what’s the plan with printing US dollars?  Perhaps not surprisingly, details are not very forthcoming.  The Central Bank governor claims they will be “bond notes” although it’s unclear why anyone would voluntarily buy a bond backed by the Zim government.  It’s also not clear if they would be identical to US dollars.  If they were, I think Zimbabwe would have an additional problem on its hands!


Much ado about nothing

As all the world knows, the Fed announces tomorrow whether or not they go through with a  rate hike. Social and old media are choking with punditry denouncing the possibility.

I say, “meh”.

Sure, asset markets will probably swing tomorrow, but there’s nothing in the Fed’s plans that would have any real influence on the fundamentals of the real economy.

How so?

Firstly because rates will still be really low after the “hike”. I’m not sure how they will state it, but the current position is a range “from 0.0 to 0.25”. So suppose it’s announced a new range from .25 to .5. Katie bar the door!

Secondly and I cannot stress this enough, monetary policy really has little to do with economic prosperity. Sure draconian tightening or hyperinflation can mess up an economy, but we are nowhere near that point. There is precious little evidence for the US that monetary policy affects output or employment.

Of course that’s the last thing you would conclude from the raging progressive punditry of the past few weeks.

Now it is true that inflation has been below the Fed’s target for like 3 straight years and the Fed doesn’t forecast it to hit the target until 2017, but rest assured, our economy, left to its own devices, won’t even notice the looming hike.

Again, I do expect asset markets to gyrate, but I don’t hold to a Sumnerian linkage between short term swings in asset prices and permanent changes in economic fundamentals. I’m more of a Shillerian when it comes to asset markets.

It’s a clown show, bro

I am on record as an overall admirer of The Ben Benank’s work as Fed Chair. I believe that the Fed acted decisively at the height of the crisis and that QE, if nothing else, did stave off deflation.

But my oh my oh my, the Fed has really made a bollux out of forward guidance. This however, I do not blame on Bernanke. I feel like it was pushed on him by outside economists and other FOMC members (Evans and Yellen, you know I’m talking about you!). I just can’t believe Ben would think such cheap talk would seriously move the economy.

First they went with calendar based guidance. You know, the Fed promising to keep interest rates low until the rivers run dry. But the economy did not really respond. So the Fed, under intense pressure to “do more”, switched to outcome based guidance. You know, the Fed promising to keep interest rates low until unemployment fell below 6.5%.

Well, we now sit on the cusp of a 6.5% unemployment rate, but we’ve gotten there largely for the wrong reason, namely a persistent decline in labor force participation. Employment has still not hit pre-crisis levels and nobody is very happy with the state of the economy, least of all Evans and Yellen of the 6.5% pronouncement.

Now they have a big problem, which is rationalizing not raising rates when the 6.5% threshold is crossed. We are getting mired, Bill Clinton-like, in a maze of Talmudic interpretations of what words mean and what can be weaseled on without losing the Fed’s vaunted credibility.

I guess someone should have read Williamson on incomplete contracts? Or any right wing public choice nut on unintended consequences of government policies?

Maybe some folks on the FOMC should stop worrying about how to rehabilitate forward guidance and start thinking more humbly about what monetary policy can actually do.