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My podcast on macro and monetary policy
It is with Russ Roberts and it covers the roots of our current crisis, why things are far more troublesome than most people expected (and that is the really tough question; real estate bubbles have burst before), why monetary policy matters at all, the tricky balancing act played by the Fed, why a gold standard isn't the answer, and many other macroeconomic topics. My core attitude, in case you don't already know it, is that monetary policy is both an art and a science and there are no secret ways of getting it right, understood by only a few. The podcast is here.
Addendum: Arnold Kling summarizes.
Posted by Tyler Cowen on March 17, 2008 at 10:14 AM in Economics | Permalink
Comments
Would love your thoughts on these two papers...
When Bubble's Burst by the IMF
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
Is Price Stability Enough by William White of the BIS
http://www.bis.org/publ/work205.pdf
Posted by: joe at Mar 17, 2008 11:23:38 AM
I don't suppose any of those old "credit snob" folks have done a mea culpa on debt just yet?
Posted by: odograph at Mar 17, 2008 11:31:21 AM
As an I-told-you-so, on Mar 26, 2007, I replied to this comment:
"The fact that people do not anticipate their inability to pay is a problem to be addressed only by the borrower and the lender. And nobody else."
With this:
That's not really the theory of banking regulations is it? The theory is that the good actors could be protected from the bad, yes? Are savings and loan failures between the borrower and the lender? And nobody else?
I was roundly told here, as recently aas March 2007, that the sub-prime thing was nothing like the Savings & Loan crisis, of course.
Posted by: odograph at Mar 17, 2008 11:39:27 AM
A good piece on the speculation economy. What we need is an Austrian central banker!
I am also in the I told you so crowd, although I made my comment in August. It's turning into more than a $35billion writedown, eh?
Looking forward to the podcast -- not so often that you get an art/food/culture expert talking monetary policy (but I don't know your full CV Tyler :)
Posted by: David Zetland at Mar 17, 2008 12:44:49 PM
I really think its only because we have trained ourselves on inflation that people are so irrational as not not like lower-wage plus lower-prices. I don't think its so ingrained that it would take long to untrain ourselves. And I think that is a weak criticism of natural deflation, meanwhile the fed's intervention is actually seriously bad policy, which actually detrimental effects.
Posted by: liberty at Mar 17, 2008 12:52:33 PM
Well, odograph, I scanned the old thread and was unable to find the source of your comment that "I was roundly told here, as recently aas March 2007, that the sub-prime thing was nothing like the Savings & Loan crisis, of course."
At that time, the subprime delinquency rate was about 13% - according to the Mortgage Banks Assocaition iit now a bit less than 19%. So 87% of subprime buyers were not behind at that point, and now it's down to 81%. Has the 6% drop suddenly invalidated credit snobbery? I do not think so.
Posted by: Rich Berger at Mar 17, 2008 1:02:57 PM
I love this quote from Russ Roberts (2007/10/09) -
Ron Paul thinks we’re in a recession at a time when unemployment is under 5 percent and blames it on monetary policy. This resonates with people who are scared and confused. I’m neither, so I’m not sure what he’s talking about.
Oooops.... Not trying to be too harsh on you guys, but I'm not sure whether your record is good enough to debate just this recessin :)
Anyway, I'm going to listen to the podcast :)
Posted by: andy at Mar 17, 2008 1:04:08 PM
Well Rich, maybe I'm carrying my baggage from multiple old threads ... but what are you really giving me here? Does repetition of subprime default rates somehow negate the "Fed Scramble" served up in the last few weeks?
People who lean toward free markets, and perhaps would have taken their own medicine on this, have to accept that American capitalism in toto could not.
We are seeing a half-hearted free market system, too often "free markets until I need MY bailout."
Posted by: odograph at Mar 17, 2008 1:27:07 PM
a regular listener of Roberts' casts, and this was a good one.
Posted by: Mercutio at Mar 17, 2008 1:28:47 PM
I think I waste too many neurons remembering web conversations. I'd be better off remembering the first-names of people I meet around the office! Anyway, March 26, 2007:
odograph,The government will not pay the losses of subprime loans unless Fannie/Freddie go under, which is possible, but unlikely. While they might buy some for their own portfolio (not sure), it is a fraction of the fixed, prime mortgages they buy. The predominant owners of subprime are hedge funds, investment banks, and mortgage companies that didn't sell it off. There is virtually no risk (if any) to tax payers, unless you think the banking system is going to collapse.
The S&L crisis is a poor analogy. The S&L's were taking so much risk because a 1982 Federal Law (can't remember the name) was passed that allowed and encouraged them to. The law was passed because S&L liabilities are short-term and their assets were 30 year mortgages. Many knowledgeable people consider the S&L crisis to be government induced, in fact that is what I was taught in school. Your premise is misguided. I don't disagree that regulation is needed, but with the disintermediation of the last couple of decades, the risks are spread out.
Posted by: odograph at Mar 17, 2008 1:36:29 PM
Pardon me, that was the 29th. link
Posted by: odograph at Mar 17, 2008 1:38:31 PM
Tyler,
One question that I have never heard adequately answered from any economist is: who gets the money when the fed increases the money supply?
Obviously if it was seignorage the government would get the money. If it was literally throwing money out of a helicopter, whoever picks it up would benefit. If it was a pure revaluation, money would be given out in exact proportion to its current distribution, and the process would be completely neutral.
My best guess is that the Fed is subsidizing maturity mismatching. The losers are people holding cash and long term lenders. The winners are borrowers and short term lenders. The rational thing to do in this situation is to either borrow or put your money in assets. This distorts the economy and causes bubbles.
I was also under the impression that growth in M3 is the real number to watch - not price inflation or M2 ( actually, the right number is M3 minus time deposits). M3 has grown at 10% a year. This is far higher than most people realize, and it indicates terrible management of the money supply.
Posted by: Patrick Fitzsimmons at Mar 17, 2008 2:06:41 PM
And similarly, your argument on gold volatility are very weak - yes its volatile now, because of the fiat money, the hedging against fiat money, etc. "Why take the risk?" Well in order to prevent the kind of thing we are dealing with right now, the subject of the podcast! The one argument that made sense is that if it is only one country, it won't be effective. That is something to consider.
Posted by: liberty at Mar 17, 2008 2:14:40 PM
Also, precious metals have real value (use-value) because they have very special properties and they are extremely rare. Its not any kind of mystery why people trust gold. Supply and demand. Its a good hedge- people are not likely to change their mind on it any time soon.
Posted by: liberty at Mar 17, 2008 2:18:50 PM
"All around the world, central banks are doing a good job."
Which planet are you broadcasting from? I'd like to move there. I'm pretty sure it's not Earth.
We need a government monetary policy in the same sense that we need a government food policy, a government housing policy, a government energy policy, and a government health care policy. We're reaping the results of the Fed's "artful and scientific" monetary policy: a shambles.
I never understood the "credit snob" charge. But we're now seeing the consequences of making bad loans, encouraged by the Fed's continuing money-credit expansion and pressure to reduce underwriting standards.
Roubini's position looks better all the time.
Posted by: Charles N. Steele at Mar 17, 2008 2:29:21 PM
More questions to ask :) You have read some austrian literature, didn't you? I would like to know your opinions, why they are wrong? You seem to put some arguments that are readily debunked by the austrians, however you don't explain, why they are wrong and you are right...
Wage cuts being 'psychologically unpleasant'..
The rate of deflation in stable-money-supply economy would be roughly the same as the raise in productivity. Because the wage of the employees is ultimately correlated with productivity, you would expect that their wages would remain constant and there would have to be no wage-cutting needed in the first place.
I think Hazlitt made the point, that if SOME prices are too high, some OTHERS are too low. Why do you expect inflation to solve one problem and not cause others?
accounting problems and distorting business decisions
Mises came with the idea of 'non-neutrality of money'. Money printing means that somebody gets the money first. This is very likely to distort business decisions - the rate of inflation in 'housing industry' was totally different from the rate of inflation in other industries. How are the businessmen expected to know the 'industry-specific' rate of inflation?
- long vs. short-term rate vs. real vs. nominal
If you expected that Fed is going to keep low interest rates for 10 years AND at the same time there were high 10-year interest rates, what would you do? I would borrow short-term and lend long-term.
Which brings me to the point: interest rates are set by supply and demand. Supply is influenced by inflation expectations. However: one part of supply is Fed that is not influenced by inflation expectations. Why would you expect the interest rate to be influenced by inflation expectations when Fed provides the whole supply? (they don't do it...yet...)
I tend to believe that the mortgage banks might have got this wrong: they believed that long-term interest rates are going to be higher then inflation, that's why they tried to send the risk to the mortgage holder with ARM's. It seems to me they might have been wrong.... but it would be very inflationary.
- small amounts of inflation vs profit?
It depends. If you have 10% margin over your operating expenses and you have unexpected inflation 5%, your profit is going to be shrunk 50%.
-business cycle variability and smoothing out
There used to be many more business cycles. However, none of them was as huge as 70's and 30's. Which begs the question, if the central banking is just postponing the business cycle and make it bigger?
Which reminds me of the classical accounting problem. Bear Sterns made profit last year. However, they are totally bankrupt now. Did they really make the profit last year or should we subtract the profit from today's loss? The latter seems to be what common sense tells. Isn't it the same with GDP? Shouldn't we subtract from current GDP at least some future losses?
Private money vs. private money derivatives vs. guarantee.
The IOU is money derivative, it is a claim on money. The real money is the Fed note or, the gold. Asking 'who guarantees gold' seems to me irrelevant, regarding the money derivateves we face the same problem today.
Value of money vs. credibility game.
Commodity money has value, because I believe somebody believes that somebode else would like to exchange it because he wants to use the commodity.
Fiat money has value, because I believe that somebode else believes that somebody else believes that somobody else believes....
I see a clear difference. You don't?
Price of gold unstable
If we assume stable fiat currencies sure....don't look at the charts of inflation...
Why gold?
It has actual use - people like jewelery, today it has some uses in electronics. Same question as 'why chocolate'...well, people LIKE to eat chocolate. The same way they LIKE to use gold jewelery.
Shock deflations
If prices are overvalued, 'shock deflation' would move them to the equilibrium, which, I would assume, is a 'good thing'. You seem to be against 'shock deflation', which means that either
- you think that the market is in balance now (while the market doesn't think so). Great speculation opportunity, isn't it?
- you think that it is better for prices to be out-of-equilibrium then to be near-equilibrium.
Well?
And, btw, one more reason to use gold: no central planning. Are you suggesting that central planning of interest rate works better then free market?
Posted by: andy at Mar 17, 2008 2:37:30 PM
David,
What we need is an Austrian central banker!
Wasn't Greenspan an Austrian, originally?
Wouldn't an Austrian central banker be a contradiction
in terms?
Posted by: jomama at Mar 17, 2008 2:50:48 PM
"Wouldn't an Austrian central banker be a contradiction
in terms?"
No more so than a libertarian dictator :)
Posted by: liberty at Mar 17, 2008 3:00:33 PM
jomama: ask Jim Rogers :) "What would you do if you were a central banker?" - "I would abolish the Fed and resign"....
Posted by: andy at Mar 17, 2008 3:01:03 PM
Didn't you say a few weeks ago that there was no real estate bubble? Anyone who believes that is in no position to understand the current macro environment.
Posted by: Bill Stepp at Mar 17, 2008 3:53:30 PM
It's worth noting that a few of you in this comments section, such as Bill Stepp, are confusing Alex's proclamations with mine...
Posted by: Tyler Cowen at Mar 17, 2008 3:55:07 PM
Do you also think that other forms of central planning are an "art and science?" Ron Paul is proving more prophetic every day. Few of the "experts" saw this coming, though he did. Perhaps he deserves some small amount of credit for this.
Posted by: dodsworth at Mar 17, 2008 4:00:27 PM
IIRC, "credit snob" was more Alex's thing, though Tyler had fun with it now and again.
(I see the "predatory borrowing" kerfuffle in the googles but probably don't need to go there.)
Posted by: odograph at Mar 17, 2008 4:18:31 PM
darn, i messed up both those links, in various ways. The first should have been this (from Tyler) and the second was indeed Alex. Sorry.
Posted by: odograph at Mar 17, 2008 4:23:52 PM
Liberty,
In a world with population growth and a fixed money supply, everyone's wages would actually decrease each year. Instead of a yearly raise, you would get a yearly pay cut. Of course, as long as productivity increased, prices would decrease more than your pay, so you could buy more. But I can't help but think that this would be psychology tough for workers.
Posted by: Patrick Fitzsimmons at Mar 17, 2008 8:30:34 PM
