tag:blogger.com,1999:blog-5154389358831836369.post5452315295168223679..comments2024-03-29T04:16:04.255-04:00Comments on The Slack Wire: Five Thoughts on Monetary PolicyJW Masonhttp://www.blogger.com/profile/10664452827447313845noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-5154389358831836369.post-71311731629869529852015-01-11T19:13:22.034-05:002015-01-11T19:13:22.034-05:00At the risk of typing to a dead thread I'd lik...At the risk of typing to a dead thread I'd like to address #2 and #4. Would it be fair to characterize monetary policy as a tool that can boost aggregate output but at the expense of exacerbating financial imbalances? I'm thinking of Steve Randy Waldman's <a href="http://www.interfluidity.com/v2/3451.html" rel="nofollow">post</a> mocking the Great Moderation, not the typical "too low, too long" framing that you've criticized in past blog posts.<br /><br />Key points as I understand it:<br />1. Business investment may not be very sensitive to interest rates, but real estate investment is<br />2. Interest rate sensitivity is pro-cyclical. People won't borrow unless they A) can expect to make sales or capital gains B) meet lenders underwriting standards (which deteriorate as memory of the past crisis fades, a la Minsky).<br />3. Borrowing does boost GDP through investment and wealth effects, but mostly is used to bid up the price of existing assets (which means that debt tends to increase faster than income)<br />4. The burden of debt servicing can be a drag on the economy and/or a contributor to financial fragility. This could be framed in terms of sectoral balances (retained earnings by financial corporations would correspond to a portion of household or business dissaving) or income distribution (even if retained earnings by financial corporations are small, dividends and deposit interest accrue mostly to the wealthy).<br />5. Randy Wray talks about the perverse impact of higher interest rates through interest income from govt. bonds, but it is based on the silly assumption that most govt. debt is held by widows and orphans with a high propensity to consume out of interest income as opposed to central banks and pension funds.QEnoreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-85259535182029724092014-12-30T13:19:43.682-05:002014-12-30T13:19:43.682-05:00I also think the distinction you make between usin...I also think the distinction you make between using credit to consume out of wealth vs to out of future income, is important and gets lost in the normal consumption-loan framework. JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-9328785675648001032014-12-30T13:16:07.952-05:002014-12-30T13:16:07.952-05:00You may be right about this -- tho some significan...You may be right about this -- tho some significant fraction of home equity loans financed home improvements, no? But I think it's a mistake to take bubble-era home equity lending as representative of household credit in general. I had a long debate about this with Steve Randy Waldman on twitter -- he had the same criticism of the post as you do. <br />JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-62649435535320314342014-12-30T12:22:10.429-05:002014-12-30T12:22:10.429-05:00"In reality, consumption loans -- while they ..."In reality, consumption loans -- while they do exist -- are a very small fraction of total debt. The vast majority of private loans are taken to finance assets, which are expected to be income-positive."<br /><br />I'm not so sure about this. Home equity loans pre-crisis looked like a situation where a significant chunk of the credit markets was being used to finance current consumption. Of course the collateral was not your future income but the value of your house. Marcusnoreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-34556516307018060952014-12-07T15:57:22.188-05:002014-12-07T15:57:22.188-05:00On point 3, everything you say seems right to me.
...On point 3, everything you say seems right to me.<br /><br />Also right on point 4 -- Steve Randy Waldman on twitter also pointed out that it is a bad metaphor.<br /><br />The one point I would push back on is a secular shortfall in consumption demand. First of all, it is logically possible for an economy to maintain an arbitrarily high investment share indefinitely. China today is a good example of an economy where the main source of demand validating past investment, is new investment. Second, I'm not convinced that there is any evidence of a decline in consumption demand in the US or most other rich countries. It is true that, all else equal, upward redistribution will tend to reduce desired consumption. But that can be, and evidently has been, offset by increased luxury demand by the rich and by increased third-party consumption in the form of public health benefits, etc. It seems to me that to the extent there is a chronic shortfall of demand, a better candidate is reduced investment due to stronger liquidity preference among capitalists.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-28779970726342358832014-12-05T16:37:57.133-05:002014-12-05T16:37:57.133-05:00Will try to post some stuff in the next couple day...Will try to post some stuff in the next couple days.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-10284132742501016782014-12-05T16:37:41.272-05:002014-12-05T16:37:41.272-05:00Brian-
Thanks, fixed that sentence.
On the centr...Brian-<br /><br />Thanks, fixed that sentence.<br /><br />On the central planning point, I don't think we disagree. Another way of saying the same thing would be that the Fed is reluctant to announce prices because that makes monetary policy more obviously a political choice. That's the point of the quote from Governor Morris.<br /><br />You are right there is a (tiny) range for the Fed Funds target. But I think there is a reason that that trivial technical point gets such prominent emphasis in the official definition.<br /><br />You are right also that the official target was not announced prior to the late 1980s. Krippner's book (which is excellent, by the way) gives a lot of evidence from Fed policymakers at the time that the main reason for this was to avoid the perception that the Fed was "setting prices" in an important market. Concerns about the ability to hit the target are an argument FOR announcing it, not against, since it is easier to hit a public target.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-5015119606166404872014-12-05T16:30:39.127-05:002014-12-05T16:30:39.127-05:00I understood that the Fed has moved a corridor sys...I understood that the Fed has moved a corridor system as well with interest on excess reserves (IOER).<br /><br />I'm not sure what your point is about central planning and widow and orphans.<br /><br />I would look to Kalecki. If supposedly the market sets long term interest rates, then it's Tom Friedman's "golden straightjacket" enforcing market discipline on governments that spend too much. <br /><br />But if the Fed can set it where it wants, then the government can spend what it wants up to a point. There is no market discipline.<br />Peterhttps://www.blogger.com/profile/08272747870634233567noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-35485555576091478482014-12-04T08:41:58.271-05:002014-12-04T08:41:58.271-05:00Josh - can you reference research you find interes...Josh - can you reference research you find interesting on the liquidity point, liquidity point, liquidity point?<br /><br />What does it mean, exactly, to abstract from liquidity, or assume its non-scarcity?<br /><br />I'm sure you have in mind Perry Mehrling/the money view for this post. Are there more concerted efforts to describe what liquidity is and what it does with from this perspective?<br /><br />And what about our most recent nobel prize winner's work? This from the abstract of a 1998 paper of his ("Private and Public Supply of Liquidity" Bengt Holmström and Jean Tirole):<br /><br /> When there is only aggregate uncertainty, the private sector cannot satisfy its own liquidity needs. The government can improve welfare by issuing bonds that commit future consumer income. Government bonds command a liquidity premium over private claims. The government should manage debt so that liquidity is loosened (the value of bonds is high) when the aggregate liquidity shock is high and is tightened when the liquidity shock is low. The paper thus suggests a rationale both for government‐supplied liquidity and for its active management. <br /><br />Thanks,<br />AlexAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-53017941576520279482014-12-03T21:09:21.720-05:002014-12-03T21:09:21.720-05:00This is being discussed on reddit in case any of y...This is being discussed on reddit in case any of you are interested:<br /><br />http://www.reddit.com/r/Economics/comments/2o67fw/five_thoughts_on_monetary_policy/Benoit Essiambrehttps://www.blogger.com/profile/09777196965771952105noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-56961431919572066462014-12-01T20:32:17.578-05:002014-12-01T20:32:17.578-05:00A few small points.
It looks like you chopped off...A few small points.<br /><br />It looks like you chopped off the end of a sentance in point 4. ".. Same flexibility that allows an entrepreneur Monetary reform"<br /><br />The Fed has shied away from the implication about their setting bond yields for some time. I agree that it is politics, but I would not think it is squeamishness about central planning. The Fed does not protests from widows and orphans every time bond holders suffer capital losses. Additionally, they targeted bond yields in the 1950s, and the objective was financial repression. Targeting yields looks like they are subordinate to fiscal policy.<br /><br />Finally, the _effective_ fed funds rate is a market rate. There used to be a single target for that rate, but now I believe the express it as an upper and lower bound. The effective rate used to have a reasonable spread versus the target, at least until he mid-2000s.<br /><br />Until some point in the early 1990s, the FOMC did not announce their target, and market participants had to guess what it was. (That was before my time in finance.) There was concern about making the target rate public, as it was unclear that Fed could hit it with open market operations.<br /><br />Other central banks used a corridor system with interest rates on deposits or loans from the central bank. These banks had less worries about guiding interbank rates.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-25015714092517348012014-12-01T18:36:56.883-05:002014-12-01T18:36:56.883-05:00Two toughts:
On point 3, it seems to me that the o...Two toughts:<br />On point 3, it seems to me that the orthodox view is not only that all loans are consumption loans (and so the interest rate is the tradeoff between consumption today and consumption tomorrow), but also that all capital investiments (including lending) are a tradeoff between consumption today or consumption tomorrow.<br />If one assumes this, then there is a finite optimal level of capital intensity and of leverage to which the market does/should converge.<br />However, if one doesn't assume that interest and profits represent a tradeoff between consumption at differnt times, but takes the different approach that profits and interest are just what investors are able to accumulate, there is neither a finite optimal level of leverage nor of capital intensity. (I'm thinking about this stuff because of Piketty and Marx's "tendential fall in the rate of profit", that in reality just means that there isn't a finite level of capital intensity to which the market tends, but capital just is continuously accumulated).<br /><br />On point 4, I think that there is a problem when we apply the idea of lending as a bridge over dips of income to the economy as a whole, because when one person can certainly consume more than s/he produces, the whole economy cannot, as it isn't possible to consume something that hasn't been produced yet.<br />Thus, while a fall in income for John can cause an increase in John's debt level, a generalized fall in income for the whole economy (for example, because of peak oil) cannot logically cause an increase in the overall leveragedness of the whole economy (at least not in the same straightforward way).<br />For example, suppose that Germans sell cars to the Italians for 100, while Italians sell olive oil to Germans for 50, and this imbalance causes a debt of 50 to the Italians. But all cars and oil were already produced, so there isn't any global overconsumption, and the only way to balance trade is either for car's price to fall to 50 or to olive oil price to rise to 100, because the Italians can't produce cars (or they would already be doing it) and the Germans have no reason to produce oil, that has a lower added value, neither to consume themselves all the cars (or they would already be doing it instead of lending to the Italians).<br /><br />I personally believe that there is a sort of "permanent saving glut" in capitalist economies due to the fact that some actors tend to accumulate wealth and not to consume, so an increase in leveragedness is needed to match aggregate demand to aggregate supply.<br />When this increase in leverage for some reason stops, we have financial crises and underconsumption crises.MisterMRhttps://www.blogger.com/profile/03806545811376548828noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-25150331923313103202014-12-01T00:43:04.881-05:002014-12-01T00:43:04.881-05:00I think monetary policymakers are interested. It&#...I think monetary policymakers are interested. It's only academic economists writing about monetary policy who aren't. Altho that's still odd, I agree. JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5154389358831836369.post-24133804985872015022014-11-30T21:07:01.901-05:002014-11-30T21:07:01.901-05:00It does seem odd that monetary policy would be so ...It does seem odd that monetary policy would be so little interested in mechanisms of financial asset price formation.Bruce Wilderhttps://www.blogger.com/profile/09631065564839959376noreply@blogger.com