Narayana Kocherlakota; see here.
Hmm...his biography says that he was born in Baltimore. I seem to recall him mentioning that he was born in Winnipeg. Is he Canadian, or isn't he? Someone enlighten me!
In any case, he is an excellent choice. NK is a consummate academic: clear-thinking, articulate, and persuasive. Does he have what it takes to be a successful/influential Fed president? Yes, I believe so. Apart from his academic credentials, he has a very easy manner; not many people are likely to find him a boor. He has the gift of skewering lame-brained ideas to the wall, and then making you feel good that you've learned something useful (at least, this has been my experience).
Congratulations to NK...and good luck!
Wednesday, 30 September 2009
Tuesday, 22 September 2009
Kocherlakota on the State of Macro
A very nice piece by NK here. Unfortunately, you won't see something like this published in the NYT. But naturally, we can rely on DeLong to make a comment; see here: Narayana Leaves Me Puzzled. I love this classicly stupid DeLong quote:
This is exactly how I would expect a first-year undergraduate to interpret a model that they've seen for the first time. And DeLong claims that he has a PhD in economics! Let me help the poor lad along.
Modern macro models now incorporate "news shocks." A news shock is the random arrival of information that leads people to (rationally) revise their forecasts of future events. These forecasts may be made, for example, over future productivity, future riskiness of investments, future policies, etc. These news shocks do not seem like an implausible impulse mechanism; unexpected news arrives every day.
Investment demand today depends on forecasted productivity of investment. These forecasts will change with news; leading to variations in investment that an econometrician might identify as "aggregate demand shocks." As the investment matures and comes online, its actual productivity may be higher or lower than originally forecast; its realization constitutes another "shock."
There is no need to appeal to DeLong's childish "great forgetting" interpretation of a negative technology shock. A negative technology shock occurs when the expected return on investment is lower than expected. The return on an important class of investments may turn out to be terrible (think of all the fibre optic cable planted across the world's oceans in anticipation of a demand that never materialized). And as Fisher Black has stressed, these types of errors are typically correlated across agents. In short, recessions may be explained, in part, by collective mistakes on investments made in the past.
In any case, what DeLong fails to offer us what he might propose instead as the ultimate source of the business cycle? I am guessing that he might say something like "animal spirits." So why did the recession occur? Because people thought that it would. Why did that boom occur? Because people believed that it would.
There may be an element of truth to the animal spirit hypothesis; but then, there do appear to be competing interpretations as well. If DeLong would spend less time writing his blog and more time reading the literature, he might one day be less puzzled with Narayana's observations.
The models thus tell us that downturns are either the result of a great forgetting of technological and organizational knowledge, a great vacation as workers develop a sudden extra taste for leisure, or a great rusting as the speed with which oxygen in the air corrodes speeds up and so reduces the value of large things made out of metal.
This is exactly how I would expect a first-year undergraduate to interpret a model that they've seen for the first time. And DeLong claims that he has a PhD in economics! Let me help the poor lad along.
Modern macro models now incorporate "news shocks." A news shock is the random arrival of information that leads people to (rationally) revise their forecasts of future events. These forecasts may be made, for example, over future productivity, future riskiness of investments, future policies, etc. These news shocks do not seem like an implausible impulse mechanism; unexpected news arrives every day.
Investment demand today depends on forecasted productivity of investment. These forecasts will change with news; leading to variations in investment that an econometrician might identify as "aggregate demand shocks." As the investment matures and comes online, its actual productivity may be higher or lower than originally forecast; its realization constitutes another "shock."
There is no need to appeal to DeLong's childish "great forgetting" interpretation of a negative technology shock. A negative technology shock occurs when the expected return on investment is lower than expected. The return on an important class of investments may turn out to be terrible (think of all the fibre optic cable planted across the world's oceans in anticipation of a demand that never materialized). And as Fisher Black has stressed, these types of errors are typically correlated across agents. In short, recessions may be explained, in part, by collective mistakes on investments made in the past.
In any case, what DeLong fails to offer us what he might propose instead as the ultimate source of the business cycle? I am guessing that he might say something like "animal spirits." So why did the recession occur? Because people thought that it would. Why did that boom occur? Because people believed that it would.
There may be an element of truth to the animal spirit hypothesis; but then, there do appear to be competing interpretations as well. If DeLong would spend less time writing his blog and more time reading the literature, he might one day be less puzzled with Narayana's observations.
Levine to Krugman: A Love Letter
David Levine (Washington University in St. Louis) writes an open letter to Paul Krugman here.
Saturday, 12 September 2009
Thar she blows! The Bitter Paul Krugman
The latest by Paul Krugman here: How Did Economists Get It So Wrong?
So what, pray tell, have we learned from the blowhard this time?
First thing: Krugman is not an economist. Evidence: Throughout his long rant, he is careful in referring to economists as "they." So whatever went wrong, please don't blame Krugman. On the other hand, not being an economist does not appear to place limits on his profound knowledge of how the profession should reorganize its thinking. Please show us the way, o wise one.
But first, what went wrong exactly? His claim is that the profession fell in love with its mathematically elegant models; and adopted a belief that unfettered markets achieve the best of all possible worlds (Dr. Pangloss). Evidently, this latter belief, supported by unsubstantiated modeling, translated into policy advice with predictable consequences.
Funny though: My reading of economic history suggests that economic crisis preceded mathematical modeling. Moreover, the phenomenon seems to transcend institutional regime (economic crises are endemic to "planned" societies as well). And as for how the philosophy of free market capitalism has manifested itself in reality--well, this is utterly laughable.
In any case, his claim that "Freshwater economists are, essentially, neoclassical purists" is so far off the mark as to make one question his academic credentials. The neoclassical framework is certainly viewed as a benchmark; but almost all serious work that I am aware of regularly departs from its basic tenets (in particular, by explicitly modeling the problems that arise when commitment is limited and information is private). There is, in fact, much work being done in taking institutions seriously, in modeling environments where trade is subject to search frictions, and in identifying potentially beneficial policy interventions. Krugman would not be aware of this, of course, as he spends all his time writing op-ed pieces for the NYT instead of actually engaging in difficult research questions.
It is true, however, that most of the profession adopts the view that individuals are "rational;" at least, in the sense that we model people trying to the best they can (according to a well-defined objective) subject to the constraints imposed upon them by the economic or institutional environment. I believe that this assumption is employed for three reasons: [1] the idea that people try to do the best they can subject to limitations does not sound crazy; [2] the hypothesis admits all sorts of "crazy" equilibrium behavior anyway; and [3] it is hard to know what the hypothesis should be replaced with. In particular, while there is only one way to be "rational," there are an infinitely many different ways to be "irrational."
To give you just two quick examples, Krugman offers his Capitol Hill Babysitting Cooperative anecdote as some sort of puzzle for "neoclassical" economists. I doubt, however, whether he has read this. Or, if you believe his rant the mathematically inclined are oblivious to possibility of economic catastrophe; read this.
As an alternative, Krugman proposes the methodology of behavioral finance. Basically, the approach there is to simply assume that people behave according to some (theoretically imposed or empirically estimated) rule of thumb. In less polite language, assume that people are "stupid." Personally, I believe there may be much to be learned by this approach; and I welcome the fact that a part of the profession devotes some time exploring its implications. But one gets the sense that Krugman prefers this approach because by adopting it, we admit that the general population is stupid and is therefore in need of guidance. This guidance, quite naturally, is to come from self-appointed philosopher kings, like Krugman (consulting $).
On one point, Krugman is correct: There was a growing complacency among many in the profession (and elsewhere). He is incorrect, however, in suggesting that this complacency was the product of economists falling in love with their mathematical models. The majority of the profession continues to whittle away at difficult problems in relative obscurity. The complacency, in my view, stemmed from people like Krugman -- people who poo-poo those of the profession engaged in exploring difficult problems in a rigorous manner.
Krugman prefers his simple equations--an IS curve, and LM curve, and all his "fudge factors" to explain the world. Not much else is needed when you know that the world is stupid; and that you alone hold the answers.
Unfortunately, people are evidently too stupid even to recognize Krugman's genius (confirming his hypothesis in his own mind, no doubt). Is this the source of his thinly-disguised bitterness?
So what, pray tell, have we learned from the blowhard this time?
First thing: Krugman is not an economist. Evidence: Throughout his long rant, he is careful in referring to economists as "they." So whatever went wrong, please don't blame Krugman. On the other hand, not being an economist does not appear to place limits on his profound knowledge of how the profession should reorganize its thinking. Please show us the way, o wise one.
But first, what went wrong exactly? His claim is that the profession fell in love with its mathematically elegant models; and adopted a belief that unfettered markets achieve the best of all possible worlds (Dr. Pangloss). Evidently, this latter belief, supported by unsubstantiated modeling, translated into policy advice with predictable consequences.
Funny though: My reading of economic history suggests that economic crisis preceded mathematical modeling. Moreover, the phenomenon seems to transcend institutional regime (economic crises are endemic to "planned" societies as well). And as for how the philosophy of free market capitalism has manifested itself in reality--well, this is utterly laughable.
In any case, his claim that "Freshwater economists are, essentially, neoclassical purists" is so far off the mark as to make one question his academic credentials. The neoclassical framework is certainly viewed as a benchmark; but almost all serious work that I am aware of regularly departs from its basic tenets (in particular, by explicitly modeling the problems that arise when commitment is limited and information is private). There is, in fact, much work being done in taking institutions seriously, in modeling environments where trade is subject to search frictions, and in identifying potentially beneficial policy interventions. Krugman would not be aware of this, of course, as he spends all his time writing op-ed pieces for the NYT instead of actually engaging in difficult research questions.
It is true, however, that most of the profession adopts the view that individuals are "rational;" at least, in the sense that we model people trying to the best they can (according to a well-defined objective) subject to the constraints imposed upon them by the economic or institutional environment. I believe that this assumption is employed for three reasons: [1] the idea that people try to do the best they can subject to limitations does not sound crazy; [2] the hypothesis admits all sorts of "crazy" equilibrium behavior anyway; and [3] it is hard to know what the hypothesis should be replaced with. In particular, while there is only one way to be "rational," there are an infinitely many different ways to be "irrational."
To give you just two quick examples, Krugman offers his Capitol Hill Babysitting Cooperative anecdote as some sort of puzzle for "neoclassical" economists. I doubt, however, whether he has read this. Or, if you believe his rant the mathematically inclined are oblivious to possibility of economic catastrophe; read this.
As an alternative, Krugman proposes the methodology of behavioral finance. Basically, the approach there is to simply assume that people behave according to some (theoretically imposed or empirically estimated) rule of thumb. In less polite language, assume that people are "stupid." Personally, I believe there may be much to be learned by this approach; and I welcome the fact that a part of the profession devotes some time exploring its implications. But one gets the sense that Krugman prefers this approach because by adopting it, we admit that the general population is stupid and is therefore in need of guidance. This guidance, quite naturally, is to come from self-appointed philosopher kings, like Krugman (consulting $).
On one point, Krugman is correct: There was a growing complacency among many in the profession (and elsewhere). He is incorrect, however, in suggesting that this complacency was the product of economists falling in love with their mathematical models. The majority of the profession continues to whittle away at difficult problems in relative obscurity. The complacency, in my view, stemmed from people like Krugman -- people who poo-poo those of the profession engaged in exploring difficult problems in a rigorous manner.
Krugman prefers his simple equations--an IS curve, and LM curve, and all his "fudge factors" to explain the world. Not much else is needed when you know that the world is stupid; and that you alone hold the answers.
Unfortunately, people are evidently too stupid even to recognize Krugman's genius (confirming his hypothesis in his own mind, no doubt). Is this the source of his thinly-disguised bitterness?
Sunday, 30 August 2009
Fiscal Multiplier Mockery
Just came across this IMF Staff Position Note by Olivier Blanchard (and coauthors) entitled Fiscal Policy for the Crisis.
The best part of this paper is contained in Appendix II: Fiscal Multipliers-A Review of the Literature, and Appendix III: Five Case Studies of Fiscal Policy During Financial Crisis.
The conclusion I arrive at in reading these appendices is that during a financial crisis: [1] fixing the financial sector is of primary importance; and [2] fiscal policies may be marginally beneficial at best, and seriously detrimental at worst.
In the body of the paper, the authors draw several lessons from history.
[1] Successful resolution of the financial crisis is a precondition for achieving sustained growth.
Here, they give the example of Japan during the 1990s. Evidently, "fiscal actions following the bursting asset bubble failed to achieve sustained recovery because financial problems were allowed to fester."
In short, fiscal stimulus failed in Japan. But we don't really want to believe that fiscal stimulus doesn't work. It didn't work here because things were not set up to allow it to work. I wonder how one might modify an IS-LM model to formalize this notion?
But there are more examples. "Delaying interventions, as was also done in the US during the Hoover administration and during the S&L crisis, typically leads to a worsening of macroeconomic conditions, resulting in higher fiscal costs later on."
So I guess that if we wait too long, the fiscal multiplier now is severely negative. Not sure what to make of this (like, where does this show up in the IS-LM model?). And in any case, they have their history wrong: Hoover did in fact react quickly to the crisis (although many of his measures were frequently blocked by the Democrats-Roosevelt, in particular-and then later adopted wholesale by the Democrats). And even though "interventions" were evidently delayed during the S&L crisis, I seem to recall a fairly protacted spell of growth in the 1980s. Unimportant details, I suppose.
Ah yes, but there was the "prompt and sizeable support to the financial sector by the Korean authorities that limited the duration of the macroeconomic consequences thus limiting the need for other fiscal action."
Huh? The Korean government fixed the financial sector, thereby eliminating the need for future fiscal stimulus? So fiscal stimulus is not needed, if the financial sector is repaired. This is supposed to be taken as evidence that fiscal stimulus is needed?
[2] The solution to the financial crisis always precedes the solution to the macroeconomic crisis.
Sure.
[3] A fiscal stimulus is highly useful (almost necessary) when the financial crisis spills over to the corporate and household sectors.
Not sure where this came from; they cite no examples (and indeed, the examples above seem to suggest otherwise).
[4] The fiscal response can have a larger effect on aggregate demand if its composition takes into account the specific features of the crisis.
In this regard, they note that the tax/transfer policies implemented early in the Nordic crisis did little to stimulate output. Sure, the Ricardian equivalence theorem at work. As for "evidence" as to how a different composition of expenditure might work, they make the following compelling statement: "In theory, public spending on goods and services has larger multiplier effects..."
I see. That would be the same theory (IS-LM) that has absolutely nothing to say about financial crisis?
And so, on the basis of this, the authors' conclusions are:
The best part of this paper is contained in Appendix II: Fiscal Multipliers-A Review of the Literature, and Appendix III: Five Case Studies of Fiscal Policy During Financial Crisis.
The conclusion I arrive at in reading these appendices is that during a financial crisis: [1] fixing the financial sector is of primary importance; and [2] fiscal policies may be marginally beneficial at best, and seriously detrimental at worst.
In the body of the paper, the authors draw several lessons from history.
[1] Successful resolution of the financial crisis is a precondition for achieving sustained growth.
Here, they give the example of Japan during the 1990s. Evidently, "fiscal actions following the bursting asset bubble failed to achieve sustained recovery because financial problems were allowed to fester."
In short, fiscal stimulus failed in Japan. But we don't really want to believe that fiscal stimulus doesn't work. It didn't work here because things were not set up to allow it to work. I wonder how one might modify an IS-LM model to formalize this notion?
But there are more examples. "Delaying interventions, as was also done in the US during the Hoover administration and during the S&L crisis, typically leads to a worsening of macroeconomic conditions, resulting in higher fiscal costs later on."
So I guess that if we wait too long, the fiscal multiplier now is severely negative. Not sure what to make of this (like, where does this show up in the IS-LM model?). And in any case, they have their history wrong: Hoover did in fact react quickly to the crisis (although many of his measures were frequently blocked by the Democrats-Roosevelt, in particular-and then later adopted wholesale by the Democrats). And even though "interventions" were evidently delayed during the S&L crisis, I seem to recall a fairly protacted spell of growth in the 1980s. Unimportant details, I suppose.
Ah yes, but there was the "prompt and sizeable support to the financial sector by the Korean authorities that limited the duration of the macroeconomic consequences thus limiting the need for other fiscal action."
Huh? The Korean government fixed the financial sector, thereby eliminating the need for future fiscal stimulus? So fiscal stimulus is not needed, if the financial sector is repaired. This is supposed to be taken as evidence that fiscal stimulus is needed?
[2] The solution to the financial crisis always precedes the solution to the macroeconomic crisis.
Sure.
[3] A fiscal stimulus is highly useful (almost necessary) when the financial crisis spills over to the corporate and household sectors.
Not sure where this came from; they cite no examples (and indeed, the examples above seem to suggest otherwise).
[4] The fiscal response can have a larger effect on aggregate demand if its composition takes into account the specific features of the crisis.
In this regard, they note that the tax/transfer policies implemented early in the Nordic crisis did little to stimulate output. Sure, the Ricardian equivalence theorem at work. As for "evidence" as to how a different composition of expenditure might work, they make the following compelling statement: "In theory, public spending on goods and services has larger multiplier effects..."
I see. That would be the same theory (IS-LM) that has absolutely nothing to say about financial crisis?
And so, on the basis of this, the authors' conclusions are:
And so there you have it. The fiscal multiplier is greater than one. Unless, that is, the stimulus in question is any one of: not-in-time, small, short, undiversified, non-contingent, non-collective, and unsustainable.The optimal fiscal package should be timely, large, lasting, diversified, contingent, collective, and sustainable: timely, because the need for action is immediate; large, because the current and expected decrease in private demand is exceptionally large; lasting because the downturn will last for some time; diversified because of the unusual degree of uncertainty associated with any single measure; contingent, because the need to reduce the perceived probability of another “Great Depression” requires a commitment to do more, if needed;collective, since each country that has fiscal space should contribute; and sustainable, so as not to lead to a debt
explosion and adverse reactions of financial markets.
Thursday, 27 August 2009
Why the Growing Level of U.S. Debt May Not be Inflationary
History shows that high levels of government debt are frequently associated with inflation. The reason for this seems clear enough. At some point, maturing debt needs to paid back. At high enough levels of debt, rolling the debt over is no longer feasible. Cutting back government spending and raising taxes is politically difficult. The easy way out is simply to print new money. As the money supply expands, inflation resuts.
The rough logic described above would seem to fit the experience of many smaller economies that find themselves under fiscal pressure. But things may not work so simply for a select few dominant economies. Japan appears to be one example; and the U.S. another.
Let us consider the U.S. Unlike most other economies, there appears to be a huge worldwide demand for U.S. Treasuries and U.S. dollars (which can be thought of as zero-interest Treasuries). A large scale increase in the supply of these government debt instruments need not lead to a depreciate in their value if there is a correspondingly large scale increase in the worldwide demand for these objects. What is the evidence that this may be happening?
Foreigners Snap Up Treasuries Even as US Debt Keeps Rising
But why should this be so? What accounts for what appears to be an insatiable demand for US debt, especially in the wake of the recent financial crisis?
Ricardo Caballero of MIT offers some hints in a very interesting piece entitled: On the Macroeconomics of Asset Shortages. After reading this paper, I started thinking in the following way. Tell me what you think.
There is a high and growing demand for low-risk assets, both as a store of value, and as collateral objects in payment systems (e.g., repo and credit derivatives markets). This growth has exploded over the last 20 years or so; and stems from the demand from emerging economies and innovations in the financial sector. There is a worldwide "shortage" of good quality (low-risk) assets, like U.S. Treasuries (which explains their relatively low yield). Indeed, many of the innovations in the financial sector can be interpreted as the private sector's response to this shortage: the creation of "low-risk" tranches of MBSs allowing these objects to substitute for U.S. Treasuries as collateral in the rapidly expanding repo market.
The recent financial crisis was centered in the repo market. Very suddenly, agents in the repo market were no longer willing to accept MBS as collateral (or if they did, at very large "haircuts"). The demand for U.S. Treasuries exploded (I seem to recall a day when their yields actually went negative). At the same time, there was a worldwide "flight to quality;" which again, manifested itself as large increase in the demand for (relatively safe) U.S. Treasuries.
If this is more or less true, then the implication is this: The massive increase in the supply U.S. Treasury debt may very be "socially optimal" in the sense that the U.S. government is simply supplying the world with an asset that is in very high demand (which, in turn, means that the demanders obvious find some value in the existence of such an asset). To the extent that this "new demand regime" remains stable, the added supply of U.S. Treasuries will impose no financial burden on the U.S. (indeed, they make off like bandits, as the Treasuries are ultimately purchased by exporting goods and services to the U.S.).
The million dollar question, of course, is whether the high world demand for U.S. debt will persist long into the future (and whether the U.S. government will "overissue" debt beyond what is called for by this new high-demand regime). Who knows what will happen. But it appears to me that IF the U.S. government plays its cards right, it may very well enjoy its higher debt levels without the prospect of inflation. U.S. citizens will benefit (from the sales of Treasuries for goods) and the world will be grateful to hold a stable asset.
Well, maybe. But that was a big IF. What could possibly go wrong?
The rough logic described above would seem to fit the experience of many smaller economies that find themselves under fiscal pressure. But things may not work so simply for a select few dominant economies. Japan appears to be one example; and the U.S. another.
Let us consider the U.S. Unlike most other economies, there appears to be a huge worldwide demand for U.S. Treasuries and U.S. dollars (which can be thought of as zero-interest Treasuries). A large scale increase in the supply of these government debt instruments need not lead to a depreciate in their value if there is a correspondingly large scale increase in the worldwide demand for these objects. What is the evidence that this may be happening?
Foreigners Snap Up Treasuries Even as US Debt Keeps Rising
But why should this be so? What accounts for what appears to be an insatiable demand for US debt, especially in the wake of the recent financial crisis?
Ricardo Caballero of MIT offers some hints in a very interesting piece entitled: On the Macroeconomics of Asset Shortages. After reading this paper, I started thinking in the following way. Tell me what you think.
There is a high and growing demand for low-risk assets, both as a store of value, and as collateral objects in payment systems (e.g., repo and credit derivatives markets). This growth has exploded over the last 20 years or so; and stems from the demand from emerging economies and innovations in the financial sector. There is a worldwide "shortage" of good quality (low-risk) assets, like U.S. Treasuries (which explains their relatively low yield). Indeed, many of the innovations in the financial sector can be interpreted as the private sector's response to this shortage: the creation of "low-risk" tranches of MBSs allowing these objects to substitute for U.S. Treasuries as collateral in the rapidly expanding repo market.
The recent financial crisis was centered in the repo market. Very suddenly, agents in the repo market were no longer willing to accept MBS as collateral (or if they did, at very large "haircuts"). The demand for U.S. Treasuries exploded (I seem to recall a day when their yields actually went negative). At the same time, there was a worldwide "flight to quality;" which again, manifested itself as large increase in the demand for (relatively safe) U.S. Treasuries.
If this is more or less true, then the implication is this: The massive increase in the supply U.S. Treasury debt may very be "socially optimal" in the sense that the U.S. government is simply supplying the world with an asset that is in very high demand (which, in turn, means that the demanders obvious find some value in the existence of such an asset). To the extent that this "new demand regime" remains stable, the added supply of U.S. Treasuries will impose no financial burden on the U.S. (indeed, they make off like bandits, as the Treasuries are ultimately purchased by exporting goods and services to the U.S.).
The million dollar question, of course, is whether the high world demand for U.S. debt will persist long into the future (and whether the U.S. government will "overissue" debt beyond what is called for by this new high-demand regime). Who knows what will happen. But it appears to me that IF the U.S. government plays its cards right, it may very well enjoy its higher debt levels without the prospect of inflation. U.S. citizens will benefit (from the sales of Treasuries for goods) and the world will be grateful to hold a stable asset.
Well, maybe. But that was a big IF. What could possibly go wrong?
Wednesday, 26 August 2009
William Poole on Ben Bernanke
For those of you who may not know, I have recently joined the Federal Reserve Bank of St. Louis as a VP in the research division. Will keep you posted on things that I learn (and am allowed to reveal).
We were recently asked to comment on an article written by Bill Poole, former president and CEO of the Fed here in St. Louis. He asks the question: Should President Obama reappoint Fed Chairman Bernanke? See here. His conclusion is "no." (too late, it appears).
So what's his beef? Essentially, that some of the new policies initiated by Bernanke have violated stipulations in the Federal Reserve Act (FRA) and that, in doing so, he has comprised the Fed's political independence. The relevant stipulations are section 13(3) and section 14(b).
Poole grants Bernanke some leeway in terms of the emergency measures adopted in March 2008 (Bear Stearns) and September 2008 (AIG). But he believes that the Fed's Commercial Paper Funding Facility (CPFF) violates section 13(3). He may have a point here; but there is not much a leg for him to stand on as the term "exigent" is not precisely defined.
Poole also believes that the Fed's buying program for Mortgage Backed Securities (MBS) is not authorized under Section 14(b). I beg to differ. As far as I can tell, the act does allow for purchases of assets that are guaranteed by the U.S. government. The MBS purchased by the Fed are fully insured by the Treasury (and indeed, they are generating a very nice return).
Poole makes some very good points about distancing the Fed from politics as much as possible. But I do not believe that he makes a compelling case against reappointment. Among other things, he does not propose alternative candidates (many of the apparent frontrunners would likely view Bernanke's interventions as too conservative). Bill should be careful what he wishes for.
In any case, it looks like Bernanke will be reappointed (after a good grilling in front of the Senate). Considering the alternatives, I think this was the right choice.
We were recently asked to comment on an article written by Bill Poole, former president and CEO of the Fed here in St. Louis. He asks the question: Should President Obama reappoint Fed Chairman Bernanke? See here. His conclusion is "no." (too late, it appears).
So what's his beef? Essentially, that some of the new policies initiated by Bernanke have violated stipulations in the Federal Reserve Act (FRA) and that, in doing so, he has comprised the Fed's political independence. The relevant stipulations are section 13(3) and section 14(b).
Poole grants Bernanke some leeway in terms of the emergency measures adopted in March 2008 (Bear Stearns) and September 2008 (AIG). But he believes that the Fed's Commercial Paper Funding Facility (CPFF) violates section 13(3). He may have a point here; but there is not much a leg for him to stand on as the term "exigent" is not precisely defined.
Poole also believes that the Fed's buying program for Mortgage Backed Securities (MBS) is not authorized under Section 14(b). I beg to differ. As far as I can tell, the act does allow for purchases of assets that are guaranteed by the U.S. government. The MBS purchased by the Fed are fully insured by the Treasury (and indeed, they are generating a very nice return).
Poole makes some very good points about distancing the Fed from politics as much as possible. But I do not believe that he makes a compelling case against reappointment. Among other things, he does not propose alternative candidates (many of the apparent frontrunners would likely view Bernanke's interventions as too conservative). Bill should be careful what he wishes for.
In any case, it looks like Bernanke will be reappointed (after a good grilling in front of the Senate). Considering the alternatives, I think this was the right choice.
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