Bruce Krasting presents an example of how Fed policy actually retards job growth:
The idea that lower interest rates are hurting savers is an old one. The question is, “How significant are the negative consequences of low interest rates?” The multi-decade efforts in Japan to reflate an economy with low interest rates is a shining example of policy that has not worked.
I’ve not seen any discussion that attempts to quantify how large a drag on economic activity low rates are. I know that some of the folks at the Fed will read this; my request/challenge to them is that they respond with an answer. If the Fed did a fair job of looking at this, and took into consideration all of the consequences of the prolonged zero rate policy, it would be forced to conclude that it is now causing more harm then benefit.
Read the whole thing.
I think he should provide good examples of how raising interest rates in a weak economy have been beneficial. IOW, I think he is confusing cause and effect, but I have never gone looking for data on this topic, so maybe some exists.
Steve
I think it should be noted that in addition to the obvious effect artificially low rates have on fixed income retirees who must curtail expenditure in favor of younger people (maybe) engaging in time financed purchases, and enabling of (my words) artificially low government financing and inefficient spending, that the whole process distorts the term structure of interest rates and gives false signals.
How’s that for a runon sentence?
Is there such a thing as a ‘natural’ interest rate for an economy using a fiat currency? Or is any interest rate just automatically a function of the how the central bank works?
The problem with Krastings is he does nothing to inform readers of the difference between interest rates and bond yields, or how manipulation of the Fed Funds Rate affects those yields. He writes as though it’s all one big interest rate rather than a series of separate ones. Having said that yes, the Fed should be paying out higher yields on its bonds because they are the non-government sector’s primary savings vehicle and yields are an important method of increasing that sector’s financial wealth.
http://ace.mu.nu/archives/330376.php
I hope Dave will indulge me, and I may have to repost this later, but ice pick, I think you will find this fascinating. It was sent to me by a friend.
Ben Bernanke is one of the most fascinating people in high government. More than anyone still alive, here’s the guy who wrote the book on what not to do subsequent to a real estate bubble & ensuing financial crisis. He then gets put in exactly the office to respond to exactly that situation – and ends up doing exactly what all of his predecessors would have done, which is re-inflate the bubble.
I don’t usually read biographies, but I won’t hesitate to read his, thirty years from now.
From Krugsy-wugsy’s latest:
Why won’t the Fed act? My guess is that it’s intimidated by those Congressional Republicans, that it’s afraid to do anything that might be seen as providing political aid to President Obama, that is, anything that might help the economy. Maybe there’s some other explanation, but the fact is that the Fed, like the European Central Bank, like the U.S. Congress, like the government of Germany, has decided that avoiding economic disaster is somebody else’s responsibility.
http://www.nytimes.com/2012/06/25/opinion/krugman-the-great-abdication.html?_r=1&hp
Why do these people never articulate what it is they think the Fed should do? The Fed has one basic monetary tool, which is altering the composition of reserves and bonds in the banking system. What ratio of these things is it that Krugman and the oh-so-aptly named market monetarists think will stimulate aggregate demand? The depth of thinking on this subject continues to be about one inch. Why can’t these people who insist they know what the Fed must do tell us rather than making vague calls for action?
Paul Krugman’s is a set piece player. Period.
Why can’t these people who insist they know what the Fed must do tell us rather than making vague calls for action?
Because they don’t want to be held accountable if their recommendations are implimented and fail. But you already know that.
I find it interesting that someone like Krugman doesn’t attempt to grasp some of the levers of power himself. Are you telling me that the Nobel winning economist couldn’t get a seat at the table in the Administration (and I mean a decent one) or even a spot on the Board of the Fed? Surely a place to bitch on the NYTs can’t be more influential…. I’m thinking of a line from Kipling….
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Thanks Drew. The mate was sadistic, but also more aesthetically pleasing. Technically a model mate, and those are hard to pull off in a real game.
Speaking of chess and economics, I’m thinking Ken Rogoff is likely to win a Nobel for the work he’s been doing with Reinhart. Looks like the loss for chess was a win for economics….
That is exactly right. In Bernanke’s case he knows he’ll never be dinged for doing whatever his fellow-economists expect him to do.
One gauge of how little they actually believe in their prescriptions—they never bet on them with their own money.
“One gauge of how little they actually believe in their prescriptions—they never bet on them with their own money.”
Heh. The very definition of private equity. Ever wonder why I have disdain for detractors? Where’s your check, you sniveling little……
Some problems with the piece:
– false choice between stocks and bonds, returns on residential rental income are very high right now. He could even, gasp, borrow money for a very low rate to finance that activity.
– He wants easy, safe, predictable high rates of return. Who else wants those… hmm… everyone!? Could that be another reason rates are low? In an environment of de-leveraging savers have to fight over fewer borrowers.
– Does he really think the Fed can provide him with higher real investment returns? How?
Also, Japan can tell you what happens if you do what he wants and exit ZIRP too fast: more ZIRP.
Ice pick
You are obviously a better chessman than me. I looked at it and just would have gone for the quick kill. Going for style points, in business, gets you killed. I’d have gone for the throat with a sharp instrument.
But what a finish, eh!? And what a couple of chess studs.
I looked at it and just would have gone for the quick kill.
I would have gone for the quick kill too. The problem with the other finish is that it gives the winning side more opportunities to screw up. But then if I were as good as Tarrasch maybe I would just enjoy the model mate. (And if I were as nasty as Alekhine I would do the quick kill but publish the pretty kill in my books.)