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Oct 17

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Someone at the Federal Reserve Is Making Sense

Lael BrainardI hope you will forgive me for talking about monetary policy. But really, you should pay attention, because it is good for you, in a far more important way than Cymbeline. Tim Duy has a sub-blog over at Mark Thoma’s place, Fed Watch. In general, I skip what he writes, because it makes my brain hurt. Monetary policy really is difficult. It drives home just what a slippery concept money is.

But there is another aspect of it, that is really important but also keeps me away from it: the Federal Reserve is irrational. It has been obsessing for the last two years about when exactly it will raise interest rates. I saw an interview recently where Dean Baker explained in clear terms what that means: the Fed raising interest rates is deciding to put millions of people out of work to head off inflation. Now, maybe that’s a good thing when inflation is a problem. But when there is just concern that maybe the economy is kind of, sort of at the place where maybe inflation will tick up to the Fed’s own 2% target, talking about raising interest rates is not just mad — it is evil.

I’ve been in this very uncomfortable position of thinking that the Fed is making no sense. But everywhere you look, people are saying that they are right to do this. I realize that most of this is nonsense. It’s an unstated kind of moralism that cheap money just can’t be good. But this belief is so common that it makes me uncomfortable. If I didn’t have Dean Baker, who I trust completely, I’d wonder if I weren’t just really ignorant. So any indication that the conventional wisdom is actually wrong is welcome.

Thus we get to Duy’s recent article, Brainard Drops A Policy Bomb. That’s a reference to Lael Brainard, a Fed governor, but formally Undersecretary of Treasury. She’s something we don’t see all that much in economists: an independent thinker. She recently gave a speech at the National Association of Business Economists. And she said that she was not willing to make “calendar-based statements” about raising interest rates. This is a shot across the bow at Janet Yellen and others at the Fed who seem to do nothing but.

The issue, to me at least, is that most of the people are not letting the facts guide them. They want to raise interests rates. (That is: they want to put people out of jobs and make wages continue to stagnate.) And they are looking for any reason to do so. And now, it’s December. If the economy can just hold on and look good for a couple of months, then Yellen and company can raise the interest rates and get the bankers off their backs!

Paul Krugman offered an interesting take on why it is that Brainard has such a different idea from the other folks at the Fed, “I would say that Brainard’s experience is dominated not so much by the Great Moderation as by the Asian financial crisis and Japan’s stagnation.” In other words, Brainard isn’t hyper-focused on the possibility of inflation — she knows that there is at least as big a threat of low and even negative inflation.

What I find fascinating is that the inflation rate in the 1970s was high — but not that high. In 1980, it reached almost 15%. But before the Federal Reserved decided to tame inflation, the unemployment rate was less than 6% — so workers weren’t suffering that much. I can see being totally freaked out if the inflation rate had been 200%. But it was manageable. And that was it at its worst. And they are only concerned about that, and not the great threat of low inflation.

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  1. James Fillmore

    Couple of things. First, why the hell would anyone take a “shot across the bow” as a member of the Reserve? But the Krugman bit explains, she’s a noob. Okay.

    Why would the Reserve admit anyone who questioned conventional wisdom? How the hell do Reserve people get on there anyway? I could look, but I’m lazy. You’ll answer these things eventually and then I don’t have to look. “Frankly Curious”: best site ever for the very curious and very lazy reader. That’s a compliment, BTW. You’re like Wiki without trying to be neutral.

    That whole end-of-the-70’s- bit is very bizarre. The oil embargo happened, then it didn’t. Terrorists were everywhere, then they kinda flamed out. I don’t get if Volcker was doing long-term planning or responding to goofy current trends. I know Reagan was responding to current trends with the long-term planning of right-wingers who dreamed a dream. It was a strange period.

    1. Frank Moraes

      I try not to be quite as boring as Wikipedia. And I’m really pleased when I can deal with an issue that Wikipedia doesn’t. It’s really hard!

      My understanding of the 1970s is that there was a lot of wage-push inflation. People had contracts with automatic pay increases, and these were growing faster than productivity. Or something. What Volcker did was make jobs harder to find, thus eliminating upward pressure on wages. And basically, they’ve never come back. There are a lot of reasons for it, but that was when wages became uncoupled from productivity. And the country has been on tilt since then.

      1. James Fillmore

        Thanks for not being as boring as Wiki! And it IS hard doing better than they do. Wiki to me represents both the good side of crowd-sourced material (they rely on free labor, but don’t profit from it) and the unfortunate side. As in, it has to be uncontroversial. So its history stuff, say, can’t include events that one side thinks are outrageous and the other disputes they ever occurred, because otherwise it’d be flame city all up in there.

        A thing I noticed when I looked at Wiki’s Mozart page after reading your post about him. Most of the paintings of Mozart are by court painters, so he has drab generic facial features (court painters were not in the habit of accurately depicting royalty’s flaws.) The one painting which sticks out was done by his brother-in-law and, per Wiki, is considered the most accurate by historians. Mozart doesn’t look bad in it — but he looks the spitting image of Rowan Atkinson:

        https://en.wikipedia.org/wiki/File:Mozart_%28unfinished%29_by_Lange_1782.jpg

        Maybe the “Blackadder” line had some good descendants, after all!

        1. Frank Moraes

          I’m terrible with faces, so I can’t say. That is probably the most famous portrait on him — certainly the first I ever saw. But that’s an interesting idea to look at Mozart through hid portraits.

    2. Elizabeth

      Plus, I was born! Clearly a sign of the apocalypse coming upon us.

      The process of who gets appointed is partially based on who you know. It is a private entity run by publicly appointed officials which means that the President gets to appoint them and it is usually after he asks some subordinate “who do we know who could do banking? Gimme five names and their bios by the end of the week.” Then the Republicans whine because it is someone who does not favor making little kids and puppies work 100 hours in a coal mine and eventually the Democrats set fire to enough Republicans to get them to stop fighting over the issue.

      I don’t think they get to submit an application like you would if you were going for a regular state board or commission. I could check Wikipedia but I wanted to see if I was correct. *checks* Kind of. Republicans are not set on fire.

      1. James Fillmore

        Dammit, fire would be good. That should be the penalty for ethics violations. Make Hastert or DeLay dance around in one of those flame-retardant Hollywood stunt suits on live TV, to the Clash’s version of “I Fought The Law.”

        1. Elizabeth

          Solves a few budget problems at least.

  1. Yellen Is Making Sense; Financial Journalists Aren't

    […] I'm glad that Yellen and (a personal hero) Lael Brainard and others on the Federal Reserve Board are casting their spells for the good of the economy and […]

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