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.

Walmart Stock Plunge Shows Wall St Dysfunction

Michael HiltzikOn Wednesday, Walmart stock went down by over 10%. And over the following two days, it has slowly gone down another 3%. Walmart did announce that earnings for the next year will be 6% to 12% less. But as Michael Hiltzik pointed out, this is primarily due to investments that the company is making. In particular, Walmart is raising wages and improving its ecommerce capabilities. To offset this, the company is going to do a $20 billion stock buyback, which should increase shareholder value. But that was apparently not good enough. And clearly, this wasn’t an impetuous reaction from Wall Street — the slide continues.

What the whole thing shows is how American finance is razor focused on short term profits. The things that Walmart is doing are undoubtedly good for its long term profitability. In fact, this has traditionally been the point of having stocks. It is a way for businesses to raise money so that they can invest in their infrastructure. But today, it seems the only point of stocks is to have a quarterly return. The stock traders figure that they can always buy back into Walmart after it is done with its worker and capital improvements. They don’t need to be part of the process, because actual business investment is scary.

As I write this, the total value of Walmart stock is down over 12%. Supposedly, this means that the company is worth that much less than it was Wednesday morning. You know: the perfection of markets and all. But this just shows that Wall Street doesn’t actually reflect the value of companies. It is some kind of sick and twisted notion of wealth where companies are worth only what they can bring in immediately. It is this kind of thinking that never would have gotten us to the Moon or even to civilization.

Although I think this is a particular dysfunction of modern Wall Street, this has actually always been the problem with capitalism. It really is great at doing the minutia of production and distribution. If you need to produce and distribute disposable diapers, capitalism is absolutely the best way there is for getting them to new parents. When it comes providing prenatal care for mothers, capitalism is a particularly bad system. So that ought to be settled. But as a society, we seem incapable of looking objectively at capitalism, and see it rather as a law of the universe that can’t be questioned.

But it is very disturbing that as proven a moneymaker as Walmart can’t look out for its long term interests without being savaged. Investors would rather use their money to get certain immediate profits than do the work of actual investment. There are only two possibilities in the Walmart case. It’s either that the investors are panicking over nothing — they care only about profits in the next year and not at all about Walmart’s long term profitability. Or it is that investors greatly overvalued it before based only on short term considerations, not calculating its need to continue to invest in order to grow.

This is a great example of the failure of capitalism. And part of it is that the rich understand that they don’t need to worry about the long term. If things go wrong, the government — which they spend so much time complaining about — will be there to bail them out. So they base everything on a three month time frame. Squirrels plan further ahead.

Morning Music: Claude Debussy

Claude DebussyTo me, the Romantic period really ends with Brahms. Clearly it did go on, but even by end of his life, the Impressionists had come to dominate classical music — at least as a going concern. And you can hear the continuity between Brahms and Claude Debussy, our featured artist today.

I don’t want to get far into his career — he really came into his full power in his early thirties with pieces like, Prelude to the Afternoon of a Faun. And he created great works up to shortly before his death of rectal cancer at 55, like arguably the greatest piece ever written for solo flute, Syrinx.

Debussy is really were classic music starts to become un-linked from standard tonality. Harmony becomes much more a matter of setting an emotional tone. He is also the first composer that I know of who really understood chromaticism, and was able to make it work in the context of the larger work. We see some of this in the following early work that he wrote around the age 25, Petite Suite — a work for piano with four hands. It’s also be transcribed for other groups of instruments. I think it is notable just for having such a broad range of colors. It’s a gorgeous work.

And here again, we get to enjoy Martha Argerich on the piano. She is joined by the Romanian pianist Cristina Marton.

Anniversary Post: “The Game of the Century”

Donald ByrneOn this day in 1956 was “The Game of the Century” — a chess game in the Rosenwald Memorial Tournament between 26 year old Donald Byrne and 13 year old Bobby Fisher. At the time, Byrne was a leading chess player in the US.

Byrne lost the game, due mostly to an amazing queen “sacrifice” by Fischer, which, over the course of several moves results in Fisher winning a rook, two bishops, and a pawn — generally counted as 12 points versus 10 points for the queen. I’ve always thought that Byrne showed very good sportsmanship for playing the game through long after he knew he had lost. Mostly, he underestimated the 13-year-old chess genius.

It isn’t actually that interesting a game. Fischer himself conspicuously ignored it in his My 60 Memorable Games. As noted, Byrne was a great player. In 1955, for example, while playing black, he beat one of the chess icons of the 20th century Efim Geller. He went on to become an International Master in 1962. It is assume that he would have become a Grandmaster, but he was in poor health and died of lupus at the age of 45.