Daily Digest - December 19: It's a Whole New Economic Policy-Making World

Dec 18, 2014Rachel Goldfarb

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Uncharted Interest Rate Territory (U.S. News & World Report)

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Uncharted Interest Rate Territory (U.S. News & World Report)

Jason Gold points out that since interest rates have been declining for 33 years, none of today's lawmakers know quite what they're in for when the Fed begins to raise rates in 2015.

  • Roosevelt Take: Roosevelt Institute Fellow Mike Konczal says that raising interest rates is not the way to fight "financial instability."

The Greatest Tax Story Ever Told (Bloomberg Businessweek)

Zachary R. Mider shares the story of the very first corporate tax inversion, in which a company incorporates abroad to avoid paying U.S. taxes. The idea was invented by a liberal tax lawyer in 1982.

A Big Safety Net and Strong Job Market Can Coexist. Just Ask Scandinavia. (NYT)

The strong safety net programs in Scandinavian countries, which include far more direct aid, might be more effective at getting people to work than the U.S. tax subsidy model, writes Neil Irwin.

How ALEC Helped Undermine Public Unions (WaPo)

Alex Hertel-Fernandez explains that ALEC's attacks on public sector unions aren't new: ALEC-backed anti-union laws were enacted in some states a decade before the Great Recession.

Pro-Warren Protesters Take Their Fight to Wall Street (MSNBC)

Zachary Roth reports on yesterday's protest at Citigroup's New York City headquarters, where protesters denounced the Citigroup-crafted measure weakening Dodd-Frank in the spending bill.

From the E.R. to the Courtroom: How Nonprofit Hospitals Are Seizing Patients’ Wages (ProPublica)

Paul Kiel and Chris Arnold profile the Missouri hospital that sues the most patients in the state. Nonprofit hospitals are required to offer low-cost charity care, but that isn't particularly regulated.

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Daily Digest - December 18: Can Subprime Lending Really Be Safe?

Dec 18, 2014Rachel Goldfarb

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The Return of Subprime Lending (AJAM)

Matt Birkbeck says a new wave of subprime mortgages appear to be following much stricter rules and have far less usurious interest rates, but regulators are still watching closely.

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The Return of Subprime Lending (AJAM)

Matt Birkbeck says a new wave of subprime mortgages appear to be following much stricter rules and have far less usurious interest rates, but regulators are still watching closely.

Paid Maternity Leave Is Good for Business (WSJ)

Susan Wojcicki says that the United States is behind the rest of the world in not offering paid maternity leave to all mothers, and that such a policy makes good sense socially and economically.

Federal Reserve Says It Will Be ‘Patient’ on Interest Rate Timing (NYT)

Binyamin Appelbaum reports on the latest comments from Federal Reserve Chair Janet Yellen about when the Fed will start raising interest rates. The process won't begin before April.

Fired Walmart Worker Says She Had to Choose Between a Paycheck and a Child (The Guardian)

Lauren Gambino and Jessica Glenza profile one former Walmart employee who was still asked to work with dangerous chemicals after her doctor said they would endanger her pregnancy.

What Was the Job? (Pacific Standard)

Kyle Chayka says the gig economy brought with it a massive reinterpretation of what it means to have a job, leaving behind a disenfranchised workforce without any of the benefits it once enjoyed.

New on Next New Deal

Ten Years: Students Moving the Country Forward

Roosevelt Institute Vice President of Networks Taylor Jo Isenberg reflects on the Campus Network's tenth anniversary, and how Roosevelters can continuing pushing for a better country for all of us.

Two Contradictory Arguments That Dodd-Frank is Crony Capitalism

Roosevelt Institute Fellow Mike Konczal compares two mutually exclusive conservative analyses of what crony capitalism means and how to fix it, which suggest this isn't a useful concept in policy debates.

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Monetary Policy Event with Paul Krugman and Senator Warren Today

Dec 9, 2014Mike Konczal
I'm very excited to share that AFR, EPI, and the Roosevelt Institute have teamed up to host a conference on monetary policy, the recovery and the financial sector today. The conference will feature keynotes from Paul Krugman and Senator Elizabeth Warren.
I'm very excited to share that AFR, EPI, and the Roosevelt Institute have teamed up to host a conference on monetary policy, the recovery and the financial sector today. The conference will feature keynotes from Paul Krugman and Senator Elizabeth Warren. It also features, among many other great panelists, friend of the blog and Roosevelt fellow JW Mason (who recently wrote about monetary policy here and here, and at the old rortybomb blog here), and who has been part of the financialization project we'll be releasing soon.
 
Though the event is sold out, EPI will be posting the video after the event, and I hope you'll watch it.
 
Tuesday, December 9, 2014
 
12:30 – 4:00 p.m. ET
 
Hart Senate Office Building 902
Washington, DC
 
Sponsored by Americans for Financial Reform, Economic Policy Institute, and Roosevelt Institute's Financialization Project
 
FEATURING
Senator ELIZABETH WARREN
Economist/columnist PAUL KRUGMAN
 
Today, pressure is building on the Federal Reserve to use monetary policy to raise short-term interest rates, a move that could short-circuit a still far from complete economic recovery. Proponents of this move argue it is needed to avert wage and price inflation and prevent excessive risk-taking in the financial sector. But there are serious questions about this argument, and there are new tools available to the Fed to influence Wall Street and the wider economy. These tools and better economic analysis could allow the Fed to better target specific concerns regarding Wall Street financial risk-taking while minimizing unnecessary drag on the Main Street economy.
 
Join Elizabeth Warren, Paul Krugman, and experts on monetary and regulatory policy for a discussion of Federal Reserve economic management. The discussion will range from what the Fed’s next moves should be in monetary policy to the ways in which the Fed can use new regulatory tools to address problems in the financial market without causing unnecessary problems in the broader economy.
 
AGENDA
 
12:30pm – Keynote by Senator Elizabeth Warren
 
1:00pm -  Panel: Monetary Policy and the Economy
 
Panelists: 
 
Josh Bivens, Research and Policy Director, Economic Policy Institute
William Spriggs, Chief Economist, AFL-CIO
JW Mason, John Jay College, Roosevelt Institute
Robert Pollin, Professor of Economics and Co-Director of PERI, University of Massachusetts Amherst
 
2:15pm – Keynote by Paul Krugman
 
2:45pm – Panel: Regulatory Tools For Managing Financial Cycles
 
Panelists: 
 
Marcus Stanley, Policy Director, Americans for Financial Reform
Jill Cetina, Associate Director for Policy Studies,  Office of Financial Research
Jennifer Taub, Professor of Law, Vermont Law School
Jane D'Arista, Author, “The Evolution of U.S. Finance"

 

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Let the Fed Lend Directly to Cities and States to Save Taxpayers Billions

Dec 9, 2014Saqib Bhatti

Using our central bank's resources to save cash-strapped local governments from bankruptcy would prevent economic devastation and bring other benefits.

Using our central bank's resources to save cash-strapped local governments from bankruptcy would prevent economic devastation and bring other benefits.

The Federal Reserve should be allowed to make long-term loans directly to cities, states, school districts, and other public agencies so taxpayers can get low interest rates and avoid predatory Wall Street fees. Currently, banks borrow money at near-zero interest rates from the Fed while public entities are forced to pay billions in fees and interest each year. Cities and states should have access to the same low interest rates that banks enjoy so that taxpayer money earmarked for infrastructure improvement and other public goods will no longer be spent subsidizing corporate profits. If the Fed lent directly to cities and states at low interest, it would free up public dollars for services like education and mass transit. Direct loans from the Fed could also help alleviate fiscal crises and become a tool for promoting stronger environmental and labor protections.

Fiscal crises and municipal bankruptcies are typically caused by revenue shortfalls. The definition of "municipal insolvency" is the inability to pay debts as they come due. A city is insolvent and can file for bankruptcy if it is not bringing in enough revenue to be able to pay its bills on time. For example, although there were many political and economic causes for Detroit’s bankruptcy, the technical reason that Detroit went bankrupt was that the city had a $198 million revenue shortfall and could not pay all of its bills. A $198 million loan could have allowed Detroit to avoid bankruptcy. In the future, we can prevent untold devastation if the Fed can provide affordable loans to municipal borrowers.

Detractors will argue that it would be imprudent to use federal taxpayer dollars to make loans to distressed cities and states that might be unable to pay them back. However, the reality is that municipal borrowers in the United States have extremely low rates of default because their debt is ultimately backed by tax revenues. According to Moody’s, one of the three major credit rating agencies in the country, the default rate for municipal issuers that it rates was 0.012 percent between 1970 and 2012. Even though there has been a slight uptick following the financial crisis, the likelihood of municipal default is still virtually nonexistent.

If a municipality defaults on a loan, it is because elected officials made a political decision to default rather than raise taxes. In the case of Detroit, state elected officials in Michigan made that decision by cutting revenue-sharing with the city and prohibiting it from raising additional taxes. The Fed could take proactive steps to address this political problem. For example, it could attach a provision requiring elected officials to raise taxes on large corporations and high-income earners to avoid defaulting on loans from the Fed.

Direct loans from the Fed could also be used to promote fair and sustainable development. Either Congress or the Fed could establish minimum labor and environmental standards that cities and states must abide by to qualify for a loan from the Fed. For example, cities that borrow from the Fed could be required to pay all workers a living wage. Any state that borrows from the Fed for highway repairs could be required to establish stronger fuel efficiency standards for cars. The Fed could also prioritize loans for green infrastructure improvements. This would ensure that direct loans from the Fed support long-term national interests.

Currently, the Fed already has the power to purchase municipal debt securities that mature within six months. In other words, the Fed effectively has the power to lend to cities and states for up to six months, with some caveats. But if Congress were to pass a law allowing the Federal Reserve to make long-term loans directly to cities and states, we could start using our central bank to support the long-term financial, economic, and environmental health of our cities and states. It would allow us to cut Wall Street out of the middle and ensure that our taxpayer dollars are going toward improving our communities instead of padding banker bonuses.

Saqib Bhatti is a Roosevelt Institute Fellow and Director of the ReFund America Project.

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Daily Digest - December 9: One Strong Voice Against the Mega Cable Company

Dec 9, 2014Rachel Goldfarb

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

Blows Against the Empire (Medium)

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Blows Against the Empire (Medium)

Roosevelt Institute Fellow Susan Crawford praises the new "Stop Mega-Comcast Coalition" for uniting the voices of those who view the Comcast-Time Warner Cable merger as monopolistic.

Fed’s Lockhart Still Favors Mid-2015 for First Fed Rate Increase (WSJ)

Lockhart, President of the Atlanta Fed, calls for patience regarding raising interest rates, writes Michael S. Derby, who describes Lockhart as "a bellwether of policy makers’ consensus outlook."

Congress Races to Reach Spending Deal Before Shutdown Deadline (MSNBC)

With a potential shutdown approaching at midnight on Thursday, Benjy Sarlin says Congress is working through disagreements on issues like environmental regulation and financial reform.

Are West Coast Longshoremen Spoiling Christmas? (Politico)

As their union continues to negotiate wages and benefits, Mike Elk reports that the longshoremen are accused of slowing holiday season shipping by sticking exactly to company rules.

The Lame-Duck Congress Plots to Undermine Retiree Pensions (LA Times)

A proposed change – which has no public language only days before Congress goes on vacation – would decrease the pensions of already-retired workers on certain plans, writes Michael Hiltzik.

U.S. States' Revenue Growth Picks Up But Still 'lackluster' (Reuters)

Lisa Lambert reports on a new survey on state revenues and budgets, which says that stagnant wages are keeping revenues from growing as well.

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Daily Digest - November 24: How to Win Minimum Wage Fights

Nov 23, 2014Rachel Goldfarb

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The Fight for $15.37 an Hour (NYT)

Steven Greenhouse explains how the Los Angeles Alliance for a New Economy won its campaign to get hotel workers in L.A. a significantly higher minimum wage.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Fight for $15.37 an Hour (NYT)

Steven Greenhouse explains how the Los Angeles Alliance for a New Economy won its campaign to get hotel workers in L.A. a significantly higher minimum wage.

Elizabeth Warren Tells NY Fed President: Fix Your Problems, Or We’ll Find Someone Who Will (Buzzfeed)

At the Senate Banking Committee on Friday, the four senators in attendance – all Democrats – pushed back hard on William Dudley's framing of his work as a "fire warden," reports Matthew Zeitlin.

What’s a CEO Really Worth? Too Many Companies Simply Don’t Know (WSJ)

Paul Vigna writes about a new report examining how executive compensation lines up with company performance. It turns out that most companies don't measure success very accurately.

  • Roosevelt Take: In her primer on the CEO pay debate, Roosevelt Institute Fellow Susan Holmberg lays out the main theories for the skyrocketing in executive pay and potential policy solutions.

Obama's Executive Action Is About Labor Policy, Not Just Immigration (AJAM)

E. Tammy Kim explains how work authorization will transform opportunities for many undocumented workers, who will have new opportunities to organize or fight wage theft without fear.

The Antitax Push Has Done Harm to State and Local Government (WaPo)

Catherine Rampell says the piecemeal way that state and local governments create new revenue sources are far worse for the economy and inequality than raising taxes would be.

  • Roosevelt Take: Roosevelt Institute Fellow Saqib Bhatti explains the impact of predatory financial deals taken on by state and local governments struggling to fund public services.

The GOP Controls Congress So Now It Can Change How Math Works (MoJo)

The Republicans' preferred method of calculating budget projections uses impossible predictions about economic growth, writes Erika Eichelberger, making tax cuts appear less costly.

New on Next New Deal

Bigger Health Care Providers Mean Bigger Profits, But Not Always Better Care

Roosevelt Institute | Campus Network Senior Fellow for Health Care Emily Cerciello calls on state attorneys general to consider whether hospitals that buy up physicians' practices are violating anti-trust laws.

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Daily Digest - November 20: From the Banks to the Fed and Back Again

Nov 20, 2014Rachel Goldfarb

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New Scrutiny of Goldman’s Ties to the New York Fed After a Leak (NYT)

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New Scrutiny of Goldman’s Ties to the New York Fed After a Leak (NYT)

The leak has led to questions regarding the conflict of interest that arises when people advise the same banks they used to regulate, write Jessica Silver-Greenberg, Ben Protess, and Peter Eavis.

Are Financial Whistleblowers Worth It? Study Says Yes – to the Tune of $21.27bn (The Guardian)

Jana Kasperkevic reports on a new study that proves the value of financial whistleblowers. Rewards encourage whistleblowers to step up, and companies in such cases pay heavier penalties.

Loan Servicer Busted for Backdating, But Foreclosure Victims Say Shenanigans Haven’t Stopped (In These Times)

Ocwen Financial has admitted to a "glitch" involving back-dated loan modification letters, but Joel Sucher says the slow work to fix the problem follows familiar patterns.

Lenders Shift to Help Struggling Student Borrowers (WSJ)

Annamaria Andriotis reports on the plans of two major private student loan providers to lower interest rates, extend repayment periods, and modify loans.

Why It's So Hard for Millennials to Find a Place to Live and Work (The Atlantic)

Derek Thompson explains that cities that provide the best opportunity for economic mobility and cities that have affordable housing hardly overlap at all today.

New on Next New Deal

A Dem Who Can Explain that Fairness is Prosperity Will Sweep in 2016

Roosevelt Institute Senior Fellow Richard Kirsch argues that Democrats who focus on economic policies that emphasize fairness (which are the best ones for economic growth) will succeed.

Leadership Wanted: Governor Cuomo, Homeless Students Need College Support

Roosevelt Institute | Campus Network Leadership Director Kevin Stump proposes a new program to support homeless youth in achieving their college goals.

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In Blowout Aftermath, Remember GDP Growth Was Slower in 2013 Than in 2012

Nov 5, 2014Mike Konczal

In the aftermath of the electoral blowout, a reminder: the Great Recession isn't over. In fact, GDP growth was slower in 2013 than in 2012. Let's go to the FRED data:

There's dotted lines added at the end of 2012 to give you a sense that throughout 2013 the economy didn't speed up. Even though we were another year into the "recovery" GDP growth slowed down a bit.

There's a lot of reasons people haven't discussed it this way. I saw a lot of people using year-over-year GDP growth for 2013, proclaiming it a major success. A problem with using that method for a single point is that it's very sensitive to what is happening around the end points, and indeed the quarter before and after that data point featured negative or near zero growth. Averaging it out (or even doing year-over-year on a longer scale) shows a much worse story. Also much of the celebrated convergence between the two years was really the BEA finding more austerity in 2012. (I added a line going back to 2011 to show that the overall growth rate has been lower since then. According to David Beckworth, this is the point when fiscal tightening began.)

Other people were hoping that the Evans Rule and open-ended purchases could stabilize "expectations" of inflation regardless of underlying changes in economic activity (I was one of them), a process that didn't happen. And yet others knew the sequestration was put into place and was unlikely to be moved, so might as well make lemonade out of the austerity.

And that's overall growth. Wages are even uglier. (Note in an election meant to repudiate liberalism, minimum wage hikes passed with flying colors.) The Federal Reserve's Survey of Consumer Finances is not a bomb-throwing document, but it's hard not to read class war into their latest one. From 2010 to 2013, a year after the Recession ended until last year, median incomes fell:

When 45 percent of the electorate puts the economy as the top issue in exit polls, and the economy performs like it does here, it's no wonder we're having wave election after wave election of discontentment.

Follow or contact the Rortybomb blog:
 
  

 

In the aftermath of the electoral blowout, a reminder: the Great Recession isn't over. In fact, GDP growth was slower in 2013 than in 2012. Let's go to the FRED data:

There's dotted lines added at the end of 2012 to give you a sense that throughout 2013 the economy didn't speed up. Even though we were another year into the "recovery" GDP growth slowed down a bit.

There's a lot of reasons people haven't discussed it this way. I saw a lot of people using year-over-year GDP growth for 2013, proclaiming it a major success. A problem with using that method for a single point is that it's very sensitive to what is happening around the end points, and indeed the quarter before and after that data point featured negative or near zero growth. Averaging it out (or even doing year-over-year on a longer scale) shows a much worse story. Also much of the celebrated convergence between the two years was really the BEA finding more austerity in 2012. (I added a line going back to 2011 to show that the overall growth rate has been lower since then. According to David Beckworth, this is the point when fiscal tightening began.)

Other people were hoping that the Evans Rule and open-ended purchases could stabilize "expectations" of inflation regardless of underlying changes in economic activity (I was one of them), a process that didn't happen. And yet others knew the sequestration was put into place and was unlikely to be moved, so might as well make lemonade out of the austerity.

And that's overall growth. Wages are even uglier. (Note in an election meant to repudiate liberalism, minimum wage hikes passed with flying colors.) The Federal Reserve's Survey of Consumer Finances is not a bomb-throwing document, but it's hard not to read class war into their latest one. From 2010 to 2013, a year after the Recession ended until last year, median incomes fell:

When 45 percent of the electorate puts the economy as the top issue in exit polls, and the economy performs like it does here, it's no wonder we're having wave election after wave election of discontentment.

Follow or contact the Rortybomb blog:
 
  

 

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Daily Digest - October 31: Proof That Big Telecoms Are Slowing Your Internet

Oct 31, 2014Rachel Goldfarb

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The Cliff and the Slope (Medium)

Roosevelt Institute Fellow Susan Crawford breaks down a new study explaining how Internet service providers' fights with Netflix have caused major connectivity problems for unrelated users.

Click here to subscribe to Roosevelt First, our weekday morning email featuring the Daily Digest.

The Cliff and the Slope (Medium)

Roosevelt Institute Fellow Susan Crawford breaks down a new study explaining how Internet service providers' fights with Netflix have caused major connectivity problems for unrelated users.

Janet Yellen’s Remarks Trigger Inequality Debate (MSNBC)

Ned Resnikoff looks at discussions that have followed the Federal Reserve Chair's recent comments on inequality, referencing Roosevelt Institute Fellow Mike Konczal.

Yes, the Federal Reserve is Politicized — and That's a Good Thing (The Week)

Ryan Cooper says the Fed ignoring inequality would be political too – favoring the wealthy. He quotes Roosevelt Institute Chief Economist Joseph Stiglitz and Mike Konczal on the links between inequality and monetary policy.

Economic Lessons Not Learned (NYT)

Teresa Tritch says that major role of increased defense spending in last quarter's economic growth should serve as a reminder of the importance of government spending.

New on Next New Deal

Did the Federal Reserve Do QE Backwards?

Roosevelt Institute Fellow Mike Konczal suggests that if the Federal Reserve had set a price for long-term securities instead of buying a quantity, its goals would have been clearer and easier achieved.

Election 2014: Women's Rights in the Balance

In her series on the close-call races that could have major impact on women, Roosevelt Institute Fellow Andrea Flynn has looked at Wisconsin, Colorado, and Florida, with more to come today.

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Did the Federal Reserve Do QE Backwards?

Oct 30, 2014Mike Konczal

QE3 is over. Economists will debate the significance of it for some time to come. What sticks out to me now is that it might have been entirely backwards: what if the Fed had set the price instead of the quantity?

To put this in context for those who don’t know the background, let’s talk about carbon cooking the planet. Going back to Weitzman in the 1970s (nice summary by E. Glen Weyl), economists have focused on the relative tradeoff of price versus quantity regulations. We could regulate carbon by changing the price, say through carbon taxes. We could also regulate it by changing the quantity, say by capping the amount of carbon in the air. In theory, these two choices have identical outcomes. But, of course, they don't. It depends on the risk involved in slight deviations from the goal. If carbon above a certain level is very costly to society, then it’s better to target the quantity rather than the price, hence setting a cap on carbon (and trading it) rather than just taxing it.

This same debate on the tradeoff between price and quantity intervention is relevant for monetary policy, too. And here, I fear the Federal Reserve targeted the wrong one.

Starting in December 2012, the Federal Reserve started buying $45 billion a month of long-term Treasuries. Part of the reason was to push down the interest rates on those Treasuries and boost the economy.

But what if the Fed had done that backwards? What if it had picked a price for long-term securities, and then figured out how much it would have to buy to get there? Then it would have said, “we aim to set the 10-year Treasury rate at 1.5 percent for the rest of the year” instead of “we will buy $45 billion a month of long-term Treasuries.”

This is what the Fed does with short-term interest rates. Taking a random example from 2006, it doesn’t say, “we’ll sell an extra amount in order to raise the interest rate.” Instead, it just declares, “the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent.” It announces the price.

Remember, the Federal Reserve also did QE with mortgage-backed securities, buying $40 billion a month in order to bring down the mortgage rate. But what if it just set the mortgage rate? That’s what Joseph Gagnon of the Peterson Institute (who also helped execute the first QE), argued for in September 2012, when he wrote, “the Fed should promise to hold the prime mortgage rate below 3 percent for at least 12 months. It can do this by unlimited purchases of agency mortgage-backed securities.” (He reiterated that argument to me in 2013.) Set the price, and then commit to unlimited purchases. That’s good advice, and we could have done it with Treasuries as well.

What difference would this have made? The first is that it would be far easier to understand what the Federal Reserve was trying to do over time. What was the deal with the tapering? I’ve read a lot of commentary about it, but I still don’t really know. Do stocks matter, or flows? I’m reading a lot of guesswork. But if the Federal Reserve were to target specific long-term interest rates, it would be absolutely clear what they were communicating at each moment.

The second is that it might have been easier. People hear “trillions of dollars” and think of deficits instead of asset swaps; focusing on rates might have made it possible for people to be less worried about QE. The actual volume of purchases might also have been lower, because the markets are unlikely to go against the Fed on these issues.

And the third is that if low interest rates are the new normal, through secular stagnation or otherwise, these tools will need to be formalized. We should look to avoid the herky-jerky nature of Federal Reserve policy in the past several years, and we can do this by looking to the past.

Policy used to be conducted this way. Providing evidence that there’s been a great loss of knowledge in macroeconomics, JW Mason recently wrote up this great 1955 article by Alvin Hansen (of secular stagnation fame), in which Hansen takes it for granted that economists believe intervention along the entirety of the rate structure is appropriate action.

He even finds Keynes arguing along these lines in The General Theory: “Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.”

The normal economic argument against this is that all the action can be done with the short-rate. But, of course, that is precisely the problem at the zero lower bound and in a period of persistent low interest rates.

Sadly for everyone who imagines a non-political Federal Reserve, the real argument is political. And it’s political in two ways. The first is that the Federal Reserve would be accused of planning the economy by setting long-term interest rates. So it essentially has to sneak around this argument by adjusting quantities. But, in a technical sense, they are the same policy. One is just opaque, which gives political cover but is harder for the market to understand.

And the second political dimension is that if the Federal Reserve acknowledges the power it has over interest rates, it also owns the recession in a very obvious way.

This has always been a tension. As Greta R. Krippner found in her excellent Capitalizing on Crisis, in 1982 Frank Morris of the Boston Fed argued against ending their disaster tour with monetarism by saying, "I think it would be a big mistake to acknowledge that we were willing to peg interest rates again. The presence of an [M1] target has sheltered the central bank from a direct sense of responsibility for interest rates." His view was that the Fed could avoid ownership of the economy if it only just adjusted quantities.

But the Federal Reserve did have ownership then, as it does now. It has tools it can use, and will need to use again. It’s important for it to use the right tools going forward.

Follow or contact the Rortybomb blog:
 
  

 

QE3 is over. Economists will debate the significance of it for some time to come. What sticks out to me now is that it might have been entirely backwards: what if the Fed had set the price instead of the quantity?

To put this in context for those who don’t know the background, let’s talk about carbon cooking the planet. Going back to Weitzman in the 1970s (nice summary by E. Glen Weyl), economists have focused on the relative tradeoff of price versus quantity regulations. We could regulate carbon by changing the price, say through carbon taxes. We could also regulate it by changing the quantity, say by capping the amount of carbon in the air. In theory, these two choices have identical outcomes. But, of course, they don't. It depends on the risk involved in slight deviations from the goal. If carbon above a certain level is very costly to society, then it’s better to target the quantity rather than the price, hence setting a cap on carbon (and trading it) rather than just taxing it.

This same debate on the tradeoff between price and quantity intervention is relevant for monetary policy, too. And here, I fear the Federal Reserve targeted the wrong one.

Starting in December 2012, the Federal Reserve started buying $45 billion a month of long-term Treasuries. Part of the reason was to push down the interest rates on those Treasuries and boost the economy.

But what if the Fed had done that backwards? What if it had picked a price for long-term securities, and then figured out how much it would have to buy to get there? Then it would have said, “we aim to set the 10-year Treasury rate at 1.5 percent for the rest of the year” instead of “we will buy $45 billion a month of long-term Treasuries.”

This is what the Fed does with short-term interest rates. Taking a random example from 2006, it doesn’t say, “we’ll sell an extra amount in order to raise the interest rate.” Instead, it just declares, “the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 5-1/2 percent.” It announces the price.

Remember, the Federal Reserve also did QE with mortgage-backed securities, buying $40 billion a month in order to bring down the mortgage rate. But what if it just set the mortgage rate? That’s what Joseph Gagnon of the Peterson Institute (who also helped execute the first QE), argued for in September 2012, when he wrote, “the Fed should promise to hold the prime mortgage rate below 3 percent for at least 12 months. It can do this by unlimited purchases of agency mortgage-backed securities.” (He reiterated that argument to me in 2013.) Set the price, and then commit to unlimited purchases. That’s good advice, and we could have done it with Treasuries as well.

What difference would this have made? The first is that it would be far easier to understand what the Federal Reserve was trying to do over time. What was the deal with the tapering? I’ve read a lot of commentary about it, but I still don’t really know. Do stocks matter, or flows? I’m reading a lot of guesswork. But if the Federal Reserve were to target specific long-term interest rates, it would be absolutely clear what they were communicating at each moment.

The second is that it might have been easier. People hear “trillions of dollars” and think of deficits instead of asset swaps; focusing on rates might have made it possible for people to be less worried about QE. The actual volume of purchases might also have been lower, because the markets are unlikely to go against the Fed on these issues.

And the third is that if low interest rates are the new normal, through secular stagnation or otherwise, these tools will need to be formalized. We should look to avoid the herky-jerky nature of Federal Reserve policy in the past several years, and we can do this by looking to the past.

Policy used to be conducted this way. Providing evidence that there’s been a great loss of knowledge in macroeconomics, JW Mason recently wrote up this great 1955 article by Alvin Hansen (of secular stagnation fame), in which Hansen takes it for granted that economists believe intervention along the entirety of the rate structure is appropriate action.

He even finds Keynes arguing along these lines in The General Theory: “Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.”

The normal economic argument against this is that all the action can be done with the short-rate. But, of course, that is precisely the problem at the zero lower bound and in a period of persistent low interest rates.

Sadly for everyone who imagines a non-political Federal Reserve, the real argument is political. And it’s political in two ways. The first is that the Federal Reserve would be accused of planning the economy by setting long-term interest rates. So it essentially has to sneak around this argument by adjusting quantities. But, in a technical sense, they are the same policy. One is just opaque, which gives political cover but is harder for the market to understand.

And the second political dimension is that if the Federal Reserve acknowledges the power it has over interest rates, it also owns the recession in a very obvious way.

This has always been a tension. As Greta R. Krippner found in her excellent Capitalizing on Crisis, in 1982 Frank Morris of the Boston Fed argued against ending their disaster tour with monetarism by saying, "I think it would be a big mistake to acknowledge that we were willing to peg interest rates again. The presence of an [M1] target has sheltered the central bank from a direct sense of responsibility for interest rates." His view was that the Fed could avoid ownership of the economy if it only just adjusted quantities.

But the Federal Reserve did have ownership then, as it does now. It has tools it can use, and will need to use again. It’s important for it to use the right tools going forward.

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