Friday, March 23, 2012

Brad at Brookings

The guy was presenting a paper and he had energy to consider other presentations.  How many brains do you think are in that skull.  I guess at least three.

3 Separate Comments

3) on Mamelukes. Huh ?!?!? What about Egypt ?  Yes it is mostly desert, but the people live in the Nile valley -- ground zero for extracting taxes from agriculture.  This is where excess grain beyond that needed to feed the farmers was produced.  This was where farmers couldn't run away and farm somewhat less valuable land under another lord (or no lord).  Or maybe ground zero was Mesopotamia.  The Ibn Kaldun hypothesis makes less than no sense.  It is a common story for the Arabian Peninsula on the one hand and Egypt and Mesopotamia on the other.  But clearly they are the most nearly opposite ecologies in the old world.  Egypt has been under central control or a province of an empire longer than any other place.  Saudi Arabia competes with Afghanistan as the area where empire feared to tread (or didn't bother).  The idea of a border (along with the first geometry) came from Egypt.  Saudi Arabian borders were not defined on maps drawn in my lifetime.  The places to look to test Erich Chaney vs Ibn Kaldun are Egypt and Iraq not Iran. 50 years hah.  The experiment is well under way.

1) Stock Watson and Blinder together say a drop in aggregate demand has about the same effects no matter what the cause.  Keynes would not be surprised by this.  It is a problem for newKeynes (have I mentioned that I think that  newKeynes seems to have more to learn from Keynes than vice versa ?).  To the extent that the dynamics are similar, there is evidence that money isn't so very special after all.  This isn't just trouble for Friedman but for all of his followers, that is all mainstream macro-economists.

2. Gauti et all I like your insistence on fiscal not monetary policy.  Many of my critical comments on this blog were comments on posts in which you discussed useful things the Fed could legally do.  But I didn't disagree 100% then and so I don't agree 100% now.  The Fed can irreversibly expand the money supply if it buys a huge amount of illiquid assets.  This is not good strategy for an investor as one loses huge amounts of money that way.  Ah yes loosing money is irreversibly supplying money.  If the Fed manages to have more liabilities than marked to market assets, then it can't retire the liabilities.  Now this means using open market operations to give money to financiers.  I'd much prefer giving it to ordinary people by cutting T.  I also prefer increased G to reduced T.  But the Fed can commit by trading very badly.

To be serious.  If the Fed buys risky assets there are two benefits. One is the one you have been stressing since 2008, that the supply of risky assets to the private sector is too high and this is the root of the problem.  But the other is that if things go bad, the monetary expansion can't be reversed (can't retire liabilities if your assets aren't worth that much).  So the Fed commits to an irreversible monetary expansion if things go badly.  The fact that it transfers its mark to made up balance sheet profits to the Treasury but the Treasury doesn't give the money back, makes it easy for the Fed to gamble -- win for a while and then get stuck so it can't reduce the money supply when it finally looses.

The problem is that if the economy tanks, then the Fed can't avoid creating high inflation expectations (because it will not be able to retire the huge pile of money).  Is this a bug or a feature ?

This approach is within the Fed's current legal authority.  What's the problem ?

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