Pearls of wisdom from long ago

Comenter Ryan Sanchez went on a “archeological digging expedition” and found a nice “treasure”. In Ryan´s words:

I was as looking over some old fed minutes from December 1982, interesting stuff, they debated targeting NGDP but decided it was too politically sensitive.

Here are some key quotes page 20 (selected by Ryan (all bolds mine)):

MR. MORRIS. I think we need a proxy–an independent intermediate target– for nominal GNP, or the closest thing we can come to as a proxy for nominal GNP, because that’s what the name of the game is supposed to be. If we have to target something that is not predictably related to GNP, which M1 has not been in the past two years, one of two things can happen. One is that we can do as we did in 1981 and say the M1 shift adjusted, which was our target, is coming in too low and we are just going to let it come in low–we’re not going to use it as a target de facto. I think that was the right decision. If we had tried to hit our targets for M1 in 1981, we obviously would have put too much money into the system. I think the targets have misled us this year. That is, up until October when we finally caught up with it, it seems to me that the monetary aggregates misled this Committee into following a much more restrictive policy than we intended. And that is reflected in a nominal GNP growth this year, which we’re now estimating at 3.6 percent, that I don’t think any of us a year ago would have [favored] as a target for nominal GNP. It seems to me that the best proxy for nominal GNP in this world of enormous change is the rate of growth of debt. Now, that may not be a perfect proxy, either. But we certainly don’t want to go back to interest rate targeting. Politically, I don’t think we could adopt a nominal GNP targeting approach even though theoretically that is what we ought to be doing. I don’t think we can do it. We need a proxy for nominal GNP.

CHAIRMAN VOLCKER. What is that political objection?

MR. MORRIS. Well, let’s say the President comes out in January and says we are going to have 12 percent nominal GNP growth, and you go up before the congressional committee in your Humphrey-Hawkins testimony the next month and say we’re going to finance a 9 percent nominal GNP growth. It seems to me it is not well suited to the needs of the central bank to be that far out on a limb.

CHAIRMAN VOLCKER. How far do you think we can go in that regard by saying we’re going to project a 9 percent credit growth or 9 percent M2 growth or something that is inconsistent with the 12 percent [nominal GNP growth]?

MR. MORRIS. I would merely submit that we’ve been getting away with this on the money supply for a number of years. I’m quite amazed that we have. But I think it’s very clear that the intermediate target should not be politically sensitive. And the wonderful thing about the rate of growth in the money supply, for all of its problems, is that it was never a politically sensitive item such as the unemployment rate, or interest rates, and so on. Nominal GNP, if we were to use that as a target, would be a politically sensitive target, and we ought to avoid it for that reason. But we need a proxy for it.

Another from page 40:

VOLCKER. I do think we’re going to be forced into a more explicit rationale, whatever we do, in terms of the nominal GNP. I’m not saying we have to target nominal GNP very directly, and there are obviously dangers in that, but I do suspect that we’re going to be drawn out on that subject much more heavily than we have been in the past. I think there is a real danger in that because it does overemphasize what we in practice can do. I think there’s great overemphasis now on what monetary policy can do either in terms of nominal GNP or interest rates. And it’s very dangerous. It’s partly just a matter of frustration. Nobody else can think of anything else to do so they say that the monetary authority must have control over all these things and if they press the right button everything is going to come out right. The presumption is that there’s a right button to press; I’m not sure there is. Some problems don’t have that simple an answer. I suspect we’re in one of those periods, and we ought to devote some attention to arguing that we’re not all that omnipotent. I myself would accept what some people have mentioned: That we keep an eye on such things as exchange rates or maybe even more importantly the price trend and the price forecast but that we not formally target them.

Mr Morris (alternate Board Member and for 20 years – 1968-88 president of the Boston Fed) was on the right track. Volcker seems reluctant to commit (to a TARGET). But in the end, look how things turned out over the next 5 quarters. Amazing!

And this is what went on during the next 3 years up to the end of Volckers tenure

A “soft and smooth landing”. And Greenspan “nurtured” the “gift received”

Update: Bill Woolsey has interesting comments on the points discussed in the meeting.