“I say a little prayer”

The title of Ryan Avent´s post: “Unconventional policy forever” for some reason, maybe because of the word ‘forever’, reminded me of the Burt Bacharat/Dinne Warwick 1960s hit “I say a little prayer”. It seems so should we:

THE Federal Open Market Committee concluded its two-day meeting today with a nothing-burger of a statement. Very little changed in its wording on the state of the economy, and both asset purchases and interest-rate guidance remain as they were before. Things continue on as they have. New economic projections released with the statement suggest the Fed expects a bit less output growth and a bit less inflation than it previously did over the next few years, with the unemployment moving toward its long run range (between 5.2% and 6.0%) a little bit faster. Nothing to see here.

A good part of the explanation for that miserable showing can be summed up in three words: zero lower bound (ZLB). Since December of 2008, when the Fed cut the fed funds rate target to roughly zero, the FOMC has been scrapping to try and boost recovery without its favoured tool. It has had some success. But the recovery has obviously been much, much weaker than anyone would have preferred. And one can conclude, from this performance and from Fed statements, that the weak recovery is rooted in the fact that the Fed is less convinced of the benefits of the unconventional tools it has been deploying and more concerned about their risks, relative to normal interest-rate policy.

We are living the consequences of the ZLB and the Fed’s best estimates have America right back in the same hole when the next recession hits. If the Fed is simply waiting for academia to sort things out, that’s really disconcerting. Alternatively, if the Fed is actually pretty comfortable using unconventional policy and not particularly worried about rolling it out again during the next downturn then one has to ask why it isn’t doing much more now to address unemployment.

The answer doesn’t have to be a higher inflation target. It can be a commitment to treat the current target more symmetrically (that is, to err above as often as it errs below). Or it could be a switch to an NGDP level target. But right now, the Fed’s answer seems to be: get used to nasty recessions and insufficient monetary responses, suckers. At least until academics tell us it´s safe to try something new.

In academia there´s a ‘protocol’ to be followed. What the heck, they´ve had had seminars and papers on “Conducting monetary policy in a low inflation environment” since the late 1990s. For an academic ‘consensus’ to emerge it takes forever. In real life many times you have to ‘go with your gut’. And it´s not that Bernanke would be ‘going in blind’. After all he gave all sorts of unconventional advice to Japan 14 years ago!

Update: Scott Sumner has a post on RA

HT Bill Woolsey

“The euro area recovery starts with Cyprus”(!)

Anything goes! From Willem Buiter Citibank Chief-Economist

Depositors of Cypriot banks are to be ‘bailed in’ in all but name, pending the passing of emergency legislation by the Cypriot parliament.

 In our view, this course of action is qualified good news for the euro area, in that it is a decisive step to restructure excessive levels of (in this case bank) debt which is necessary for the return to sustainable growth in the euro area. Future restructurings of                        bank debt and sovereign debt (both official sector involvement and private sector involvement) in the euro area are to follow.

 Some near-term costs are likely, as some – perhaps previously complacent – investors reassess the risks of debt restructuring of euro area banks and sovereigns, and because the agreement in Cyprus strengthens the perception that the euro area approach to reducing excessive debt in sovereigns and banks is rather ad-hoc and sometimes relatively unpredictable. We think it would have been desirable: i) for insured depositors (below €100k) to be spared, ii) for haircuts on larger deposits to be made bigger to satisfy the entire recapitalization need of the banks, and iii) for losses to reflect recapitalization needs of each bank.

 Contagion risks are overrated, in our view. The risk of bank runs in other euro area countries has clearly risen, but the unique features of the Cypriot situation should limit the ‘read through’ to other cases in the euro area. Even when bank runs occur, the ECB has the means to substitute for the funding lost from departed deposits.

“A ‘Scott’ for all seasons”

This is the ‘Abe will lead Japan to hyperinflation Scott’:

Not many things keep me awake at night, but recent developments in Asia are a cause for concern. The increasingly destabilizing  policies being implemented by Japan have the potential to ignite a global financial conflagration with consequences even more severe than the recent crisis.

Japanese authorities have embarked on a precarious policy of depreciating the yen, raising domestic inflation to 2 per cent, and running larger fiscal deficits in an attempt to end decades of chronic stagnation. This policy cocktail, designed to increase domestic spending while improving export competitiveness, threatens to rekindle uncertainty and upheaval across the globe.

The world’s third-largest economy may be setting the stage for a global inflationary spiral, perhaps beyond anything previously experienced. As Japan seeks to deal with the longer-term consequences of its current policy, it could easily slide down the slippery slope that leads to hyperinflation. Troublingly, the rest of the industrialized world is at risk of going down with it.

So I suppose he would have that Japan remains ‘collared’!

JP Hipeinflation


HT Patricia Stefani

Why is ignorance so pervasive in the info age?

A poignant story:

The back-pedalling and hand-wringing has been an embarrassing spectacle but it has also laid bare the unedifying eurozone decision-making process and the lack of stature amongst its decision makers. The only two plausible interpretations for the Eurogroup approving such a self-destructive decision as taxing all bank deposits is a complete disregard for the consequences (doubtful) or an utter underestimation for the effect it would have (more plausible).

The latter suggests that one part of the eurozone is now completely out of step with the other, unable to understand its challenges, its concerns and, ultimately, its reality. Only a core group of decision makers with no sense of the fragile state of societies in the periphery, which have been battered by deepening economic crisis and uncertainty for months on end, would favour a policy that creates a precedent for governments to grab people’s savings without second thought.

Even if capital flight from Cyprus as a result of this decision is less severe than many fear, even if Cypriot banks survive this real stress test, even if the island’s economy is not set back many years, even if savers in Greece, Spain, Portugal and Italy don’t panic, the idea of a deposit tax and the way it was adopted has released something poisonous in the air. It is difficult to see how these citizens will be able to trust the system – be it their governments, banks or eurozone partners – in the weeks to come. Belief in countries where the economy is contracting and unemployment growing is already vitreous and planting fears about a possible deposits grab in the future could shatter it completely.

Others will argue that it is unfair to expect Germany or other eurozone taxpayers to keep footing the bill for bailing out member states. This also speaks of different perceptions of reality in the euro area. It ignores the fact that taxpayers in countries that have been bailed out are also paying a price. In fact, if one looks at the eurozone today and chooses any of its main economic indictors, it is abundantly clear who is footing the much higher cost for these rescue packages.

This emergence of parallel lives is the illness spreading to the heart of the single currency. How can the eurozone’s two parts understand each other when their realities are growing further apart? How can one side decide for the other when it’s not experiencing the depression, polarization and incertitude of its counterpart? In this two-tier construct, how can those on the upper deck assimilate the warnings from those below that the vessel is sinking, when their feet aren’t even wet?

That’s why Cyprus is about so much more than just numbers.

The picture confirms this view

Dry Feet

Greenspan´s Fed vs Bernanke´s Fed – A picture post

Back at Scott Sumner´s blog, TravisV writes in the comments:

I’ve thought of a good blog post that might generate controversy and interest:

Talk about how the Fed led Greenspan was much much much much much better than the Fed led by Bernanke.

To which Scott answers:

It’s obvious that the Greenspan Fed was far better, but it’s not at all obvious that Greenspan himself was better than Bernanke–indeed I’d argue the opposite.

The Fed has a mandate: Low inflation and low unemployment. So that´s the criteria to use when comparing the Greenspan and Bernanke Fed. The charts provide the instrument for you (the reader) to judge.

G-B Fed_1


G-B Fed_2

And on the operation of the “control lever” (NGDP):

G-B Fed_3

But Scott also says he thinks Bernanke is better than Greenspan. That got me confused. Is he talking about the person, the economist or the Fed chairman? Maybe Bernanke is more pleasant and polite. Surely the academic standing of Bernanke is higher. But to the extent that the Fed Chairman is influential in getting FOMC policy made, as Fed Chairman Greenspan was much better than Bernanke. If they were awarded bonus by results, Bernanke would have gotten none!

Everyone knows the academic qualities of Bernanke. But even as an academic inferior, Greenspan developed a reputation not only as the world´s preeminent central banker, but also as the best economic forecaster. His knowledge of economic statistics and ability to dissect and connect official statistics, market/industry data, and so called anecdotal evidence was legendary. I would think those are the qualities/characteristics that make up a good central banker.

“Wish I had kept my mouth shut”!

Very soon to be four year anniversary of this prediction:

May 13 (Bloomberg) — The Federal Reserve may soon need to raise interest rates, said John Taylor, the former Treasury official who devised the “Taylor Rule,” a formula for rate- setting based on the outlook for inflation and growth.

“My calculation implies we may not have as much time before the Fed has to remove excess reserves and raise the rate,” Taylor, a Treasury undersecretary under President George W. Bush from 2001 to 2005, said yesterday at an Atlanta Fed conference in Jekyll Island, Georgia.

At that time Scott Sumner had just started saying quite the opposite!

The Nordics

In this post Scott Sumner muses:

It’s interesting to note that all eight EU countries on the Mediterranean (or close by in the case of Portugal) opted to get into the euro, whereas most of the countries in the far north stayed out (Sweden, Denmark, Britain, and of course Iceland and Norway stayed entirely out of the EU.)  What explains this pattern?  Perhaps this is just the standard problem of clubs; those who see themselves as better than average prefer to stay out, and vice versa.

Leaving Britain aside, in order of ‘association’ with the euro we have:

  1. Finland: in EU and belongs to euro
  2. Denmark: in EU and linked to euro
  3. Sweden: in EU but not linked to euro
  4. Norway: outside EU and not linked to euro
  5. Iceland: outside EU and not linked to euro

Norway and Iceland have the same degree of ‘independence’. The only difference is distance, with Iceland located halfway to Greenland!

How did they fare? It appears the more closely tied to the euro a country is the worse the outcome.


Norway´s NGDP sways with oil. Recently Lars Christensen called attention to a presentation by the head of the Norwegian central bank which showed the relative stability of the non-oil Norwegian NGDP. This post has a take.

Iceland looks like a ‘special case’ (see here)

Unfortunately it seems Lars Svensson is losing influence over the board of the Sveriges Riskbank! Sweden is falling prey to the inflation nutters.

Mystery solved: The ECB ‘targets’ German/Austrian NGDP!

While the going was good, this appeared adequate for all, but when ‘push came to shove’ in 2008, ‘targeting’ German/Austrian NGDP did not provide a ‘safety net’ for the ‘others’, not even for those in the ‘Northern Kingdom’, here represented by Finland and the Netherlands.

Cyprus Heist

Since most EZ countries are fragile, if the surprise ‘heist’ (to use David Beckworth´s expression) on Cypriotes’ depositors goes through, ‘chaotic’ behavior may follow.

The Cyprus affair

Yesterday, in discussing the debate on “European austerity myth”, I put a 400 year old quote from John Donne:

“No man is an Island, intire of it selfe; every man is a peece of the Continent, a part of the maine…any mans death diminishes me, because I am involved in Mankinde; And therefore never send to know for whom the bell tolls; It tolls for thee.”

I think it´s very a propos in the unfolding Cyprus affair, and not only because Cyprus is an island.

The topic has been widely covered (here, here and here, for example). But I found this statement quite shocking:

  “As it is a contribution to the financial stability of Cyprus, it seems just to ask for a contribution of all deposit holders,” Dutch Finance Minister Jeroen Dijsselbloem, who chaired the meeting in Brussels, told reporters.

PS. If bank runs on the EZ take hold, the dollar will appreciate and monetary policy in the US effectively tighten.

Update: From W. Munchau at the FT:

If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus.

As in the case of Greece, the finance ministers said: “Don’t worry, this is a unique situation”. This is true only in a very narrow legal sense. The bond haircut in Greece is indeed different to the depositor haircut in Cyprus. And when they repeat this elsewhere, it will be unique once more.