Never reason from a liquidity crisis

A James Alexander post

Tony Yates tips his hat with more respect that in previous posts towards NGDP Targeting.

Re-reading his earlier “silly” post I was struck by this comment he made in reply to some of the commenters:

“NGDP targeting would not have helped avoid the financial crisis. That was caused not by bad monetary policy, but by bad financial regulation policy”.

He was picked up on this by both Andy Harless and one other, but Yates kept mum. Why?

I suspect he can’t go there because his long time at the Bank of England turned him into something of an apologist for his alma mater. Benjamin Cole has complained here about the same sort of thing in the US.

Dan Davies, another sometime Bank of England employee and sometime apologist, has written very insightfully about the demarcation lines between the elite macroeconomists at the Bank of England and everyone else, in particular the grubby lot doing banking regulation. [Apologies to readers but I can’t find the link … it may have been an e-mail from when he was a banker]. They were always regarded as second-raters. Yates unconsciously reinforces that in his website bio:

“I worked for 20 years at the Bank of England in its Monetary Analysis directorate, the part of the Bank devoted to the setting of monetary policy.”

He has to make it very clear that it wasn’t in the lower ranked parts of the central bank, inhabited by dumb financial regulators, who failed to control those smart but evil guys at the banks.

But if it weren’t the banks or their regulators who caused the crisis then who was to blame? Yates and the all too numerous academics who move in, out and around the central banks have too much at stake to hold their hands up and take the blame. They can’t face the embarrassment. But it was them.

And this is probably the reason we hear so little criticism of the Bank of England’s monetary policy or that of the Fed or the ECB in precipitating the 2008 and 2011 crises. They really are “all in it together”. And like any good trades union, united they stand divided they fall.

Well paid bankers make easy villains yet the liquidity crisis that brought them low was a central bank failure.

Yates pompously suggests Market Monetarists should stop writing and go and create some mathematical models, but if I were to put in a function for “catastrophic failure by central banks to stick to targeting core CPI and in fact actively tighten policy or threaten to do it in the face of falling NGDP expectations” how would that go down?

I suspect I wouldn’t get much funding from Yates and his cronies who stuff the academic funding bodies or see it published in one of the hundreds of central bank academic journals. It may be wordy to call most modern macro a closed shop, but it’s true.

If Yates can so easily toss off populist comments that it was all caused by evil commercial bankers and useless regulators then there is plenty to argue about over the internet.

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