i’m not really sure what this will accomplish, but it should help asset prices. 5-6 year duration leaves a lot of ambiguity…
If you step back for a second, there weren’t too many times in history where a question like that would even make sense. This whole enterprise is nutty.
Tricky question. Short answer: it is hard to judge without a real-time market that can determine what the market thinks will happen to growth and inflation over the policy-relevant horizon. Long answer: I think a big issue is if you use lagging indicators in calculating a policy rule versus rules that don’t focus on the earlier path of an indicator. (note all this stuff is related to a monetary authority trying to target any of these variables over the policy relevant horizon, not based on where they are now necessarily) For instance, if you use price level targeting instead of inflation targeting, then you need to increase your inflation target during periods of deflation. Similarly, an unemployment target depends on not only the labor market over the next year, but also what the labor market was like over the past year. Something like nominal GDP (so nominal GDP level vs. nominal GDP growth targeting) can also fulfill the Fed’s dual mandate and could require similar adjustments to either of the two above. The academic research suggests that price level targeting is preferred to inflation targeting due to price level targeting being able to get you out of a liquidity trap. However, I haven’t seen much about nominal GDP level targeting vs. nominal GDP growth targeting. I think the issue with nominal GDP targeting is that its simple to estimate the target level of prices or inflation, but estimating potential real output or some idealized output you should want in a year is tricky. This can cause large errors in monetary policy if a trend line has a structural break and there is a fundamental reason why growth won’t return to trend. For that reason, I support nominal GDP growth targeting rather than level targeting. According to the SPF, nominal GDP is expected to grow a little more than 4% over the next year. If I set my target as 5% (which is reasonable I think), then this suggests monetary policy is a little tight right now. Hence, additional monetary stimulus is appropriate until the 1 year ahead nominal GDP forecast rises to 5%. So is $600bn enough? It is hard to say without a market in nominal GDP growth futures or something. If that were the case, I could tell in real-time what happened to expectations. Now I have to wait until the next SPF to see if it is enough. However, if you believe in any form of level targeting (unemployment, price, or nominal GDP) you should support even stronger QE (probably way more than what they did) in order to return to trend. That is probably a mistake.
$600 BILLION?? That’s a lot of money. I’m not sure what you’re asking but whatever it’s for that HAS to be enough.
Billion is the new million so 600b is nowhere near enough. 600 Trillion would be a more appropriate number.
This 600B is additional to the 1.7T of QE1 that ended in March. According to a Fed computer model, the 600B of QE2 is similar to lowering the interest rate by 75 bps. As the Fed can no longer reduce rates using conventional means, it is left with this alternative, which I believe is an indirect way to manipulate the currency.
WTF jmh? I know that’s all chic research these days, but is any of that relevant? Dumping money in an economy that doesn’t need it doesn’t affect any of those things. Does anybody know anyone who is having trouble getting money for any project because the bank has too much demand for money? Has anyone tried to get a mortgage recently? The US is awash in lendable funds with nobody they want to lend it to.
God knows whats going on in this country nowadays.
What can I say, I find Scott Sumner pretty convincing. Perhaps I’m a bit too out of the mainstream on these issues, but I think I’m working from a good framework to analyze the issues. “The US is awash in lendable funds with nobody they want to lend it to.” You’re saying that dumping money won’t affect anything because the banks won’t lend it. This is a serious critique, but I think it is due to the way the Fed implements their policy. The Fed is providing an interest rate on excess reserves. THAT IS A RIDICULOUS POLICY and has significantly diminished the effectiveness of QE. If instead, they charged banks to hold the reserves, they would be quite swift in lending out that extra money. I view this as a big problem with the way the Fed implements their monetary policy, but they could resolve it if they had the stones. What is the downside of dumping more money in the economy? Even Austrians (who have read and understand Hayek anyway) agree that the expansionary booms are caused by loose monetary policy, which I don’t think you could argue we have now (see above). Unlike the chic new-Keynesians, I would rather target the nominal GDP growth than the levels. Their policy would keep pumping money for a long time. I think their criteria would lead them to adopt monetary policies that are too loose (and all the problems associated with that). I would be more inclined to remove stimulus much more quickly as nominal GDP forecasts are revised higher. However, without a nominal GDP futures market, I can’t say how much or is it correct in real-time.
“The Fed is providing an interest rate on excess reserves. THAT IS A RIDICULOUS POLICY and has significantly diminished the effectiveness of QE. If instead, they charged banks to hold the reserves, they would be quite swift in lending out that extra money.” Do we want financial institutions to grow their loan books right now? Certainly we don’t want them making low quality loans willy nilly because there is a cost associated with not doing so. Credit growth was enormous in the boom years. Perhaps a contraction or at least modest growth is the best thing for the economy right now.
like a few have mentioned - banks having money isn’t the problem. the govt has mandated tighter lending standards, but still wants banks to pump out dough. only a mother could love these guys… i still don’t see why throwing money at the system is the answer. my stance has been and will continue to be that until obama can get a ‘roadmap’ in place for the recovery (defined tax rates, defined healthcare costs, defined infrastructure/energy projects, etc.) there won’t be targeted spending or recovery. money is fleeing the us to invest in emerging market economies (namely Brazil) and other markets with lower tax rates. as low as we can push the dollar, we still will not have a comparative advantage in production and will not bridge the current account gap. there’s no way china, india, brazil, etc. will start buying ‘american made’ when they can buy from somewhere closer for less and no one will invest here until we lower effective tax rates.
Completely agree with mar except that I’ll take something less than completely defined.
jmh530 Wrote: ------------------------------------------------------- > Tricky question. Short answer: it is hard to judge > without a real-time market that can determine what > the market thinks will happen to growth and > inflation over the policy-relevant horizon. > > Long answer: > I think a big issue is if you use lagging > indicators in calculating a policy rule versus > rules that don’t focus on the earlier path of an > indicator. > > (note all this stuff is related to a monetary > authority trying to target any of these variables > over the policy relevant horizon, not based on > where they are now necessarily) > For instance, if you use price level targeting > instead of inflation targeting, then you need to > increase your inflation target during periods of > deflation. Similarly, an unemployment target > depends on not only the labor market over the next > year, but also what the labor market was like over > the past year. Something like nominal GDP (so > nominal GDP level vs. nominal GDP growth > targeting) can also fulfill the Fed’s dual mandate > and could require similar adjustments to either of > the two above. > > The academic research suggests that price level > targeting is preferred to inflation targeting due > to price level targeting being able to get you out > of a liquidity trap. However, I haven’t seen much > about nominal GDP level targeting vs. nominal GDP > growth targeting. I think the issue with nominal > GDP targeting is that its simple to estimate the > target level of prices or inflation, but > estimating potential real output or some idealized > output you should want in a year is tricky. This > can cause large errors in monetary policy if a > trend line has a structural break and there is a > fundamental reason why growth won’t return to > trend. For that reason, I support nominal GDP > growth targeting rather than level targeting. > > According to the SPF, nominal GDP is expected to > grow a little more than 4% over the next year. If > I set my target as 5% (which is reasonable I > think), then this suggests monetary policy is a > little tight right now. Hence, additional monetary > stimulus is appropriate until the 1 year ahead > nominal GDP forecast rises to 5%. > > So is $600bn enough? It is hard to say without a > market in nominal GDP growth futures or something. > If that were the case, I could tell in real-time > what happened to expectations. Now I have to wait > until the next SPF to see if it is enough. > > However, if you believe in any form of level > targeting (unemployment, price, or nominal GDP) > you should support even stronger QE (probably way > more than what they did) in order to return to > trend. That is probably a mistake. same argument was made in the Economist this week.
In order to get out of the financial crisis caused by an extended period of low interest rates and lax lending standards, the government is keeping rates artificially low for an extended period and is asking banks to make more loans. Genius.
Sweep - concise and to the point. Wish there was a black and white obvious solution to this mess, but fully agree kicking the can down the road isn’t doing us any favors. I don’t blindly adhere to one side of the political spectrum, and I work at a hedge fund so I have my bias, but this crap about ‘certainty’ is pure BS. As long as we have a huge deficit, no energy policy, etc, I don’t care if tax rates are fixed for the next 50 years there won’t be any “certainty” regarding future market and economic direction. I don’t think at any point in history the future has ever been certain. And good luck getting “defined healthcare costs.” Back when Medicare began who could have predicted actuaries would be off by an order of magnitude on its costs 20-30 years down the road? Healthcare and insurance is insanely expensive, but what are the alternatives? Force insurers to take uneconomical risks? Impose limits on rising medicine costs and choke off R&D? Complain about doctor’s salaries when Wall Street often takes home more pay? Let people suffer and die because they can’t afford treatment? Trust me, I don’t want the government allocating wealth any more than the next capitalist, but ideas such as Jack Welch’s solution to our economic problems as professed this morning on CNBC of “create more jobs, lower taxes” is a utopian dream if I ever heard one…
dudes, what do you want? stagflation or deflation? the less painful choice is stagflation so thats what they’ve decided on. through the upcoming period of stagflation, bernanke is banking on the wealth affect of universal rising asset prices to drive investment and growth at home. get ready for the period of no income growth at home except for dividend growth via worldwide companies like MSFT, AAPL, LULU, CSCO… the list goes on for quite a while. most of the productivity gains we’ll make at home for quite some time will be the result of efficiency gains and until we see something as revolutionary as the internet, invest in companies that are invested in growing countries and see your investment income grow. that’s about it. there’s no magic bullet, but this is the closest thing. bernanke is telling the american populace to invest in companies that invest abroad or they will be broke in the near future…
My biggest issue with money printing is the creation of tail risk. While one can pretend to understand all of the possible scenarios and attempt to control and invest accordingly, I think that at the risk of sounding cliche, the seeds have been sown for blackswans everywhere. The UNEXPECTED consequences of this policy and their far-reaching effects seem a lot more dangerous than the risks everyone is talking about. But overall I’m in the camp of JDV and mar. Fundamental valuation of assets is not only no longer possible because of the long-term uncertainty of inputs, but pointless as the main driver of long-term assets is now the massive, speculative, technically driven FOREX market. Which is famous for diverging from any measurable economic underpinnings.
Just back to the states and super tan…and I’m like what the hell is going down. …so what, they are buying their own crappy govie securities? In the amount of $600 billion dollars. Oh right, cause that is normal. I think I already said a trillion times, but since people here have ADD I’ll say again, the USA goes the way of bankruptcy and then it hyperinflates itself out of it, which is all the same outcome anyhow. There doesn’t seem to be any other possible destination. To me this just seems like things moving toward the place where they are going. How are the Chinese/Japanese taking the news, doesn’t this totally erode the value of all those crappy bonds?
Google gave me this link, which helps. More financial schemes to solve prior financial schemes! http://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears
The US has a confidence problem, not a liquidity problem. By buying more bonds the Fed is signalling that people should be worried, while doing very little to affect liquidity because liquidity is not the issue in the first place. The Fed got too used to saving the economy and now it seems they just can’t leave well enough alone. Please Fed, just sit on your hands for a while.