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Eurozone crisis
First, listen to Scott Sumner argue that monetary policy in the U.S. was unintentionally contractionary in 2008. Then, read Izabella Kaminsky on monetary policy today in Europe.
the central bank transmission mechanism has been compromised because expansion or contraction of high-powered money makes no difference to the overall amount of money which is multiplied into the system.
Pointer from Tyler Cowen.
One way to look at the U.S. case is that the Fed bailed out the banks but carried out a contractionary monetary policy. The result was a steep recession. Is Europe going down that path?
READER COMMENTS
marcus nunes
Jan 3 2012 at 2:32pm
What Tyler says is what I called the “neutron bomb effect”. The Fed kept the “financial houses intact” but “killed the worker”.
Mike Rulle
Jan 4 2012 at 3:56pm
Scot draws one into his world like a mystical snake charmer. I have recommended him to many. His confident, soothing, “just right” sarcastic tone of certainty makes him an attractive read. I read all his posts carefully.
I have mentioned before that there is something “tautological” about his writings. But I now realize what I meant is it feels like he has cause and effect backwards. Or, at the very least, it needs to be explored. This assumes for the moment his correlations are correct to begin with.
He says he wants the Fed to publically target NGDP and do this thru some mechanism which gives real time market feedback (he proposes a Futures contract). This will create an expectation for investors and, to the extent reality falls short it will be reflected in the contract price. I accept for the moment that if the Fed and the market are in synch, that is better than if they are not.
But, at the end of the day, are there not just so many tools in the Fed’s toolbox? I believe his current view has been the Fed is too tight. That may be right—-but who would have thought 2 years ago that tripling the size of its balance sheet would be a tightening move? What if the feedback mechanism tells us that monetary policy alone just will not cut it?
My bias is the economy is more driven today by other factors (I am guessing of course) such as PSST, extraordinary anti-business sentiment by the administration, the reality of having already spent a good chunk of “tomorrows” income and a slew of other fiscal and regulatory restraints/constraints.
He appears at time to be Krugmanian—except on the monetary side. I still read him for the reasons stated above.
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