Saturday, November 23, 2013

On The Minneapolis Fed Shake Up

There's been a big staff shake up at the Minneapolis branch of the Federal Reserve. If you don't know much about the Fed you should first read Matt Yglesias's great overview from 2011. I'd also recommend Paul Krugman great piece for The New York Times Magazine from 2009 about the state of the "dismal science" to get a good look at divisions inside the discipline.

Simply put, the Minneapolis Fed, along with a few other regional branches like Dallas and Kansas City, have been consistent advocates of a hard money approach to monetary policy. They've been arguing for years now that the Fed should tighten credit in order to head off non-existent and imaginary inflation.

The result has been a divided central bank under Bernanke that knows what it needs to do, for example pull out all the stops to help alleviate unemployment and heal our nation's economic wounds, but can't go "all the way" so to speak because of Ben Bernanke's moral cowardice and a wrongheaded obsession with "consensus" that allows the hard money wingnuts to tie the Fed's hands.

Enter Narayana Kocherlakota, the current president of the Minneapolis Fed. Kocherlakota is the former chair of the economics department at the University of Minnesota (along with the University of Chicago a stronghold of hard money fire eaters and the idea that the marketplace is what some have called "a perfectly self-correcting instrument" and other such silliness) who, unlike few members of his profession, has changed his mind over the past few years in light of the the experience of the "Lesser Depression." Basically Kocherlakota used to be a hard money kook and believed that there was nothing that the Federal Reserve could possibly do to ease unemployment. Then he actually changed his mind about something in light of reality. Kocherlakota decided that there were things that the Fed could do to help address unemployment and, amazingly, publically annouced this view.

He recently appeared to have decided to fire his research director, then another researched was removed, and yet another monetary policy "adviser" named Ellen McGrattan was forced into taking unpaid leave. Ellen didn't like that one bit and she was all outraged to Minnesota Public Radio, "I'm a monetary adviser, by the way. The job is to advise the president. He has chosen not to use me in that capacity."

To which I would reply with something along the lines of:

"Yes he did, and good for him! Your "research" is a bunch of silly nonsense that has been proven totally wrong over the last five years and you refusing to take this into account shows that you are a terrible "adviser." You coauthored a paper back in 2008 where you argued that monetary policy can't do much to affect the unemployment rate. This was obviously pretty silly back then and now is an egregious error, (note that Ireland, Iceland and Israel all dealt with the global downturn with different monetary policies, this has resulted in radical different experiences between them. So yeah, you're an "expert" on monetary policy in the same way phrenologists were "experts" on intelligence.) no matter. You'll obviously get an easy gig teaching econometrics or whatever at the University of Minnesota where you and the rest of the "New Classicals" can be bitter about how horrible Obama is and what an unappreciated genius Alan Greenspan was. Okaythanksbye."

I've noticed some hand-wringing by econ folks on twitter over this new development. They, and the Wall Street Journal, seem to be following the view that this has nothing to do with disputes about policy and is more of a Kocherlakota-going-nuts type story. To which I have to say: I honestly don't care. Maybe Kocherlakota got drunk and did this on a whim, maybe he really is a mad dictator obsessed with power, maybe he just believes in things like the idea of the free market and meritocracy and thus doesn't believe high level research gigs at a branch of the Federal Reserve are entitlements that should be handed out to the enlightened few. As I see it, it's just great to see these folks kicked to the curb. In fact as MPR has pointed out this will probably severly strain, and maybe even break, the long standing ties between the Minneapolis Fed and the University of Minnesota's econ department, "If the Minneapolis Fed is going to split from the U's economics professors philosophically, it's not clear whether that mutually beneficial relationship will hold up."

But that relationship not "holding up" is a really good thing! Rather than letting one of the branches of the Fed be captured by hard money kookery and Randian nonsense from the so called "freshwater" school of economics, we could see people who are, you know...uhh...right about stuff, take over in Minneapolis! It will also put pressure on the U of M's econ department to be...uhh...right about stuff instead of resting on the laurels of a "close relationship" with a branch of the Fed.

All in all this is a wonderful development.

This post probably sounds a little harsh, but as I see it these people kind of deserve it. The hard-money-inflationistas that call Minnesota and the University of Chicago home are responsible in my book for a great deal of human suffering in this world. As someone who graduated from college into what would soon become the disastrous job market that they helped to create and prolong, I can't feel sorry for them. Now we are even.

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