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.

Jannet Yellen And The Soft Bigotry Of Low Monetary Policy Expectations

I've found the debate over who Obama should appoint to be chair of the Federal Reserve to be quite fascinating. The contest has basically boiled down to being between Janet, Yellen the current Fed vice chair, and Larry Summers formerly of the White House economic team and Harvard University.  Unfortunately for us, the discussion itself has been notably free of content in the liberal blogosphere. Basically everyone except Brad Delong thinks Summers is history's greatest monster either because he once said something that made the faculty at Harvard mad and/or he once worked with with Robert Rubin. We are then told that Yellen would be much better because she's "more qualified" (whatever that means) and also because nominating her will fix some messy issues around identity politics for the Obama Administration. Meanwhile very little at all is said about her views or record on monetary policy itself, the most important part of being chair of the Fed.   

What strikes me about this whole argument is that we liberals have concocted a terrible way to debate who should become one of the most powerful people in the world.

Some smart progressives have been pointing out for a while that we basically ignore the Federal Reserve system even though it holds enormous clout when it comes to controlling the American economy and thus a variety of policy outcomes that we liberals care about (including who wins elections). It largely does this by controlling monetary policy (a phrase that only appears in Amanda Marcotte's anti-Summers article once, in a quote where we learn that "[Yellen is] very knowledgeable about monetary policy.") In short the chair exercises enormous influence on the Fed's board o' governors that sets the interest rate in the American economy through a variety of policy tools. By lowering interest rates the Fed can general encourage the economy to grow, and in certain times of high growth that can encourage inflation. The Fed can conversely raise interest rates which in turn can cut back on inflation, but this also have a tendency to slow and economy or start a recession by making it harder for business and consumers to get credit. In theory the Fed has a "duel mandate" to reduce unemployment and keep inflation low, but in recent years they don't really act like that at all.

While the Fed (and a lot of people in the press) likes to portray itself as a "neutral" entity with all our best interests at heart that does things to manage the economy like a "maestro", the reality is quite different.

In fact in Anderson's Concise History of the Federal Reserve Since Greenspan we can read the story of two Fed chairs not acting like highly qualified geniuses controlling the economy, but rather political actors working in a political system. As Anderson explains, we recently have had two pretty bad Fed Chairs who are terrible in altogether different ways. Noted Ayn Rand follower Alan Greenspan decided in the late 90's to "cool the economy" i.e. cause a recession to make sure the Democrats lost the White House pop a dangerous bubble because of "irrational exuberance." Then the Maestro did an about face in the early aughts and kept rates at record lows to make sure Bush got re-elected fight the terrorists. While this succeed in wining the election not having the American economy go off a cliff after 9/11, it unfortunately laid the ground work for the creation of the American housing bubble, one of the biggest speculatory bubbles in world history. After Greenspan left Ben Bernanke failed to deal with the bubble until it popped and nearly destroyed the world economy. Fortunately Uncle Ben was able to keep the great white ship, the SS Wall Street Banks, off the rocks during the grim days of late 2008 and early 2009. Unfortunately for the rest of the American people his response to deal with unemployment and a shrinking economy since then has been woefully inadequate. This resulted in the American people suffering years of high employment, slow growth, pain and misery. Oh and since 2010 he's been assisted in crafting his timid and far to weak response to this "Lesser Depression" but his able deputy, one Janet Yellen. And all this happened despite the fact that Bernanke was considered "the most qualified" person for the job.  Which is a round about way of saying that the Fed's monetary policy is very important and the "how" and "why" of the manner in which one creates the Fed's policy can be more important than the "qualifications" on one's "resume".

Which brings me to the problems of liberal commentary on Summers and Yellen. While tens of thousands of words have been written on the subject, the question of how each would employ monetary policy (to what ends? for whose benefit?) has largely been ignored by liberals. A typical New York Times anti-Summer editorial uses the phrase monetary policy only once, in a paragraph not about monetary policy at all:

Mr. Summers’s reputation is replete with evidence of a temperament unsuited to lead the Fed. He is known for cooperation when he works with those he perceives as having more power than he does, and for dismissiveness toward those he perceives as less powerful. Those traits would be especially destructive at the Fed, where board members and regional bank presidents all bring their own considerable political power and intellectual heft to the Fed’s decision-making on monetary policy and financial regulation. Putting Mr. Summers in charge would risk institutional discord or worse, dysfunction. 

So basically Summer's shouldn't get the job because he might say something that hurts the feelings of the hard money people on the Fed's board of governors who have been arguing for higher interest rates and tighter money (and thus less growth and higher unemployment) to stop non-existent inflation. This sort of discussion is like trying to pick a presidential nominee based on musical tastes, not only is it irrelevant, but it distracts from the important questions about the position that should be being asked.

As I see it, there wouldn't be much policy difference between these two. Both are brilliant center-left economists with longstanding ties to the Democratic Party. Both would focus on lowering unemployment as their main goal over stopping non-existent inflation. And while their styles and personalities may differ, it's hard to know whether these differences would be better or worse for the American public. Summer's rougher style might alienate allies and make his job harder, but then again a swift kick in the pants might get the Fed to start actually addressing unemployment in a meaningful way. Meanwhile Yellen might change the direction of the Fed, or she she might turn out to be full of the same weakness and moral cowardice that have been driving Bernanke's "two steps forward, one step back" policy for years now. There's no way to tell, we'll have to wait and see.

But when it comes to the liberal project in general it really is frustrating to see so many smart people ignoring monetary policy and what the Fed actually does for the same warmed over meal of accusations of sexism and hatred of Robert Rubin. Full employment really could transform American society in more ways than one, but too many liberals seem to not understand this, or just not care. This makes me sad.

Fed Reform?

Matt Yglesias has yet another post up pondering why Fed Chairman Ben Bernanke is continuing to ignore the problems of unemployment in our economy and instead is constantly focus on the non-existent threat of inflation.  As he sees it, the problem is Bernanke's poor communication skills and weak analysis:

He [Bernanke] said that if the economy improved enough, tapering would begin and he said it even though inflation is low and inflation expectations were falling. It's essentially a posture that looks at QE purchases as evil per se, and thus something to be halted in the face of good news even in the absence of inflation. The Evans Rule for interest rates embeds the dual mandate in the correct way, saying that mass unemployment will lead the Fed to temporarily ignore a bit of inflation. The taper criteria did the reverse, saying that good economic news means tighter money even if inflation is well-behaved. With that kind of dual mandate in place, bad news out of GDP revisions means tapering is less likely which means the stock market rises. Meanwhile, we're all left to cross our fingers and hope that the GDI number proves more accurate...

What we need is a new statement from the chairman that good news is not bad news and there's absolutely no chance of tighter money as long as inflation stays below target.

This could quite possibly be true, Bernanke could just be bad at communicating his intentions to markets and could just have a tendancy to royally screw up his press conferences and statements.

Or not.  As I see it, economists have been arguing for years now that the the reason the Fed has constantly prioritized fighting fantasy inflation over doing something about unemployment is a technical failure.  Analysis is incorrect, the correct information is not communicated or is done so in the wrong way.  Unfortunately their is a far simpler answer; while the Fed is required by law to keep inflation and unemployment low they actually don't believe in doing that and act accordingly.  That is if Bernanke et al. believe that unemployment is irrelevant (like the European Central Bank seems to think) their behavior may be bad policy, but it's not at all poor performance.  In short, a focus on nonexistent inflation while simultaneously ignoring unemployment is a feature, not a bug.

To broaden the conversation, I think it's important visit the political debates back in the 70's about where the dual mandate came from.  Originally Senator Hubert Humphrey teamed up with Congressman Augustus Hawkins from the Watts section of Los Angels to purpose a tough dual mandate provision for the Fed that would require them to aim for 3%(!) unemployment and if that failed offer New Deal style public works jobs as a stop gap.  Unfortunately Humphrey and Hawkins lost to powerful interest groups and politicians, including the President Jimmy Carter, and what we got instead was a toothless law that "required" the Fed to work towards full employment and low inflation, but had no mechanism to ensure that's what it actually did.

I'm not saying that Humphrey-Hawkins should be revived, but it's pretty clear that the present institutional setup of the Federal Reserve is not working for the American people, and hasn't been for some time now.  We should continue the discussions of Bernanke's follies, but progressives should also look for ways to fix the systemic problems currently going on as well.  Looking at a way to rewrite the rules of the Fed and how it operates should be at the top of that list.