3 Questions for Larry Summers About the Fed

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http://www.theatlantic.com/business/archive/2013/08/3-questions-for-larry-summers-about-the-fed/278298/


1) What kind of unconventional polices should it use? 2) What kind of target should it have? 3) What kind of bubble cop should it be?

***SNIP


1. What should the Fed do when interest rates hit zero? Monetary policy is usually pretty simple. The Fed raises rates when the economy is running too hot, and lowers them when the economy is running too cold. But today, even zero interest rates aren't enough to turn around our still-cool economy. And the Fed can't cut rates below zero, at least not for long, because people would just trade their bank deposits that were losing money for cash that wasn't. So the Fed has to instead push up inflation expectations to cut inflation-adjusted rates -- which means getting creative. The Bernanke Fed has done so by buying long-term bonds and promising to keep short-term rates low for long -- what we call quantitative easing (QE) and forward guidance. (Catchy, right?).

We don't really know what Summers thinks of these unconventional policies. Now, I suspect he prefers guidance to QE, because guidance makes fiscal stimulus, which he very much wants, even more of a slam dunk by telling us exactly how much stimulus the Fed will allow. But the Republican House means that new stimulus isn't coming anytime soon. So would Summers buy bonds out of necessity? He's been skeptical of QE, but perhaps still willing to try it. But how willing? Now, this might sound academic, but it couldn't be less so. Zero interest rates are going to be a reality for at least a few more years -- and might be again when the next recession hits.

2. Is a 2 percent inflation target the right target? Back in 1991, Summers said the optimal inflation rate was "surely positive" and "perhaps as high as 2 or 3 percent." Why? Because he thought that much inflation would let us "[avoid] the zero interest rate trap." Well, it didn't. The Fed has been tacitly targeting 2 percent for almost two decades, and recently formalized that -- but that wasn't enough to keep us out of the liquidity trap that Summers feared.

So does Summers think he underestimated how much inflation we need to prevent depressions -- and do we need more now? If we do, then we need a new target. That could be something revolutionary like an NGDP target (which just looks at the total cash size of the economy), or something evolutionary like a higher or more flexible inflation target. As Evan Soltas points out, Summers did quasi-endorse an NGDP target back in 1991 when he said that "what the monetary authority surely can control in the long run is the growth rate of nominal income." But there's a difference between what someone says at a conference 20 years ago, and what they think about policy today. Does Summers think an NGDP target makes sense? Or does something like the Reserve Bank of Australia's flexible inflation target, which aims for 2 to 3 percent inflation averaged over the business cycle, make more sense? Or is our 2 percent inflation target already good enough?

[jakeXT]

1. Summers a crook or Yellen who admits or pretends of not seeing it coming

Ms. Yellen told the Financial Crisis Inquiry Commission in 2010 that she and other San Francisco Fed officials pressed Washington for new guidance, sharing the problems they were seeing. But Ms. Yellen did not raise those concerns publicly, and she said that she had not explored the San Francisco Fed’s ability to act unilaterally, taking the view that it had to do what Washington said.
“For my own part,” Ms. Yellen said, “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened.”

http://www.nytimes.com/2013/08/14/business/economy/careers-of-2-fed-contenders-reveal-little-on-regulatory-approach.html

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2. at this point -- when it comes to the country's economic health -- i'm pretty skeptical of

establishment types.

they broke it -- and continue to want the job to fix it.

since the 90s{fairly obvious} the folks have failed again and again.