Krugman's very very simple solution to end this depression

[DSGE]

What'd I just say?

you said the Fed got its act together in about 1980

Bernanke said in 2008, "The Fed is not forcasting a recession"

Yes, the Fed stopped being grossly inept for a little while. Now it's up to its old tricks again.

What does that tell you, liberal???

It tells me that you're some kind of elephant.

 

[EdwardBaiamonte]

Yes, the Fed stopped being grossly inept for a little while. Now it's up to its old tricks again.

but it can be reformed permanently at long last, the Congress and President should abdicate their responsibility to it, and that will end recessions and depressions forever because they now know how to produce the desired GDP level to prevent recession and depressions.
You have the same optimism Marx had in the 19th Century about his liberal schemes.

Bernanke in 2008: "The Fed is not currently forcasting a recession"

 

[DSGE]

Well, first let me say that I completely agree with you -- the Fed must do its fucking job. But there problems:
1) The Fed does not do its fucking job. And, as Mankiw has put it, "If Chairman Bernanke ever suggested increasing inflation to, say, 4 percent, he would quickly return to being Professor Bernanke".
2) Why it has to be either stimulus, or inflation? And what if 4% inflation is not enough?

First off, the entire point of an independent central bank is that they're supposed to be insulated from that kind of political pressure.

Second, you don't have to raise the inflation target. I was talking about targeting the level. Specifically, targeting the level of nominal spending; which Krugman, among many others, have recently endorsed. We don't need to increase target rate of inflation, just return the level of nominal income back near its pre-recession trend line.

But, again, I agree completely -- 2% inflation is simply too low. This is not the first time we at zero lower bound. But since we are at 2%, we are in the liquidity trap.

Right but the point is that there's no such thing as "the liquidity trap". To quote Ben Bernanke, it's a "self-induced paralysis". It's not that monetary policy can't be expansionary at the zero lower bound, it's that the central bank is unwilling to engage in expansionary monetary policy.

Again, Krugman is in favour of NGDP level targeting. Yet he's still thrashing the point about fiscal stimulus. Does it make any sense to you (it certainly doesn't to me) that he insists on advocating fiscal stimulus? Fiscal stimulus requires the government to take consolidated action every time there is a recession. Congress has to agree on and successfully pass a stimulus package every recession. With NGDPLT, congress just has to pass an amendment to the Federal Reserve Act once, changing the Fed's mandate. In fact, the Fed can adopt level targeting voluntarily, but so far they're clearly unwilling to take necessary action. So if congress has to do something, isn't it clearly better to have them do the thing that only requires them to cooperate once?

Right, NGDP targeting -- yes, it would work. If only, as I understand it, because it means the Fed would accept a higher inflation down the road, just as it would after setting a higher inflation target.

Well they're not entirely similar. If you just accept a permanently higher rate of inflation you still have two problems: 1) the welfare costs associated with permanently higher inflation; 2) what happens if 4% isn't enough? What if nominal interest rates fall so far that even with the 4% buffer they still go down to zero?

NGDP doesn't have that problem. The question of "how much inflation do we need?" is already answered for you. NGDP = PY. If Y falls you need enough inflation to maintain PY. Also, NGDP should be the thing we look at anyway. The entire theory behind demand-side recessions is that nominal income falls but nominal wages are rigid, so unemployment occurs. Well NGDP is nominal income. If we're targeting the level of NGDP then if it falls we immediately have to bring it back up, avoiding the internal devaluation that would otherwise cause massive unemployment. Why proxy it with inflation? Just talk about NGDP.

As I see it,there is not much difference between what you and Krugman say. You both agree that NGDP targeting or higher inflation target would help. You agree that fiscal stimulus would help. The problem is that both fiscal and monetary stimulus are politically not feasible. Which is less unfeasible is a matter of debate.

Yeah we're using more or less the same model, it's just that he interprets the conclusion to be fiscal stimulus rather than the more immediate, likely and easier option of level targeting (maybe because he has a bit of a Keynes fetish?).

Whether or not which is more feasible is up for debate (I don't think it is), which you should be pushing for isn't really. Rely on congress to pass a bill every recession vs rely on them to pass an amendment once. That's a no-brainer.

As for liquidity trap, Krugman often stated that for him liquidity trap means simply being at ZLB. A situation in which increasing money supply does not make any difference because Fed is swapping one zero-interest asset for another. When the only thing that will have effect is a credible treat of high inflation down the road.

Yeah I use the same terminology. I just like to make clear to people that it's not really a trap by putting the " " around it.

 

[expat_panama]

...current deficits are extraordinary and Krugboy calling it 'austerity' is crazy.

Look at your own chart. The reason for current deficits is low government income (low, because the economy is depressed). Austerity will reduce the government receipts further...

Political hacks are doing to the word "austerity" what they've done to the words "gay" and "marriage". Making up new definitions can give the illusion of discourse but it's a crock. Here's what most people say "austerity" means:

Austerity

A program in which a government drastically reduces spending and/or increases taxes or other revenue sources. A government launches austerity programs when their deficit and/or national debt become unsustainable. The IMF and the World Bank often require austerity programs in exchange for restructuring or refinancing a country's debt. Austerity is usually politically unpopular because it may involve cutting programs like food subsidies or national health care.​

Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

This means that "austerity" brings lower deficits because of sever spending cuts and increasing revenue. Anyone who faces historical budget facts that everyone can see and are even shown in the chart--

--and still wants to call the past couple years "austerity", has to be a moron, a liar, or is someone making up a new definition.

 

[The Rabbi]

Worked means restored the economy to some kind of health.
And no, no stimulus has ever done that.

You sound like a clockwork monkey.

The truth is boring and repetitive sometimes.

But you could easily make your case by pointing to a case where a government economic stimulus solved a recession.

 

[TakeAStepBack]

So deflation (an apparent negative) is bad and inflation (increased supply of money - translating into increased prices) is good. I'll bet we can spend our way into wealth also.

Are you seriously saying this shit? Come on dude.

First thing is first, we want to separate demand and supply side inflation/deflation (that's why it's better to just talk about NGDP). Supply side deflation, falling prices which come from increasing productivity, is good. Supply side inflation, prices rising due to increased scarcity due to a negative supply shock, is also good.

Unexpected demand side inflation (from the supply of money outpacing demand for it), it bad. It redistributes wealth from creditors to debtors.

Unexpected demand side deflation is also bad. It redistributes wealth from debtors to creditors, and due to downward nominal wage rigidity can create severe recessions.

That would be true. But we are not in a position poised in this direction. We are coming off a giant monetary inflation binge. You must allow it to correct or it will continue to perpetuate. There is no way to inflate our way out of this.

My comment was in regards to govt. borrowing to spend on putting people to work in a fashion that does not generate wealth, but instead creates more debt. Then you end up right back here talking about we need to borrow from china again. There is no recovery, just artificial demand created.

 

[TakeAStepBack]

If you're paying down debt, then your income is lower.

No it is not, please stop writing nonsense. There is no connection between your income and your dept payments -- they can rise and fall independently. Putting it the way you understand it -- a person can get a promotion and and a nice rise and so he will increase his mortgage payments. Therefore both his income and his debt payments have increased.

What you are directly affecting by increasing your debt payment is somebody else's income. That is why it is so hard for people to make a connection between them trying to save and losing their jobs as result.

He possibly means "disposable income" which would be a true statement.

You're both correct. I meant to put savings, not income. But Rabbi is also correct from that point. Which is where the belt tightens and consumption decreases. That is what the govt and federal reserve are trying to avoid. A decrease in demand for frivolous and spurious spending. Because that is how they determine that the economy is doing well. When in fact, under the current circumstances, a tightening is exactly what both the consumer and the govt. needs. That has to also come with allowing business to work without so much interference by govt. Slashed govt. spending and a balance out to pay down debt. Otherwise it's just going to drag on.

 

[DSGE]

Yes, the Fed stopped being grossly inept for a little while. Now it's up to its old tricks again.

but it can be reformed permanently at long last, the Congress and President should abdicate their responsibility to it, and that will end recessions and depressions forever because they now know how to produce the desired GDP level to prevent recession and depressions.
You have the same optimism Marx had in the 19th Century about his liberal schemes.

Bernanke in 2008: "The Fed is not currently forcasting a recession"

I was thinking about giving you a considered response for a minute, but then I remembered "Oh right. He's not a real human being capable of learning and logic".

 

[Rozman]

Pelosi and many other Libs feel that Unemployment checks
and Food stamps are really great and do a tremendous amount
of good for the economy.They feel like it's a driving force.
So maybe that's why they are slow to get the economy going
through jobs....

Maybe it's true that the Democrats are tanking the economy deliberately.

 

[DSGE]

So deflation (an apparent negative) is bad and inflation (increased supply of money - translating into increased prices) is good. I'll bet we can spend our way into wealth also.

Are you seriously saying this shit? Come on dude.

First thing is first, we want to separate demand and supply side inflation/deflation (that's why it's better to just talk about NGDP). Supply side deflation, falling prices which come from increasing productivity, is good. Supply side inflation, prices rising due to increased scarcity due to a negative supply shock, is also good.

Unexpected demand side inflation (from the supply of money outpacing demand for it), it bad. It redistributes wealth from creditors to debtors.

Unexpected demand side deflation is also bad. It redistributes wealth from debtors to creditors, and due to downward nominal wage rigidity can create severe recessions.

That would be true. But we are not in a position poised in this direction. We are coming off a giant monetary inflation binge. You must allow it to correct or it will continue to perpetuate. There is no way to inflate our way out of this.

Okay good. The next step is to realise that the key variable is nominal spending. Nominal spending is "aggregate demand". It's not affected by supply shocks. Supply inflation/deflation is good, so we don't want to consider that. We want to look at demand-side inflation/deflation, which is the same as saying "rising/falling NGDP".

If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose, it's just that the "natural rate of interest" was lower after the dot com bubble. NGDP went on to fall 9% below trend. Excessively tight money.

My comment was in regards to govt. borrowing to spend on putting people to work in a fashion that does not generate wealth, but instead creates more debt. Then you end up right back here talking about we need to borrow from china again. There is no recovery, just artificial demand created.

Yeah, I agree with you there.

 

[TakeAStepBack]

If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose, it's just that the "natural rate of interest" was lower after the dot com bubble. NGDP went on to fall 9% below trend. Excessively tight money.

Money was definitely excessively loose. That is the entire point. Credit was extended into areas where real wealth was not apparent. Literally to the point of complete toxicity and malinvestment. That is how we got here. That is what bubbles do, they blow up and then pop. You are right though, it is a wealth confiscation. Lowered interest rates coupled with incentives made this bed, and the way out of it is deflation. Unfortunately severe deflation. If not, the more we try to correct it, the deeper the whole we dig.

Dropping helicopter loads of money onto the situation is not going to fix it.

 

[DSGE]

Money was definitely excessively loose.

Based on what?

 

[TakeAStepBack]

Based on allowing people who could not even afford the principle, to procure a loan, or mortgage on a variable interest rate in the latest case. It was obvious that FM and FM were billions in on extremely risky lending practices. Along with plenty of other banks. Credit was booming from the low interest rates and that credit went to those who were not in positions to handle the debt. Whether it be ignorance or otherwise. It pumped it up prices because there was artificial demand. In the same way the scenario of borrowing from china to have unemployed people digs holes to pay them is artificial and completely exacerbates the problem.

 

[DSGE]

Based on allowing people who could not even afford the principle, procure a loan, or mortgage on a variable interest rate in the latest case. It was obvious that FM and FM were billions in on extremely risky lending practices. Along with plenty of other banks. Credit was booming for the low interest rates and that credit went to those who were not in positions to handle the debt. Whether it be ignorance or otherwise.

Which is.... not monetary policy. Yes lending standards were bullshit. The Fed didn't do that.

 

[Middleoftheroad]

If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose, it's just that the "natural rate of interest" was lower after the dot com bubble. NGDP went on to fall 9% below trend. Excessively tight money.

Money was definitely excessively loose. That is the entire point. Credit was extended into areas where real wealth was not apparent. Literally to the point of complete toxicity and malinvestment. That is how we got here. That is what bubbles do, they blow up and then pop. You are right though, it is a wealth confiscation. Lowered interest rates coupled with incentives made this bed, and the way out of it is deflation. Unfortunately severe deflation. If not, the more we try to correct it, the deeper the whole we dig.

Dropping helicopter loads of money onto the situation is not going to fix it.

I'm not exactly sure what you are talking about when you refer to deflation. If you are talking about housing and housing alone, then yes. If you are talking about the economy as a whole, then no, no and more no. Deflation on an entire economy is the absolute worse thing that can happen. It would mean unemployemnt rising, and dramatically. Increasing government debt, sharply increasing government debt/GDP, no money to buy said debt, and possibly an immediate Greece type situation.

 

[TakeAStepBack]

Based on allowing people who could not even afford the principle, procure a loan, or mortgage on a variable interest rate in the latest case. It was obvious that FM and FM were billions in on extremely risky lending practices. Along with plenty of other banks. Credit was booming for the low interest rates and that credit went to those who were not in positions to handle the debt. Whether it be ignorance or otherwise.

Which is.... not monetary policy. Yes lending standards were bullshit. The Fed didn't do that.

Yes they did. The monetary policy was for low interest rates to spur "growth" and spending and keep the whole system running! They are at the very heart of the problem. With no credit expansion, no risky loans. Coming of the NASDAQ, interest rates should have been higher to naturally liquidate instead of just pumping air into the tire with the sidewall rip out.

 

[TakeAStepBack]

If NGDP (total nominal spending) is rising above trend, then we've got the bad inflation. If NGDP is falling below trend, we've got the bad deflation. Now when we look at NGDP though (i'm sure you can do this yourself on FRED), there was no "inflation binge". Money wasn't excessively loose, it's just that the "natural rate of interest" was lower after the dot com bubble. NGDP went on to fall 9% below trend. Excessively tight money.

Money was definitely excessively loose. That is the entire point. Credit was extended into areas where real wealth was not apparent. Literally to the point of complete toxicity and malinvestment. That is how we got here. That is what bubbles do, they blow up and then pop. You are right though, it is a wealth confiscation. Lowered interest rates coupled with incentives made this bed, and the way out of it is deflation. Unfortunately severe deflation. If not, the more we try to correct it, the deeper the whole we dig.

Dropping helicopter loads of money onto the situation is not going to fix it.

I'm not exactly sure what you are talking about when you refer to deflation. If you are talking about housing and housing alone, then yes. If you are talking about the economy as a whole, then no, no and more no. Deflation on an entire economy is the absolute worse thing that can happen. It would mean unemployemnt rising, and dramatically. Increasing government debt, sharply increasing government debt/GDP, no money to buy said debt, and possibly an immediate Greece type situation.

We can do it now, or we can do it when there is absolutely nothing left to estand on and the entire economy implodes. Neither choice is good if you ask me, but these aren't good economic times.

 

[Middleoftheroad]

Based on allowing people who could not even afford the principle, procure a loan, or mortgage on a variable interest rate in the latest case. It was obvious that FM and FM were billions in on extremely risky lending practices. Along with plenty of other banks. Credit was booming for the low interest rates and that credit went to those who were not in positions to handle the debt. Whether it be ignorance or otherwise.

Which is.... not monetary policy. Yes lending standards were bullshit. The Fed didn't do that.

Yes they did. The monetary policy was for low interest rates to spur "growth" and spending and keep the whole system running! They are at the very heart of the problem. With no credit expansion, no risky loans. Coming of the NASDAQ, interest rates should have been higher to naturally liquidate instead of just pumping air into the tire with the sidewall rip out.

No this is wrong. Temporarily interest rates should have been lower coming off the Nasdaq. The housing has been the leading factor in every economic recovery since the great depression, and it works. The problem was keeping it low for years until it became a bubble.

And the tire analogy makes no sense, are you suggesting the government should have just bought a new 1 trillion dollar tire? Because thats what I do when one of my tires blow.

 

[DSGE]

Based on allowing people who could not even afford the principle, procure a loan, or mortgage on a variable interest rate in the latest case. It was obvious that FM and FM were billions in on extremely risky lending practices. Along with plenty of other banks. Credit was booming for the low interest rates and that credit went to those who were not in positions to handle the debt. Whether it be ignorance or otherwise.

Which is.... not monetary policy. Yes lending standards were bullshit. The Fed didn't do that.

Yes they did. The monetary policy was for low interest rates to spur "growth" and spending and keep the whole system running! They are at the very heart of the problem. With no credit expansion, no risky loans. Coming of the NASDAQ, interest rates should have been higher to naturally liquidate instead of just pumping air into the tire with the sidewall rip out.

Well if it was excessively loose to spur spending, then we should have seen spending rise above trend!

This is the confusion caused by looking at interest rates. Interest rates don't tell you the stance of monetary policy! Why do you think interest rates were "artificially low" and not "naturally low"? How, do you distinguish between interest rates that are low because of easy money and interest rates that are low because the "natural rate of interest" falls?

 

[Middleoftheroad]

Money was definitely excessively loose. That is the entire point. Credit was extended into areas where real wealth was not apparent. Literally to the point of complete toxicity and malinvestment. That is how we got here. That is what bubbles do, they blow up and then pop. You are right though, it is a wealth confiscation. Lowered interest rates coupled with incentives made this bed, and the way out of it is deflation. Unfortunately severe deflation. If not, the more we try to correct it, the deeper the whole we dig.

Dropping helicopter loads of money onto the situation is not going to fix it.

I'm not exactly sure what you are talking about when you refer to deflation. If you are talking about housing and housing alone, then yes. If you are talking about the economy as a whole, then no, no and more no. Deflation on an entire economy is the absolute worse thing that can happen. It would mean unemployemnt rising, and dramatically. Increasing government debt, sharply increasing government debt/GDP, no money to buy said debt, and possibly an immediate Greece type situation.

We can do it now, or we can do it when there is absolutely nothing left to estand on and the entire economy implodes. Neither choice is good if you ask me, but these aren't good economic times.

Housing prices have been in a decline for years now, that sector of the economy is going through its healing phase. Housing prices are almost back to historic norms, which should begin to lead to growth in that sector. As far as deflating anything else, I don't see the point.