Alford: Rethinking Monetary Policy in the Light of Asset Bubbles

By Richard Alford, a former economist at the New York Fed. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side.

Low rates have a more powerful effect on driving financial assets than on driving the economy.
-Jeremy Grantham, GM0 Quarterly Letter January 2010

There has been a long-standing debate among economists and policymakers over whether or not monetary policy should reflect concerns about financial stability. One side has argued that monetary policy and stability policy are inexorably intertwined and that at times monetary policy must reflect the goal of financial stability. The other side has argued that monetary policy should address price stability only while regulatory policy addresses any financial stability concerns. Recently, Olivier Blanchard, chief economist at the IMF and a proponent of inflation-only targeting, scored an “own goal” (scored a point against his own position), even though neither he nor other proponents of inflation-only targeting seem to have noticed.

The most salient points of the recent piece by Olivier Blanchard are presented here. The Blanchard position represents a significant shift in that it acknowledges trade-offs and interplay between monetary policy and financial stability policy. Subsequently, it will be shown that Blanchard scored something of an own goal by proposing a target for inflation that is inconsistent with price stability, which remains the primary rationale of Taylor Rule-driven monetary policy.

From Blanchard et al’s “Rethinking Monetary Policy”:

What we thought we knew
To caricature: we thought of monetary policy as having one target, inflation, and one instrument, the policy rate. So long as inflation was stable, the output gap was likely to be small and stable and monetary policy did its job. . And we thought of financial regulation as mostly outside the macroeconomic policy framework. ..

One target: Inflation

Stable and low inflation was presented as the primary, if not exclusive, mandate of central banks. This resulted from … the intellectual support for inflation targeting provided by the New Keynesian model. In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap, which turns out to be the best possible outcome for activity given the imperfections present in the economy. …There was also consensus that inflation should be very low (most central banks targeted 2% inflation).

One instrument: The policy rate

Monetary policy focused on one instrument, the policy interest rate. Under the prevailing assumptions, one only needed to affect current and future expected short rates, and all other rates and prices would follow. The details of financial intermediation were seen as largely irrelevant. An exception was made for commercial banks, with an emphasis on the “credit channel.”…. Little attention was paid, however, to the rest of the financial system from a macro standpoint.

Financial regulation: Not a macroeconomic policy tool

Financial regulation and supervision focused on individual institutions and markets and largely ignored their macroeconomic implications. Financial regulation targeted the soundness of individual institutions and aimed at correcting market failures stemming from asymmetric information or limited liability. Given the enthusiasm for financial deregulation, the use of prudential regulation for cyclical purposes was considered improper mingling with the functioning of credit markets.

What we have learned from the crisis

Macroeconomic fragilities may arise even when inflation is stable
Core inflation was stable in most advanced economies until the crisis started. Some have argued in retrospect that core inflation was not the right measure of inflation, … But no single index will do the trick. Or, as in the case of the pre-crisis 2000s, both inflation and the output gap may be stable, but the behaviour of some asset prices and credit aggregates, or the composition of output, may be undesirable.

Low inflation limits the scope of monetary policy in deflationary recessions
When the crisis started in earnest in 2008, and aggregate demand collapsed, most central banks quickly decreased their policy rate to close to zero. Had they been able to, they would have decreased the rate further. But the zero nominal interest rate bound prevented them from doing so. Had pre-crisis inflation (and consequently policy rates) been somewhat higher, the scope for reducing real interest rates would have been greater.

Financial intermediation matters
Markets are segmented, with specialized investors operating in specific markets. Most of the time, they are well linked through arbitrage. However, when some investors withdraw (because of losses in other activities, cuts in access to funds, or internal agency issues) the effect on prices can be very large.

Regulation is not macroeconomically neutral

Financial regulation contributed to the amplification that transformed the decrease in US housing prices into a major world economic crisis. The limited perimeter of regulation gave incentives for banks to create off-balance-sheet entities to avoid some prudential rules and increase leverage. Regulatory arbitrage allowed some financial institutions to play by different rules from other financial intermediaries. Once the crisis started, rules aimed at guaranteeing the soundness of individual institutions worked against the stability of the system. Mark-to-market rules, coupled with constant regulatory capital ratios, forced financial institutions into fire sales and deleveraging.

Implications for policy design

The bad news is that the crisis has shown that macroeconomic policy must have many targets; the good news is that it has also reminded us that we have many instruments, from “exotic” monetary policy to fiscal instruments, to regulatory instruments. … Stable and low inflation must remain a major goal of monetary policy.

The following are important questions for economists to work on.

Exactly how low should inflation targets be?

The crisis has shown that large adverse shocks do happen. Should policymakers aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks? Are the net costs of inflation much higher at, say, 4% than at 2%, the current target range?….

How should monetary and regulatory policy be combined?

Part of the debate about monetary policy, even before the crisis, was whether the interest rate rule, implicit or explicit, should be extended to deal with asset prices. The crisis has added a number of candidates to the list, from leverage to measures of systemic risk. This seems like the wrong way of approaching the problem. The policy rate is a poor tool to deal with excess leverage, risk taking, or apparent deviations of asset prices from fundamentals. A higher policy rate also implies a larger output gap….

it follows that the traditional regulatory and prudential frameworks need to acquire a macroeconomic dimension. This raises the issue of how coordination is achieved between the monetary and the regulatory authorities. The increasing trend toward separation of the two may well have to be reversed. Central banks are an obvious candidate as macroprudential regulators.

Blanchard’s blog post reveals how much the financial crisis of 2007 and its aftermath have changed the thinking about monetary and financial stability policy. Monetary policy and financial stability policy are now seen to be intertwined even by those who would continue to adhere to a Taylor-type rule to set official rates. Monetary policy is now seen as operating through a complex system of potentially fragile financial markets and consequently having implications for financial stability. Regulatory and supervisory systems are viewed as having macroeconomic dimensions.

This economist/policymaker mea culpa, however, quickly went off the tracks. The proposed revised monetary policy regime is the same as the initial regime he caricatured (as “that we thought we knew” one target, one tool) save for the 200 bps increase in the target rate of inflation. Blanchard calls for a combination and coordination of monetary and regulatory policies. However, Blanchard knows the details, down to the last basis point, of how monetary policy should be recast while the complementary changes in the regulatory regime are still very much up in the air.

Blanchard: “The crisis has shown that large adverse shocks do happen. Should policymakers aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks?” Silly me. I thought that the US economy and financial system got where they are today because of large, unsustainable economic imbalances and a complex/overleveraged/interconnected fragile financial system that had built up over time and collapsed when the housing market rolled over, but not because a large adverse shock.

Does Blanchard think that an additional 200 basis points of ease could insulate the financial system and the real economy from the unwinding of unsustainable economic imbalances of the same magnitude in the future? Blanchard is incapable of generalizing the lesson of the current crisis, i.e., it is better to lean against large imbalances and unsustainabilities then to clean up after them. He would still have central banks ignore everything but inflation and the output gap until the imbalances and unsustainabilities correct.

Blanchard has not combined monetary and regulatory policy. He just altered the central bank mandate, ending the requirement that it pursue stability

Blanchard asserted that the central banks pre-2007 inflation targets were too low (“most banks targeted 2 %”) to allow for sufficient room to ease. Too low relative to what?

Blanchard has put the cart before the horse. A 2% inflation target is not too low relative to the real goal of policy — price stability — which has always been defined as a rate of change in prices slow enough to leave economic behavior unaffected. On the other hand, a 4% inflation target is clearly too high to be consistent with price stability. At a 4% inflation rate, prices double about every 18 years. As a result, and given life expectancies, US baby boomers would on average live long enough after retirement (65) to see the price level more than double. Inflation of 4% will most certainly affect the way a wide variety of economic agents behave.

Preserving an elegant Taylor rule is evidently more important to Blanchard than is achieving price stability. If adopted, the Blanchard proposal will reveal the policy regime to be bi-polar and dysfunctional. Prior to 2007, monetary policy was designed and executed solely to produce price stability with not so much as an episodic deviation to backstop the regulatory system or address any other concern. Now Blanchard proposes that monetary policy pursue something significantly less than price stability in order to allow it more room to episodically respond after the fact to large adverse shocks. However, the monetary authorities were always free to respond after crises hit and output gaps opened up and 200 bps is unlikely to insulate the real economy from structural imbalances. In 2007, the Fed started cutting from 5.75%. The BOJ started its 1990 ease cycle from 8.75%. Hence the only real change under the Blanchard proposal would be the acceptance of higher inflation.

The primary goals of monetary policy should remain price stability and economic growth. However, given that regulatory reform will be the result of a lobbyist-dominated political process and the history of regulatory systems is littered with failures, relying on regulation alone would be mistake. A regulation-only approach to financial stability will only succeed until circumstances that again allow financial institutions to game the system. Alternatively, it is possible that a central bank — actually concerned with economic imbalances and financial stability — could episodically alter interest rate policy to take the wind out of the sails of credit-driven asset price bubbles that pose systemic risks. It could buy regulators time to catch up with regulation-avoiding market innovations that threaten the stability of the financial system. Would it be a perfect tool? There are no perfect tools.

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  1. Tom Hickey

    The primary goals of monetary policy should remain price stability and economic growth.

    I would argue that the primary goal of monetary policy, including fiscal policy, is full employment at real output capacity, along with price stability. This requires providing sufficient net financial assets to balance nominal aggregate demand with real output capacity, without either providing so much that NAD exceeds real output capacity, leading to inflation, or so little that NAD is insufficient to real output capacity, resulting in a output gap and rising unemployment, and eventually deflation.

    Growth is the result of investment, innovation and productivity, which are not the target of monetary/fiscal policy directly. Monetary/fiscal policy can support growth by fostering an environment that generates opportunity and provides investment, but cannot create growth directly. That is not the job of government in a capitalistic economy.

    This means not only setting interest rate policy but also fiscal policy that keep the sectoral balance among households/firms (G & I), government (G), and the exterior (NX). For example, they can cannot all run surpluses simultaneously, since government surplus (deficit) = nongovernment deficit (surplus) as an accounting identity.

    1. jake chase

      The primary goal of monetary policy ought to be honest money. If Blanchard summary of what was learned by monetary mandarins is complete, it is fairly clear that they have learned nothing and will do nothing to rein in the causes of the crash: limitless leverage, sociopathic practices, and gangster looting by the financial sector, usury, bankruptcy and depression for the real economy.

      We need to end the Fed, tax away the windfall profits of finance, impose a progressive franchise tax on major corporations, stop executive looting and phony accounting and corporate tax evasion through OTC derivative hustles. We need to outlaw credit default swaps. In short, we need to control finance before finance destroys the real economy and provokes war as the means to restart it.

  2. Tom Hickey

    A regulation-only approach to financial stability will only succeed until circumstances that again allow financial institutions to game the system. Alternatively, it is possible that a central bank — actually concerned with economic imbalances and financial stability — could episodically alter interest rate policy to take the wind out of the sails of credit-driven asset price bubbles that pose systemic risks.

    The problem with the present crisis is that the Fed blew both its monetary role and its regulatory role. The proper course was timely regulation when it was obvious to anyone in the field, such as yours truly, that fraud was rampant in the “frothy” markets. Instead, Mr. Greenspan neither took away the punch bowl, or carried out the Fed’s regulatory responsibility.

    The problem is the capture of the government by financial oligarchs as Simon Johnson, William K Black and others have shown. The problem is corruption of the process, which can only be addressed by accountability. And that has been totally lacking, legally and financially, as the perps walk free, and private companies are bailed out and then told that they will not be allowed to fail.

  3. OldSkeptic

    I have total skepticism about the ‘great moderation’ of inflation of the 90’s and early 2000’s.

    It was created by:
    (1) Cheap goods from China
    (2) Low oil prices, hence low energy prices overall = low food prices and low transport prices (which made (1) possible).
    (3) Crunching ordinary people’s wages (smashing unions, etc).

    As for monetary policy .. zero or insignificant effect.

    Didn’t stop them claiming credit for it, though the real effect of these factors was rising debt (because wages were crunched), hollowing out of industry (as corps moved production to China, etc), rising ‘hidden’ unemployment or underemployment or under paid employment*.

    Bit like a fat guy who tries to lose weight through stopping eating any protein or calcium. Seems to work for a while until he collapses because of muscle wastage and/or skeletal collapse.

    * I’m a numbers guy, at the peak of the ‘booming’ Australian economy, when we were boasting of our under 5% unemployment, going through the ABS numbers I got a true unemployment rate of 17%. Gov’ts just about everywherehave been lying for decades about unemployment.

    The reality in Australia (and a lot of other places as well) is that population growth has exceeded employment (particularily full time well paid employment) growth by a fair margin since the 80’s.

    Our economies have been jokes since 1980, but we papered it over by smoke and mirrors and debt .. now the chickens come home to roost.

    1. carol

      “The reality in Australia (and a lot of other places as well) is that population growth has exceeded employment (particularly full time well paid employment) growth”

      Yes! This could be tackled by decreasing the standard workweek from 40 to say 24-30 hrs. However, given the concomitant reduction in income, not many people might be willing to collectively accept a lower standard of material living.

      A pity, as it would give people much more free time and reduce the income disparities (at a record high in many places now), as — of course — the minimum wage would have to increase, such that the reduced, new standard, total work week still results in a take home of the minimum livable income.

      1. Adam

        I would suspect the key driver for why most people aren’t interested in trading moe free time for lower incomes is because they have debts that are fixed. In the end it’s all about debt. You can’t blow asset bubbles without debt. No policy that doesn’t effectivly contain debt is going to prevent asset bubbles.

        1. Dave of Maryland

          I thought the trade-off was fewer hours for the same money.

          Didn’t we all used to work 60 & 70 hour weeks, back in bad old Dickensian times? 8 am to 8 pm, Monday through Saturday (72 hours, cadge lunch when you can), with a day off for the Lord? (When we became fodder for the preacher’s avarice.)

          In moving from 70 to 40, we didn’t take a pay cut. In real terms, we shed 20 hours & got a net pay raise.

          So let’s put legs under this. Work Tuesday to Friday, 9 to 5, an hour out for lunch, that’s seven hours a day, which is 28 hours a week. Everybody gets a three day weekend. A 30% reduction in hours, which translates into multiplying hourly wages by 1.43, which takes Walmart’s $8.20 hourly wage to $11.73.

          The problem is the growth of FIRE, its accumulation of raw money – an awful lot of it, has led to an absolute reduction in wages. Dismantle FIRE, redistribute the money, we’ll all be a lot better off. But that won’t happen without a fight. No one ever gives money for nothing, no matter how or where they got it originally.

  4. Cathryn Mataga

    I’m skeptical that pre-crash inflation was
    measured correctly. Around here, $150K houses,
    ramped up to about $500K, and yet inflation
    was low? It seems to me if housing was
    properly accounted as inflation, we
    would have noticed a massive spike along
    with the housing bubble, and someone might
    have put the breaks on early in the
    bubble — sparing us all of this pain.

  5. kezza

    The title should be “Rethinking Macro Policy”, not “Rethinking Monetary Policy”; and the URL shouldn’t have the &br& in it.

  6. carol

    thanks for debunking the Blanchard proposal!

    2 of your paragraphs stand out for me:

    “Blanchard: “The crisis has shown that large adverse shocks do happen. Should policymakers aim for a higher target inflation rate in normal times, in order to increase the room for monetary policy to react to such shocks?” Silly me. I thought that the US economy and financial system got where they are today because of large, unsustainable economic imbalances and a complex/overleveraged/interconnected fragile financial system that had built up over time and collapsed when the housing market rolled over, but not because a large adverse shock.”

    Indeed! Exactly!
    I read Blanchard’s sentence as completely giving in to the financial masters, as an acknowledgment that G20 will not (re)regulate the banksters, and hence as fully accepting that there will be another big fin. crisis. Isn’t it dangerous that a lead economist of IMF apparently does not dare to oppose the banksters?

    You: “At a 4% inflation rate, prices double about every 18 years. As a result, and given life expectancies, US baby boomers would on average live long enough after retirement (65) to see the price level more than double. Inflation of 4% will most certainly affect the way a wide variety of economic agents behave.:

    Again, exactly and indeed!
    All the papers proposing ‘inflating the debt away’ don’t consider all the horrific consequences. It is a ‘solution’ that creates even bigger problems.

    1. DownSouth


      You say: “I read Blanchard’s sentence as completely giving in to the financial masters, as an acknowledgment that G20 will not (re)regulate the banksters, and hence as fully accepting that there will be another big fin. crisis.”

      I believe that it is a mistake to perceive the IMF as being anything other than the handmaiden of the international criminal banking cartel. Blanchard didn’t “give in.” Quite the contrary, he is in the employ of the cartel and is simply running interference for it. I think of the IMF as being part of the public relations wing of the cartel. And it is perfectly positioned to fulfill this role. As Daniel Yankelovich explains:

      Our system of representative democracy assumes that those who act for the public have superior knowledge but that they share the public’s goals and values. But on many issues this assumption is invalid. Leaders and experts seek to advance their own values and interests. This is why so much emphasis is put on public relations. Correcting the public’s understanding is rarely the goal of public relations. The usual goal is to make it possible for special interests to achieve objectives and advance values the public does not fully share.
      –Daniel Yankelovich, Coming to Public Judgment: Making Democracy Work in a Complex World

      In his superb paper “Rise and Collapse of Neoliberalism in Argentina” the Argentinean economist Miguel Teubal traces the key role that the IMF played in the rise of neoliberalism in Argentina.

      Neoliberalism followed a similar trajectory in Argentina as it did in Mexico. In both countries, it was a two-step process.

      As Teubal explains, the process began with the “policy measures adopted during the military dictatorship (1976-83), known as ’proceso’“ which were “designed to favor financial and speculative activities associated, in one way or another, with foreign debt contracted in this period.” The main goal of the first step is to get the country hooked on massive debt. This process is facilitated and made possible by a highly rewarded local oligarchy that works hand in glove with the international criminal banking cartel. “Key measures tending to make foreign indebtedness profitable were related to the Financial Reforms of 1977 and 1979 when controls on finance activities and mobility of capital were eliminated, full liberalization of financial transactions took place, and an absolute guarantee of the state for these operations was established,” Teubal elaborates. Argentina’s foreign debt increased from about US $7 billion in 1976 to over $46 billion in 1983, and interest on the foreign debt rose from US $515 million in 1976 to $5.4 billion in 1983. A second major goal of the first step, and something that goes hand-in-glove with the financialization of the economy, is a turning away from the “export-led industrialization strategy” that Teubal says dominated economic policy in the 1940s, 1950s and 1960s.

      Of course as a long-term economic strategy this was unsustainable, and in 1981 a 500 percent devaluation was carried out. But, as Teubal explains, the interests of the financial elite were “safeguarded by an exchange rate insurance, contracted after the fact. Private foreign debt was eventually transferred to government, that is, was wholly ‘nationalized’.” The financial crisis doomed the military dictatorship, but the IMF intervened to make sure the debts of the dictatorship were honored by the new democratically elected administration. As Teubal continues: “During the Alfonsin administration, the whole scheme was legitimized when a new stabilization program was signed with the IMF with no critiques concerning the legitimacy and legality of this enormous increase in foreign debt and its transference to government during the military dictatorship was made.”

      Argentina struggled under this enornous debt burden, but the burden proved too great and it eventually triggered a second economic crisis marked by spurts of hyper-inflation from 1989-1991. It was this crisis under which step two of neoliberalism was implemented beginning with the Convertibility Plan of 1991. “It marked the beginning of a new era in the political economy of Argentina,” Teubal observes, “with the implementation of a severe structural adjustment program (SAP).”

      Teubal enumerates some of the main aspects of SAP:

      • “An extreme privatization program”
      • “Deregulations of all kinds, in particular with regard to the ‘flexibilization’ of labor markets”
      • “A new ‘opening’ to the world economy, in particular concerning financial interests”
      • “A substantial concentration and centralization of capital and…the consolidation of large firms excluding small and medium-sized business”
      • “Large companies and economic groups…consolidated their economic and political power”
      • “Foreign indebtedness also acquired a renewed significance…increasing from about US$61.3 billion in 1991 to US$139.3 billion in 1998.”
      • “Of course foreign creditors also acquired an enormous leverage over local policy measures, to a large extent via what were to become IMF conditionalities.”

      The thing to take home from all this is that the IMF is part and parcel of the neoliberal juggernaut. The agenda is to turn the entire world into debt slaves to the international criminal banking cartel. As Teubal observed, the SAP “was to become an important showcase for international financial interests thereafter.”

      After Argentina and Mexico the next victims are to be Greece, Spain, Ireland, Portugal, and Italy. The international criminal banking cartel is now in the process of implementing neoliberalism step two on the PIIGS. The US will be next, step one of neoliberalization having been implemented in the US beginning in the late 1970s.

      The cartel suffered a little political setback in Argentina, but as Teubal points out, is working industriously to get the country back on the neoliberal straight and narrow:

      In the midst of the present crisis these large conglomerates or grupos economicos are once again showing their muscle, pressuring the government to pay the foreign debt, increase public rates, compensate the banks for their losses due to capital flight, etc. In effect, the crisis itself shows the bare anatomy of the economic structure in which these large conglomerates reign supreme while being increasingly contested by numerous popular organizations of civil society.

  7. Doc at the Radar Station

    Here’s a great read from Steve Randy Waldman that touches on these issues directly:
    Asset inflation, price inflation, and the great moderation

    “…By the middle 2000s, the credit economy was the air we breathed, and conventional wisdom held (and continues to hold) that economic growth and credit expansion are synonymous. We had those peculiar debates about the difference between “consumption equality” and “income equality”, and which mattered more, since middle-class consumption had become significantly credit-financed. But from central bankers’ perspective, we had stumbled into a good place, one where output growth was channeled into asset price inflation, but provoked consumer price inflation only indirectly and via a channel policymakers could regulate. This benign regime faced two threats, however. First, asset price inflation is unstable — while on any given day, price moves are determined by the flow of funds into assets, over time prices can become so unreasonable relative to the the asset’s cash or service flows that arbitrageurs and nervous fundamentalists appear, creating the potential for a collapse. Second, credit expansion is unstable, as chronic borrowers may become unable to service existing debt, let alone borrow more to sustain aggregate demand. Unnervingly, sustaining consumption has required a secular downtrend in the policy interest rate, and eventually you hit that zero-bound…”

    1. Orion

      I like the responses of Doc at the Radar Station and Dwight Baker. We need an end to centralized finance / banking. Big government / central planning fails every time, when do we realize that we will never fix this system?

  8. dwight baker

    Who am I to question?
    By Dwight Baker
    March 3, 2010

    Birds Eye View Pointing the Finger for We the People Advocates

    Effortless kitchen table economics are thought by the elite to be too simple. For it is their job to make their jobs secure in deep thoughts about math problems. OH NO more too it than that as the article pointed out but then again are all the words written more about other things than just math?

    YES, and the foundations of those words are to politicize math. And to that end are the powers that affect our lives that use too much mum boo jumbo to convolute nearly every aspect of our lives. And to that end we must take great care to make the BIG SHOT BOSSES go to the bottom line and stop the mum boo jumbo. For when there is intent to deceive great plans are laid out to bring about confusion so We the People will be so confused we miss our Bank being robed.

    Now those at MIT, Harvard, Yale, Stanford and the others that work the work to discuss and change economies should first have a sign around their neck BEWARE I TALK IN RIDDLES. For the soothsayers of old have led these new and some old kids on the block teaching them how to use language only they understood to deceive.

    I know how to do math I know how to do engineering I know how to balance our budget using effortless kitchen table economics, but I will not under any circumstance join in a convoluted discussion about matters of money when the two biggest needed items are refused to be put out as absolute known’s. What is the true value of our Nation and How much do we owe and Who to.

    Once those facts are represented in great details —- then any one using commonsense and reason can use logic to go from there and hold their own with the supposed enlightened to bring about plans to improve all over time.

    SO, BEWARE OF THOSE THAT TALK IN ECONOMIC RIDDLES they are being pushed from all around by those that don’t buy their BS to go to the bottom lines. And once we can dispel their entire mum boo jumbo for what it is —– we all can use Effortless kitchen table economics to know just where we stand and what our true VALUE IS as a sovereign people living in our sovereign Nation. Our COMMUNED GREAT WEALTH is our checkbook that we have unwisely turned over to our Politicians pundits and many of them know how to cook the book as crook-masters.

    Now the GREATER GOOD at this time is for We the People using our known abilities to coalesce — too bring an open assault on the elites who refuse to talk to us in our own language. And then never forget that WE the FEW in the many it is our job once again to enforce the rights of life for everyone with equity meeting at the bar of justice to rightly prosecute and/or defend.

    Forget most you hear and see on National TV and found in the Internet Progressive Media but never forget to:

    Stand up and Shout out Stop This Madness

    This message brought to you by We the People Advocates
    Pass along — publish if you will in part or complete
    By Dwight Baker Grassroots Organizer for those who want to think clearly using sanguine sane common sense and reason working toward civility using sanity. With facts in history as our guide under the control of each ones own conscience! Where your voice is heard and your vote is counted. We the People Advocates
    Dwight Baker PO Box 7065 Eagle Pass TX 78853 Tel 830-773-1077

  9. Scarlo

    Let rates rise, get cash into consumer hands. In this way you’ll have modest inflation on consumables and less asset bubbles. I’m sure our guys are smart enough to figure a way to work this out.

  10. i on the ball patriot

    “Rethinking Monetary Policy in the Light of Asset Bubbles”


    We need to rethink government STRUCTURE in light of the gross CORRUPTION.

    Forming a government responsive to the will of the people is job one.

    All else, like this totally ding bat article that serves to legitimize and validate the gangster shills by giving them your attention, is fluffed up deflective bullshit.

    De-privatize banking! De-privatize credit!

    Socialize banking! Socialize credit!

    Socially responsible ZERO interest loans made directly to the people by the people, INSTEAD OF; self serving, high interest, intentionally parasitic bubble blowing loans — funded by citizen taxes anyway — that encourage poor resource consumption and serve to make slaves and victims of the many by the few.

    THAT is the lesson of the crisis.
    All else is deflective chicken shit avoidance of reality.

    No balls! No brains! No freedom!

    Deception is the strongest political force on the planet.

  11. jake chase

    You can’t engineer price inflation in competitive markets drowning in excess capacity, particularly when labor has no bargaining power. All that quantitative easing only fuels speculation in currencies, commodities, asset bubbles, herd effects reversed on a dime in response to unexpected shocks.

    Of course, price inflation is what the authorities are after, because nothing else will validate the debt overhang. Small prudent savers can expect to be vaporized, but of course this is nothing new.

  12. flow5

    You can’t control the money supply using interest rates as a policy tool. “Zero-bound” has nothing to do with monetary policy.

    The problem is that the Federal Reserve doesn’t gauge the volume and timing of its open market operations in terms of the amount and desired rate of increase of member commercial banks legal reserves. Rather the “trading desk” regulates the FFR by setting the one-day repo rate on Treasuries.

    By using the wrong criteria (interest rates, rather than member bank reserves) in formulating and executing monetary policy, the Federal Reserve became an engine of inflation.

    The perfect monetary transmission mechanism uses rates-of-change in bank debits. I.e., rates-of-change in monetary flows (our means-of-payment money times its rate of turnover) determines aggregate monetary demand (or nominal GDP). I.e., money is the measure of liquidity, and velocity is money actually exchanging hands, ergo the G.6 release.

    Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. And by tying open market policy to an interest rate, is to supply additional (and excessive legal reserves) to the banking system when loan demand increases. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP.

    Volker’s monetarism was confined to a 3 month period in early 1980. But from the onset of the DIDMCA, legal reserves grew at a 17% annual rate up until Dec. 1980.

  13. Dave of Maryland

    By “fragile market economy” you’re presumably thinking of about the same sort of thing as competing crime families with their tendency to rub each other out & grab all the marbles for themselves. A problem which law enforcement has never, to this day, been able to solve. The market economy is fragile because the players are gangsters, I mean, banksters, I mean, parasites.

    So tell me. Does Wall Street have mob connections and, if not, why not?

  14. craazyman

    I consulted the John Law Dictionary of Economic Terminology for an official unabridged definition of “economic shock” because I am unclear on just what that term means.

    The John Law Dictionary defines economic shock as “any event that causes financial asset values to decline more than they should.”

    The definition is wonderfully succinct, although it leaves room for interpretation. Nevertheless, I think I understand.

  15. Siggy

    I had a very hard time reading the Alford piece. Lots of incomplete sentences. The comments that follow it are much better and several are very cogent.

    My observation is that when you see asset bubbles developing, such as the house price bubble, you are correct to assume that too much credit has been extended. As our house price bubble saga has unfolded we find that there have been fraudulently originated loans and fraudulently intermediated expected income streams.

    Two facts lie at the core of the credit market frenzy that preceeded its collapse; a fiat currency and a fractional reserve banking system that were exploited by a deluded Federal Reserve Chairman who was the darling of a Congress of poltroons. As much as one might despise the banksters, their conduct is understandable if the regulatory climate is as absent as it has been over the past twenty years. It has envited fraud, we (the regulators) have given it succor. The Efficent Market Hypothesis and Self Regulating Markets are concepts I cannot fathom. Warren Buffett’s comment about EFMH and the tin cup he might have been holding is absolutely to the point. It’s crap-think! Markets seek a clearing price and fair value exists only as an individual perception. Actions based on perception only improve when there is an absolute penalty for being wrong.

    If, in truth, it is intended that we shall re-think our monetary policy, were is it that our focus should first fall. I would begin with the currency. Can a fiat currency be made to be an instrument of money that will effectively function as a store of value? I am dubious that that is possible; but, it should be evaluated.

    Next I would look at the level of required demand deposit reserves. A rate of 10% is very thin and not much of a barrier to illiquidity and insolvency. This is especially the case if one of the goals to be achieved is the elimination of the canard of TBTF. Now I do believe that it is the God Given Right of every entrepreneur and enterprise to go bankrupt. When we deny that right by defining certain institutions as being systemically necessary and therefore requiring the support of the Federal Purse, we’ve just struckout.

    It is my opinion that the monetary policy of the United States should be to have a currency that functions as a store of value and that over time, its puchasing power increases. Is it not reasonable to expect that the reward of saving and prosperity should be enhanced purchasing power?

    As to the role of government in the support of the economy; our tax dollars would be better spent in support of infrastructure, education and scientific research. I do believe that global conditions demand that we have a strong military capability. I do not believe that we achieve anything that protects us by our engagement in Iraq and Afganistan. If you think we are ‘bringing democracy’ to the middle east, you’ve been abusing your medications.

    Finally, is it not self evident that a government bureaucracy cannot induce sustainable prosperity by attempting to manipulate critical price signals such as interest rates? Also, is it not self evident that whatever the government spends, with the intent of creating prosperity, must come from either of taxation and/or the debasement of the currency?

  16. yoganmahew

    Lovely piece. When you have a hammer, every problem looks like a nail…

    The artificial dislike of deflation (as it breaks models) is a serious problem in a world where efficiency gains result in, eh, cheaper stuff… Asset price bubbles have been used to balance massive deflations in the cost of production, transportation, distribution.

    Perhaps we should go back to mining by pick and shovel, ploughing by horse, transport by galley (big job opportunity for galley slaves) and distribution by bejewelled merchants.

    It would at least reduce the difficulties of modelling deflation. Once population had declined to a level that could be serviced by such an economic model. Hey, that’d make the Greens happy too – two birds with one stone, how’d’ya like that for deflationary effects…

  17. Hosswire

    “There are no perfect tools”?

    Only for those genuinely attempting to enhance the public good.

    The banksters seeking to stuff their pockets appear to have a whole drawer full of perfect tools at their disposal. Mostly elected and appointed officials.

  18. nowhereman

    yoganmahew says:
    Lovely piece. When you have a hammer, every problem looks like a nail… and;
    Orion says:
    We need an end to centralized finance / banking. Big government / central planning fails every time, when do we realize that we will never fix this system?
    There are very few “economists” or “economic” reporters that start with the premise that “economics” as practiced is the problem. Like all so called “social” sciences it’s extremely difficult to create a paradigm shift. What needs to be done is a complete overhaul of the underlying “truths” in all the economic explanations “out there”. They can never fix the system because their underlying premises have no relationship to reality. Time to give up and start from a reality as it exists perspective, rather than a false “model” based on a complete fantasy approach.

  19. Hugh

    How can you trust anything from someone who never saw an $8 trillion housing bubble, the massive fraud associated with it, or where the plethora of “innovative” dodgy financial instruments and practices was leading?

    Blanchard remains mired in denial. He is still mostly in the “stuff happens” phase with perhaps the merest inkling of “mistakes were made.” What is most striking is how divorced from what really happened his narrative is. Even at the macro level there are plenty of specifics to what occurred and how it did. But Blanchard seems to float above all these in some nebulous meta- discussion. This avoids any real assignment of blame but it also renders his proposed solutions irrelevant at best, vacuous at worse.

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