Category Archives: Dan Kervick

By Dan Kervick

It’s starting to look like QE might be indirectly responsible for a dangerously volatile situation in US financial markets.  And 10-year Treasury notes hit a 2-year high following today’s Fed statement.

But, in my opinion, it’s not the intrinsic nature of the policy itself that has created the danger, but all of the ridiculous and misleading hullabaloo and punditry that has surrounded it. I don’t blame the Fed for using asset purchases to hold down long-term interest rates. But I do blame all of the market pundits and neo-monetarist theorists out there who have grossly misrepresented these asset purchases as something they are not: an all-embracing attempt to manage aggregate demand, gross spending and employment by “pumping money into the economy.”

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By Dan Kervick

In my recent post Escaping from the Friedman Paradigm, I noted the following remark by Paul Krugman on the way monetary policy ordinarily functions when interest rates have not fallen to the zero bound:

… people are making a tradeoff between yield and liquidity – they hold money, which offers no interest, for the liquidity but limit their holdings because they pay a price in lost earnings. So if the central bank puts more money out there, people are holding more than they want, try to offload it, and drive rates down in the process.

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By Dan Kervick

Paul Krugman made a remarkable assertion last week about the dwindling legacy of Milton Friedman:

… Friedman has vanished from the policy scene — so much so that I suspect that a few decades from now, historians of economic thought will regard him as little more than an extended footnote.

Krugman’s efforts to deliver a disparaging judgment on the Friedman legacy in macroeconomics may be appreciated, but I’m not sure his critique digs very deep.   Friedman was not just a macroeconomist; he was also an important figure in the history of American political thought who left a deep conservative impact on the minds and attitudes of people whose intellectual development occurred during the Friedman heyday.  Consequently, Friedman helped define the boundaries of the rigid neoliberalism that still seems to reign supreme among US politicians of both parties, and among elite opinion-makers in the ranks of the professional economists and technocrats. He was possibly more responsible than any other figure for converting a generation of policy makers and pundits to a more conservative, market oriented approach to political economy, an approach that goes beyond the specifics of Friedman’s own macroeconomic theorizing.   So I think Krugman overestimates the damage that has been done to Friedman’s legacy.  Aspects of Friedman’s macroeconomics might be in trouble; but Friedman’s broader paradigm for political economy is still, regrettably, too much with us.  In fact, Krugman himself doesn’t seem to have moved much outside that paradigm, as I will try to show.

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By Dan Kervick

Since the crisis of 2008, professional and academic economists have grown increasingly concerned that something is wrong with their profession.  Sometimes that anxiety springs only from the recognition that most of their colleagues failed to predict the oncoming crisis.  But sometimes a nearly opposite concern is voiced: We sometimes hear the complaint that economists are offering good advice, but none of the decision-makers are paying attention.

I am not a professional economist, so I can only speak to the way the profession looks to me from the outside.  Now, if people are not paying attention to what an expert has to say, it could be that those people are too ignorant or inexperienced to grasp the important things that the expert is trying to get across.  But it could instead be that the expert doing the saying is not offering anything relevant to the most urgent problems the listeners are attempting to grapple with in their own lives, or to the institutional and political constraints that decision-makers must grapple with in carrying out their jobs.  And it could also be that they are just not saying anything very interesting.

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By Dan Kervick

Matt Yglesias makes two very important points this morning in a post about the ongoing debate over Ben Bernanke’s successor as Fed Chair.  The first is that “a great big country like the United States should probably put its central bank in the hands of people with central banking experience.”  He elaborates:

One issue here is just that it turns out to be hard to guess what someone’s going to do based on outside writing. Bernanke is a great case in point where his conduct as Fed chair has been much more similar to his remarks in Fed meetings as a Fed governor than to his published writing as a Princeton professor. For better or for worse practical experience with the institution tempered his ideas.

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By Dan Kervick

The 2008 financial crisis has been oozing slowly down the DC memory hole for some time now, as a series of destructive and economy-crushing budget battles has taken center stage in Washington.  But the debate over outgoing Fed Chief Ben Bernanke’s successor has reignited a lot of the pain and outrage that the 2008 debacle caused.  That debate, and the President’s obtuse support for Larry Summers, is also casting a very harsh light on the White House’s basic competence, its seemingly dim grasp of the causes of the financial collapse, and its blasé and corrupt attitudes toward the correct response to it.

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By Dan Kervick

President Obama will soon name a successor to Ben Bernanke for the position of Chair of the Federal Reserve’s Board of Governors, and Brad Delong recently offered his views on what qualifies someone as a strong candidate for that position:

To be good choices for Federal Reserve chair, candidates must pass three tests. They must have experience at a similar job: this is not something to throw somebody into and expect them to swim. They must fear high inflation as they fear a tornado, and feel in their bones the pain of the unemployed. And they must understand and properly weight the different models of how the economy might behave. Right now, this third means that a good Federal Reserve chair must give a relatively high weight to the Keynesian model, which has been so successful at describing and forecasting the economy over the last six years.

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By Dan Kervick

It is sometimes said that commercial banks in our modern monetary system create money “from thin air”.  While there is truth in this metaphorical claim, the metaphor can also be seriously misleading, and leads some to attribute powers to commercial banks that are actually retained by the government alone under our system.  It is worth trying to get clear about all this.

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