Presidential Partisanship And A Layman’s Thoughts On Monetary Policy

1. The administration’s gyrations on the murder of Libyan ambassador Stevens are disgusting. There was a well coordinated terrorist attack on American interests and personnel. There seems to have been a series of intelligence failures that left our ambassador exposed. That is bad enough, but the administration then tried to put the blame for the event not on itself (for its own failures) or the terrorists (who were of course the perpetrators), but on a YouTube video. I doubt intelligence failures will ever be reduced to zero, but a first step toward limiting the repetition of a particular error is recognizing and taking responsibility for the mistake. This Obama behavior administration of blaming others has become an uncontrollable reflex. After four years of Obama’s presidency, the unemployment rate and the trillion-dollar a-year-deficits are no longer primarily Bush’s fault. The murder of Ambassador Stevens is not the fault of some idiot with a YouTube account. If the President wants to avoid all responsibility for whatever happens, he should refuse reelection and begin collecting his pension and speaking fees. May he have a long and gratifying life blaming whatever is happening on his successors. Romney might want to come up with a coherent story of how the President’s combination of ideology and irresponsibility is damaging American living standards and then offer and intelligible alternative.

2. I think there is a plausible story to tell that the Federal Reserve’s QE3 was a good faith response to a combination of persistently low growth, elevated unemployment, and very low interest rates. It might also have much to do with shifting opinions. It is possible that the “market monetarists” who wanted Nominal Gross Domestic Product (NGDP) targeting won the argument for the moment.

The Fed has committed to buying mortgage backed securities until growth improves. This approach approximates the NGDP targeting strategy that has found support from conservative journalists like Ramesh Ponnuru and Reihan Salam and economists like David Beckworth and Scott Sumner. Sumner made the case for NGDP targeting in a National Affairs article that explained the concept so simply that I almost understood it (I think.) The timing of the Fed’s conversion to something like NGDP targeting might also have been influenced by a paper submitted by the respected economist Michael Woodford. The Federal Reserve’s QE3 policy also closely resembles the advice that Milton Friedman gave Japan in the 1990s when Japan was facing a combination slow growth and low interest rates. QE3 is somewhat different because Friedman advised the Bank of Japan to buy unlimited amounts of government bonds until growth returned. The Fed is also buying mortgage securities.

QE3 is the fourth major Federal Reserve policy intervention that I can remember during the Obama years. The first was QE2, the second was a promise to keep interest rates low for two years, and the third was this year’s “operation twist.” Supporters of NGDP targeting like Ponnuru and Sumner thought that such policies were insufficient. It appears that the majority of the Federal Open Market Committee now agree with them. One way to look at it is that the Federal Reserve has decided to bail Obama out at the last minute. From the perspective of supporters of NGDP targeting, it probably looks more like a tacit Federal Reserve admission that their monetary policy under Obama has been lousy (or at best suboptimal.)

I’d add that Federal Reserve inaction can be at least as problematic as Federal Reserve action. It was Friedman who blamed the depth of the Great Depression on the Federal Reserve’s failure to take action to stop the cascading bank failures of early 1930-1933. This was a another case where Friedman counseled large open market purchases by the Fed to prop up the economy. None of this means I’m fully convinced by the arguments of the market monetarists. I think my handle on it is pretty shaky. I’d need someone to very slowly (and using small words) answer my questions on the policy. And then they would probably have to answer them several more times. But is does seem like this policy is being advocated by some reasonable-sounding people with plausible arguments and it does seem to have a respectable intellectual roots.