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Monday, June 13, 2011

From the San Francisco Fed by way of the venerable Dr. Rothman. This is a must read!


josephcmiller2 said...

Absolutely right, this was a must read! The article reads like a man trying to save his job and justify his existence. If the article wasn't so sobering, it would be hilarious. He makes the argument that economic theories which took years to develop and decades to verify were easily discarded in 2007 without undergoing the same levels of scrutiny.

He is absolutely right about the velocity of money and the need for new measurements or rather a new perspective on how this is dealt with.

Ultimately, what he gets wrong here is trying to *run* an economy from a macro-economics perspective. Macroeconomics is important to our understanding of the economy but doesn't provide a way to run an economy. The Fed obviously has an integral role in our economy today but is in no way the driver. As economic activity increases or decreases, the Fed may be able to help with acceleration.

But that's where the divergence begins. The basics of economic activity for an entire country begin with individuals making their own decisions every day. For whatever reason, individuals aren't motivated right now to do more and create more growth. Until people decide to grow more, the Fed is pretty limited in what it can do.

He spends a lot of time in the article explaining how successful the Fed has been during the recession, patting himself on the back for creating new tools and then not needing to use all of them anymore. He ignores the many times the Fed has had to downgrade its projections on economic growth in the last several years and then imagines a wonderfully growing 2012 that can be downgraded at a later time.

Must read? Absolutely! It reads just like a lot of other economic articles in the last several years. The author is justifying his job. He has no idea why economic growth isn't higher. He doesn't know how to increase economic growth any more. He has a blind optimism for the future based on the policies that have already resulted in our current sputtering growth. Have I summarized this accurately?

R. Parker said...

Joseph: We'll let your own words stand by themselves. You don't need me to tell you if you did it right or not. I only wish Fed officials had the license to say what they really felt about fiscal policy. Then you may hear what he has in mind to improve growth. Here's what I think. Monetary policy has shot their bullets. Fiscal policy holds the key and they are doing the opposite of what needs to be done. Rather like the theme you put forward re: individuals and their daily decisions. Why is $2 trillion sitting on the corporate balance sheet? Tell me that and we will have our answer (this is rhetorical but if you must answer try and be a bit more pithy).

josephcmiller2 said...

I honestly don't know how to answer the corporate balance sheet question without addressing the argument that everyone is waiting for someone else to make the first move. I think it's the argument behind the philosophy of "stimulating" the economy. It can be said that the companies don't see anything to invest in that will provide an unencumbered future return, but there appears to be many different opinions why.