Over at Econlog I did a post criticizing Mike Konczal for not conceding that monetary offset worked, just as the market monetarists predicted. David Beckworth sent me a very different post by Joe Weisenthal:
I’m really in favor of the practice of writers issuing Mea Culpas at the end of the year. It’s good for crushing one’s own ego, and it’s just good for accountability in general.
I actually already wrote one for the year, wherein I changed my mind about Bitcoin from being extremely negative to being more neutral and open minded.
But now I’m doing another one: I was wrong about the Fed!
Specifically: I underestimated the Fed’s power to boost the economy under current conditions.
For the past several years, I’ve been supportive of the Fed doing whatever it could to boost the economy, but mostly I’ve subscribed to the view of Richard Koo, the Japanese economist who has pushed the notion of a “balance sheet recession.” Koo’s view has been that in a period when the private sector was inclined to reduce debt (deleverage) that monetary policy is ineffective, and that the solution is fiscal stimulus and more fiscal stimulus. Basically, the public sector must engage in deeper deficits in order to replenish private sector balance sheets, so that businesses and households wouldn’t have such a strong inclination to want to reduce debt.
There’s a lot to be said for this view, that when interest rates drop to 0%, and people are paying down debt, that fiscal stimulus must be a huge part of the mix and that monetary policy loses its effectiveness.
. . .
In April, Mike Konczal wrote for Wonkblog on The great economic experiment of 2013: Ben Bernanke vs. austerity.
As 2013 wraps up, you have to say that Bernanke did pretty well for himself! The economy is operating at its best level since the crisis. The deleveraging has come to an end, and the pace of job creation has kicked into a new, higher gear.
One year of course isn’t definitive (there were already signs of the deleveraging coming to an end last year, and a lot of the austerity in 2013 was front-loaded, so the experiment wasn’t that clean to begin with). But the economy has clearly done better than I and a lot of other people would have guessed given the austerity, and it seems likely that the Fed played a role.
. . .
And it’s not just in the U.S. that those who believe in the power of the central bank have done well. Japan may be turning a corner economically thanks to Abenomics, which involves aggressive monetary easing. The U.K. is turning around. And Europe’s efforts to repair its banking system have helped stem the crisis (although the Eurozone is such a disaster for so many reasons that it’s hard to pin the crash or the stability on any one thing).
Bottom line though is that as 2013 comes to an end, I’m more monetarist than I was at the beginning of 2013.
Now of course a Mea Culpa isn’t very compelling unless you go back and identify where you said something specifically wrong, otherwise it’s just blather for the sake of faux humility. But I’m too lazy to find all of my exact wording on all these issues.
But I do remember one post from 2011 where I called out conservative pundit Ramesh Ponnuru and economist David Beckworth for being too confident that monetary policy could revive the economy (if done right). I still think that fiscal stimulus is an important part of the mix (or at least that the austerity we’ve seen has been disastrous), but I don’t think the Fed is as ineffective as I used to think.
Great stuff. I’d add that it’s actually easy to understand what went wrong with the eurozone. They tightened monetary policy sharply in 2011 and the Fed did not. I presume that even zero bound obsessed Keynesians would concede that raising the interest rate target in 2011 was a really bad idea.
After reading this I feel like I should admit my own failings. At the risk of sounding like a complete jerk, I don’t see many problems for 2013. It was an absolutely spectacular year for market monetarism on all sorts of fronts, all over the world. Ditto for anti-bubble ideology. I’ll do a post when all the data is in. But I was somewhat wrong about tapering. I would have expected rumors of tapering to slightly reduce long term nominal bond yields, and the rumors seem to have slightly boosted those yields (judging from the roughly 10 to 20 basis point drop in yields when tapering was unexpectedly delayed in September.) Not sure if it was because the liquidity effect outweighed the income/inflation effects, or because of some sort of market segmentation story (the purchases were pretty large.)
We know that tight money surprises sometimes raise long term yields, and we know that tight money surprises sometimes lower long term yields. My inability to figure out why is one of my greatest frustrations.