Working Papers

The Cato Institute’s Annual Monetary Conference

The proceedings of the Cato Institute’s annual monetary policy conference are available here.  Best as I can tell, The Economist is no longer sponsoring this event.  Perhaps not coincidentally, there was one notable improvement in this year’s conference: no Nouriel Roubini. 

I get a critical mention in a paper by Larry White:

Inflation targeting is not a market-based policy. Contrary to economist-blogger Stephen Kirchner (2006), Ben Bernanke is not a prophet of “the view that markets and not monetary policy should determine growth rates in broad money, credit aggregates and asset prices.” In a fiat money regime, the central bank controls the monetary base, and broad money is geared to the base via the money multiplier, so monetary policy-makers and not markets determine growth rates in broad money. Under inflation targeting, the Fed would adjust the base and thereby broad money to support the targeted price level path. In that sense the quantity of money becomes endogenous. It’s not really helpful to call that “markets” determining money growth.

Needless to say, I think this view is wrong, for reasons outlined in my critique of another economist with impeccable libertarian credentials, Tim Congdon.  Like Congdon, White believes we face a ‘central-bank-generated-asset-bubble problem.’  The only evidence White offers for this is some quotes from leading market ‘bubble’ drone, Stephen Roach, and some ritual quotes from Hayek.

What this stylised Austrian theory of the business cycle and asset price determination lacks in empirical support, it more than makes up for in popular appeal, chiefly because of its simple mono-causality and because it gives people what they want most: an institution to blame when things go wrong.  It completely ignores the real dimension to asset price booms and busts, what Jason Potts calls ‘liberty bubbles,’ which are a necessary expression of the market discovery process.

posted on 20 November 2006 by skirchner

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Surely it’s at the very least a central bank acquiesced-in asset bubble? The commonly articulated argument to persuade people to that position sites the Fed’s asymmetrical view that a central bank shouldn’t concern itself with asset bubbles until they deflate. IMO, as apparently obvious a moral hazard as that creates, a focus on asset prices yields the legitimation crew too much latitude (Dow 36,000 style). It is when you consider the attendant dereliction of duty- that irresponsible lending practices abound unchecked, (as typified by CPDO’s, exotic mortgages and the explosion of GSE balance sheets and guarantees), when you consider the cheerleading of the explosive growth of unregulated and perversely incentivized banking institutions, a.k.a. hedge funds, and cheerleading of the 20% year on year growth of derivative markets on which the most egregiously specious credit creation depends, or- alas- when you consider the eye watering current account deficits as turbo-charged engine of money supply growth (“market based” if your definition includes indirect bidders)- that’s when you realize the mono-causal narrative is not so bad after all. For when even the Fed is looking for someone else to tell the emperor he’s not wearing any clothes, then surely we’re sunk.

Btw, speaking of attendant circumstances, readers of this post should check out today’s Times for a glimpse on the Real costs of having a finance based economy:
http://www.nytimes.com/2006/11/27/business/27richer.html?_r=1&oref=slogin .

Fits well with a quote I fancy from the man who coined that term (so far as I know)-

250 million Americans sitting around thinking up ways for the rest of the world to support us is not my idea of a real world outcome. At some point we have to begin to give something back besides Krispy Kremes, Starbucks franchises, and Treasury bonds. Unfortunately that will require some other kind of work than checking for messages on our BlackBerrys or managing investment portfolios for that matter. And it will require saving as opposed to consuming - something that several generations of Americans know nothing about.

- Bill Gross, Investment Outlook, November 2004

Posted by .(JavaScript must be enabled to view this email address)  on  11/28  at  02:05 PM

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