Comments on News N Economics: Trichet got it wrong

Hello Anonymous, Are you able to be a little more...

2009-12-28T11:14:57.598-05:00

Hello Anonymous,

Are you able to be a little more specific? The German economy is set to decline this year by twice as much as the US economy, and the risk of sovereign default is rising across the eurozone (Spain, Greece). The economies in the Eurozone are surely no better off than in the US.

A lot changed AFTER this article was written, and the ECB relaxed its policy stance quickly. For example, in March of 2009 the ECB relaxed the collateral accepted for its credit operations. Also, they enacted the covered bond purchase program. For all intents and purposes, the ECB was "credit easing".

Rebecca

I guess after the event, it seems that you got it ...

2009-12-27T13:38:43.033-05:00

I guess after the event, it seems that you got it completely wrong.

Thank you all for your insightful comments!

2008-11-12T11:37:00.000-05:00
Thank you all for your insightful comments!

Hi Janie,

Always good to hear from you! Also can’t believe its November.

You said, “Do you think Bernanke and Co. are capable of withdrawing liquidity when it should?”

Except for reducing the federal funds target to 1%, the Fed has been rather innovative in its liquidity measures. Much of the additional liquidity has been done by way of loans, which at some point (generally, 30-90 days) expire. So all the Fed would have to do is wait for the loans to expire, raise the discount rate (to curtail discount lending), schedule only minimal TAF auctions, stop the PDCF program, allow the CPFF loans to expire, and call in the currency swaps. The only sticky point is the TSLF – which has a $200 billion balance. The Fed could not unload those (swap them back for its Treasuries) until a market has been well defined for these assets). That market will come…eventually.

Hi Ines,

Thank you for your comment – I totally agree with you.

You said, “I'd like to hear how you support the assertion how the fed will justify taking back the liquidity.”

The Fed will not take back any liquidity until the credit crisis is “about” to pass and health has been restored to the banking system. The velocity of money may is certainly a function of tightness in lending, but as long as the base grows enough to overcompensate for that, the money supply will rise – and it is rising. Eventually this banking crisis will end, the recession will end, and there will be liquidity left in the system with bankers there to loan it out. I have always argued that banking will go back to its roots with a focus on consumer, small business, and mortgage lending; thus the velocity will recover.

There is no reason for me to believe that the velocity will not remain fairly constant when all is said and done. Certainly financial restructuring (moving away from asset backed securities as the catalyst for easy credit) will occur, but that will be ongoing far after this recession is over and consumers are buying homes again.

Hi Flow5,

Good to hear from you again!

You said, “(1) this approach is entirely ex post (severly lagging) & (2) the money supply can never be managed by any attempt to control the cost of credit (a Keynesian fallacy).”

I totally agree, and do not support the Taylor Rule for anything except for getting a point across.

Rebecca

Taylor Rule = FED's nominal interest rate chan...

2008-11-12T10:20:00.000-05:00

Taylor Rule = FED's nominal interest rate changes (pegs) when actual GDP divergences from potential GDP & actual inflation diverges from target inflation rate"

(1) this approach is entirely ex post (severly lagging) & (2) the money supply can never be managed by any attempt to control the cost of credit (a Keynesian fallacy).

Monetary policy objectives should not be in terms of any particular rate or range of growth of any monetary aggregate. Rather, policy should be formulated in terms of desired roc’s in monetary flows (MVt) relative to roc’s in real GDP, i.e., money is the measure of liquidity and the transactions velocity of money is it's rate of turnover.

I'd like to hear how you support the assertion how...

2008-11-12T10:17:00.000-05:00

I'd like to hear how you support the assertion how the fed will justify taking back the liquidity. With tighter lending standards and a new financial memory going forward, I can't picture money velocity getting back to where it was. I thought velocity was a function of freeness of credit and investment. Why would credit ever be as free as it was in subprime days?

Can money supply increases we've seen find their way to inflate prices of goods even with a lower baseline velocity?

Good Grief! It is November already!
Your next ...

2008-11-12T08:18:00.000-05:00