More on the Romer Symposium at the Economist

I confess that I think Alan Meltzer’s contribution to the Christie Romer symposium at the *Economist* ill-advised for two reasons. Meltzer writes:>Romer roundtable: Think, plan, and tell us the plan: CHRISTINA ROMER… like generations of policymakers before her… counsels “trust us”… [I]t was they who allowed banks to circumvent the Basel regulations, that permitted Fannie and Freddie to expand beyond any reasonable standard, that brought us too big to fail and, as John Taylor has shown, abandoned a policy that brought us almost 20 years of the Great Moderation….>[L]ike most other defenders of this inflationary, low productivity policy, Christina puts the choice as whether we act against recession now or against inflation now. That leaves out a multitude of options…. [Y]es, stimulate now to reduce unemployment, but avoid creating a big inflation in a year or two. And even announce in advance how you propose to reduce the high money growth rate and the excessive deficits. Don’t just say you’ll do it, think, plan, and tell us the plan.The first reason that it is ill-advised is that Meltzer really should not be claiming that Christina Romer is one of the “they” who “allowed banks to circumvent the Basel regulations… permitted Fannie and Freddie to expand… abandoned a policy that brought us almost 20 years of the Great Moderation…” Christie has not been doing any of these things. She has been sitting in her southeast corner office on the sixth floor of Berkeley’s Evans Hall lecturing about monetary policy before, during, and since the Great Depression. If Meltzer wants to blame the actions of the American conservative politicians he has consistently voted for and the officials they appointed for our current mess, fine. But to say that Christie Romer = Phil Gramm because both are “policymakers” is simply wrong.The second reason that it is ill-advised is that Meltzer misleads when he implies that the Obama administration and the Federal Reserve have not “announce[d] in advance how [they] propose to reduce the high money growth rate and the excessive deficits…” The Obama administration wants, as OMB Director Peter Orszag explains every hour on the hour, to balance America’s long-run budget by reducing the extraordinary economic inefficiency of the American health-care system via health care reform. The fact that the people staffing the executive branch are in large part those who in the Clinton administration did such great work at bringing America’s public sector back toward fiscal balance in the 1990s (but whose work was then largely undone by the American conservative politicians Alan Meltzer has consistently voted for and the officials they appointed) should give observers some confidence that they will at least try to reduce excessive deficits. At the very least Alan Meltzer should not be claiming that they have not told us how they intend to do so.The same applies to the Federal Reserve, which Meltzer implies needs to “tell us the plan.” I have found the Federal Reserve extremely eager and anxious to explain how it intends to unwind the large increase in the money supply when monetary velocity starts to recover. The basic problem, I learned back in my first year of graduate school, is that the central bank’s ability to soak up excess liquidity in an economy and reduce the supply of “monnaie” is limited by its balance sheet: it needs to be able to induce banks to part with their cash by offering them something else to hold, and the Fed cannot offer what it does not itself have to trade. The solution the Federal Reserve is proposing is to allow it to create additional kinds of liabilities on its balance sheet. If congress grants the Federal Reserve the power to accept not just interest-free but interest-paying reserve deposits (which it has) and the power to issue and sell its own interest-bearing bonds (which I hope it will), then the Federal Reserve will have no trouble reducing the transactions balances that make up our monetary base when it wishes to do so. Once again, we have already been told the plan–and it is unfair to claim that Bernanke and company have not told us.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s