Should All Dirty Fed Operatives Be Required to Take Econ 101? Canada Says Yes

Let's face it, I could name a few supposed economic rocket scientists that could probably use a refresher, especially the lesson that covers there being no such thing as a free lunch.

Nick Rowe brings up this important point in Why "everyone" should be forced to take Intro Economics via Worthwhile Canadian Initiative:

The reason is not what you are expecting. It's because maybe if he had been forced to take Intro Economics, the 12th President of the Federal Reserve Bank of Minneapolis, who holds a PhD in Economics from the University of Chicago, who is a specialist in money and macro, who has a CV that creams mine 100 times over, would not be making mistakes like this. (H/T Andy Harless via Scott Sumner).

"To sum up, over the long run, a low fed funds rate must lead to consistent—but low—levels of deflation."

That could be interpreted two ways: a wrong way, and maybe, just maybe, a right way.

"When real returns are normalized, inflationary expectations could well be negative, and there may still be a considerable amount of structural unemployment. If the FOMC hews too closely to conventional thinking, it might be inclined to keep its target rate low. That kind of reaction would simply re-enforce the deflationary expectations and lead to many years of deflation."

Nope. He definitely meant it the wrong way. If the economy returns to normal, and the natural rate of interest rises, the Fed must raise its target rate of interest. (So far so good). If it doesn't, the result would be....deflation. ("Inflation" would be the right answer).

I never did understand how the Fed makes decisions. But if the President of the Minneapolis Fed, and people like him, have any sort of power over monetary policy, we ( OK, Americans especially, but probably Canadians too, getting caught by the implosion) are so totally screwed.

I notice he has an undergraduate in maths, then went straight into a PhD in economics. My conjecture: I bet he never took Intro Economics, or anything vaguely similar. I bet he waded straight into the mathematical deep end. And so he never really learned economics. So he took the Fisher identity (nominal interest rates = real interest rates + expected inflation), added monetary super-neutrality (equilibrium real rates are independent of monetary policy in the long run), and ran with it. He never distinguished between the equilibrium thought-experiment and the stability thought-experiment. If you explain this in words, as you have to in Intro Economics, you have to get it right.

Who are Canadians to talk about our Fedheads like that? Well first off Kocherlakota might as well belong to Canada for being up there in the Great White North of Minnesota but secondly what happens here happens up there since without easy American money they have no one to sell wood and beaver pelts to. What else do we get from Canada? Oh who cares.

I would love to see Yellen, Bernanke, Rosengren and the like all jammed into tiny desks in a community college Econ 101 course and I'd extra love to require them to get at least 95% on all homework and exams. Let's see who the Dr is now, bitches.

Regardless of their education levels (take Bernanke for example, no one can argue that he's an idiot, not even me), there is a major disconnect between the textbook and the implementation, especially since the current environment has never been case-studied in econ textbooks. Sure it'll make up entire courses once it unravels and has a full history to tell but for now we're blindly groping in the dark to find our way out and no level of edu-macation could help these guys find the exit.

Intuition cannot be taught, nor can the sense to punch one's way out of a paper bag. All the books in the world can't save us from the mean-well drive of the Fed to somehow inflate us out of this mess.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


W.C. Varones said...

This is my gripe about Fed and academic economists. They don't understand the basics.

Especially macroeconomists, who seem to be the majority. They don't have the slightest understanding of incentives, which are the basis of all economics.

I beat up Menzie Chinn at Econbrowser all the time on this issue. Though he's more a partisan political spin doctor than an economist lately, kinda like Krugman.

hungry4food said...

How does a 14 trillion dollar GDP survive this policy if it is passed into law ?