Both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked....Lars P. Syll's Blog
On useless macroeconomic theories
Quoting William Buiter
I'm glad to hear the BoE diversified their economic tool kits. I was reading through working papers this morning at the SF Fed and I wish the same were true here in the U.S..
ReplyDeletePlenty of drivel about " lets assume something unrealistic and use a super simple representative agent to understand complex interactions in the real economy." The titles and abstracts of the papers look so promising, things like "Bank Linkages and International Trade" but I dig in and about three quarters of the way through, It becomes clear, their methods are so unrealistic and pollyannish that the conclusions are nothing more than mental masturbation.
So after having a good laugh there, I thought, I'd take a look at what John Williams had to say. Usually the heads of these regional banks have to be more sensible and realistic. His abstract begins: "The U.S. economy is currently suffering from a large and persistent adverse demand shock. Optimal monetary policy absent un-certainty would quickly restore real GDP close to its potential level and allow the inflation rate to rise temporarily above the longer-run target. By contrast, the optimal policy under uncertainty is more muted in its response. "
And there is where I depart. The categorization of anything that doesn't fit a desired model (or world view) post crisis is considered to be a 'shock' by the mainstream. It is an interesting categorization and the math is simple. Government spending is too low and causes a recession, "SHOCK!" Government fails to regulate and banks collapse "SHOCK!" If you assume that an equilibrium exists... then things shock you out of it.
On the other hand if you look at something like sectoral balances. You don't need a shock, an unpredictable event, with uncertain outcomes to move the economy from an ephemeral natural equilibrium. Instead is all fairly predictable what will happen to the stocks and flows that we measure and estimate.
We also wouldn't make stupid statements like "Optimal monetary policy absent un-certainty would quickly restore real GDP close to its potential level"
If monetary policy were able to restore GDP without fiscal policy, wouldn't it already have done it? Does he really need to blame 'uncertainty' for monetary policy not working? Private sector credit demand isn't going to do it this time no matter the rates or guidance or how much policy certainty is created by rate setters.
There were a few moments of sanity at the FRBSF, when another author concluded that "forward guidance probably has greater effects than signals about the amount of assets purchased." But they don't really have a grasp that forward guidance isn't all that effective either in doing anything of consequence in the real economy or for private demand of credit. Good at moving financial markets, maybe.
I read Cullen's response the other day at an unruly commenter over at MR. He called for a 'civil' approach toward discussion free from personal criticism and on the one hand it seems like a good strategy if you want to be considered a very serious person. On the other hand, if we conclude the very serious people that hold our nation's most important economic positions are just plain wrong and are openly hostile toward new ideas then I think we are better off using gorilla tactics that attempt to disrupt their normal 'academic' approach while forcing them to respond to personal and professional criticism of themselves, their methods and their ideology. I'll take Lars' or Tom's approach over Cullen's any day of the week. It isn't civil, it isn't nice to point out flaws and talk about personal prejudices and bias. But the MR approach whereby you only describing reality and try to be right is not enough. You have to engage and show others that they are wrong which inevitably treads into very basic 'personal' attacks on beliefs.