On Friday, Chair Yellen delivered a speech at the Boston Federal Reserve Conference, “At The Elusive Great Recovery: Causes and Implications for Future Business Cycle Dynamics.” Her speech was titled, “Macroeconomic Research After the Crisis.” My short response to the questions posed by Janet Yellen have been answered by many NON-FED economists and most prominently by Richard Koo in his great work on BALANCE SHEET RECESSIONS. My sense is that the FED is an insular organization and pays little note of those outside its Ivory tower. Yellen’s second question was: “Whether individual differences within broad groups of actors in the economy can influence aggregate economic outcomes–in particular, what effect does heterogeneity have on aggregate demand?” Now, GET REALLY SCARED:
“Many macroeconomists work with models where groups of individual actors, such as households or firms, are treated as a single ‘representative’ agent whose behavior stands in for that of the group as a whole. For example, rather than explicitly modeling and then adding up the separate actions of a large number of different households, a macro model might instead assume that the behavior of a single ‘average ‘ household can describe the aggregate behavior of all households.”
All firms and households are not the same and the treating of said economic actors have revealed the flaws in the Fed’s economic models. Yellen is introducing the terminology of HETEROGENEITY INTO THE MACRO DISCUSSION and in doing so is suggesting to academic economists, “studying monetary models with heterogeneous agents more closely could help us shed new light on these aspects of the monetary transmission mechanism.”
In Yellen’s third question, she asked: “How does the financial sector interact with the broader economy? In light of the housing bubble and subsequent events, policy makers clearly need to better understand what kinds of developments contribute to financial crises. What is the relationship between the buildup of excessive leverage and the value of real estate and other types of collateral, and what factors impede or facilitate the deleveraging process that follows?”
Again, Richard Koo and many others have written on these issues for over a decade and if they had bothered to read Schumpeter he analyzed these issues back in the 1930s. MY POINT IS THAT THE FED IS NOW ENTERTAINING THESE QUESTIONS AFTER AMASSING A BALANCE SHEET OF OVER 4 TRILLION DOLLARS. Chair Yellen then raises the issue of what determines inflation? Again, she acknowledges “another gap in our knowledge about the nature of the inflation process concerns expectations.”
This speech by Yellen supports my operating thesis for the last six years: IT AIN’T ROCKET SCIENCE. The Fed maintains that its policies for the last seven years have stabilized the economy, which is part fact and much counterfactual, but we should all be concerned that the Fed’s continued money pumping was built on a theory that has little credibility. As Chuckie Baseball would say, “Rarely Right, Never In Doubt.”
***More from the FED. There was an October 13 Financial Times article titled, “Lael Brainard, a Fed Governor in the Political Glare.” FT Fed watcher Sam Fleming supports my long-held view that Lael Brainard is “… a vocal advocate of low interest rates at the Fed–based in part on the absence of wage growth.” The article paints Brainard as globally oriented and she regularly cites concerns about overseas shocks and the strength of the dollar being a potential drag on domestic economic activity. She is widely respected by groups like FED UP who push for the Fed to be far easier for far longer in an effort to stimulate wage gains at the expense of corporate profits. The article said Brainard could become the first female Secretary of Treasury in a Clinton administration, a job for which she is better qualified than a Fed Governor.
***For the Brexit and the anti-Brexit crowd: This article reflects major stupidity. The FT had a story on Monday, “German Car Industry Warns UK Over Brexit.” Matthias Wissman, the head of Germany’s auto industry lobbying group, warned about the severe consequences of Brexit for British automobile manufacturing plants. BMW and other foreign producers have invested large amount of capital into auto plants over the past 20 years as it utilized British manufacturing expertise and the lure of the EU market. In an effort to scare British manufacturing and finance about the effects of Brexit Mr. Wissman warned “… the UK could end up like Italy, whose output of cars has shrunk from about 2m a year 20 years ago to 500,000. Slovakia’s production has risen from virtually zero to more than 1 m vehicles in the same period. If the UK doesn’t want to suffer the same fate as Italy’s car industry, it must be concerned to retain full access to the single market, he said.”
This is so stupid. ITALY has been a GOOD CITIZEN OF THE EU, even displacing an elected Prime Minister Berlusconi in order to placate Brussels with their hand-picked choice of Mario Monti. The loss of its automobile manufacturing should make ITALY rethink its place in the EU, and, according to Herr Wissman it really doesn’t matter for BREXIT. Things change regardless of a nation’s situation within the EU. Wow, Alice, this is really some rabbit hole.