Bryan Caplan  

Hamilton: Trade-offs, Not Tightropes

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James Hamilton is one of the few macroeconomists whose short-run forecasts never sound like quackery. His latest analysis is full of insight:

Some analysts are saying that Fed Chair Ben Bernanke is walking a tightrope-- if he does not drop interest rates quickly enough, the U.S. will be in recession, but if he goes too far, we'll see a resurgence of inflation. I am increasingly persuaded that's not an accurate description of the situation.

[...]

There are fundamental problems with credit markets at the moment, and these arise not from a nominal interest rate or wage rate that are too high (the usual textbook suspects), but instead from a real disruption in the basic process of financial intermediation, as if somebody had dropped a bomb on our financial system, preventing it from efficiently allocating credit. To the extent that's the case, it may be that "full-employment GDP" would actually decline this year, and an effort to use a monetary expansion to prevent that would indeed be inflationary.

[...]

In any case, the tightrope analogy seems a misleading way to frame the issue, in that it presupposes that there exists a choice for the fed funds rate that would somehow contain both the solvency and the inflation problems. In my opinion, there is no such ideal target rate, and the notion that we can address the difficulties with a sagely chosen combination of monetary and fiscal stimulus and regulatory workout is in my mind doing more harm than good. Better for everyone to admit up front just how bad the problem is, and acknowledge that there is no cheap way out.

Alas, we can't expect that kind of honesty from political leaders even during normal years. In an election year? Ha!


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COMMENTS (7 to date)
Anon writes:

No need to post this: I read through an RSS reader (Google Reader) and have noticed that when a post contains a multi paragraph indented block quote (like this one), the first paragraph indents correctly but subsequent paragraphs do not.

This makes it impossible to distinguish between the quoted comments and the Econlog posters comments.

Thanks (I couldn't see a feedback form elsewhere)

Eric Hanneken writes:

Anon:

What a coincidence; I just pointed out the same thing to the webmaster. The cause is malformed HTML. The paragraphs are coded like this:

<p><blockquote>Some text . . .</p>
<p>More text . . .</p>
<p>Still more text . . . </blockquote></p>

This breaks three rules. First, and most importantly, the blockquote element is not properly nested; it starts in one paragraph and ends in another. Second, paragraphs can't contain block-level elements like blockquote. Third, blockquotes can't directly contain text. The proper way to code the quote would have been

<blockquote>
<p>Some text . . .</p>
<p>More text . . .</p>
<p>Still more text . . .</p>
</blockquote>

Firefox and Internet Explorer are both fairly tolerant of HTML mistakes (which is why the quote looks fine when the page is viewed directly), but unfortunately Google Reader is not. Apparently, it tries to fix the markup by terminating the blockquote at the end of the first paragraph.

I assumed that Bryan Caplan and Arnold Kling were using a WYSIWYG editor to write their posts, but the webmaster's response to me suggested that they've been hand-coding the blockquotes. She promised to mention the issue to Bryan (Thanks).

Anon writes:

Thanks for the update Eric.

Eric Hanneken writes:

Okay, Arnold Kling and Bryan Caplan are innocent. The culprit is the Movable Type blogging software this site uses. It's converting line breaks to <br /> and <p> tags. The same thing is happening in our comments, which is why we don't have to use those tags. The knowledge base article I linked to has some suggestions on how to write text that avoids the issue.

Dr. T writes:
There are fundamental problems with credit markets at the moment, and these arise not from a nominal interest rate or wage rate that are too high (the usual textbook suspects), but instead from a real disruption in the basic process of financial intermediation, as if somebody had dropped a bomb on our financial system, preventing it from efficiently allocating credit.
I read the linked article, but I found no further description of this credit allocation problem. What was this sudden "bomb" that mucked up lending?
Garrett Schmitt writes:
What was this sudden "bomb" that mucked up lending?

To my understanding, the "bomb" is the product of the loss in confidence in securitized subprime mortgages. Once doubts started to arise about these assets, investors didn't want to buy them. Since no one is buying them, there are no trades from which to derive guidance as to the value of the assets. Investors sitting on these securities can't tell what they're worth. Because some of these investors are big lenders, the uncertainty of their holdings makes them leery to lend out cash. The big lenders often have big debts, too, that skittish investors might try to get back early if they had the suspicion that their investment might go bust and leave them unsatisfied creditors.

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