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Tim Fernholz on Ted Cruz's monetary policy views

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Tim Fernholz has an excellent article in Quartz on the evolution of Ted Cruz's views on monetary policy:

But the Washington Examiner's Joseph Lawler has found Cruz is shifting directions in an intriguing fashion. He has begun echoing critiques made by a group of economists known as Market Monetarists, who have, since the Great Recession, developed an influential critique of monetary policy that has caught on among the party's small wing of establishment reformers.

. . .

At a hearing last week with Federal Reserve chair Janet Yellen, Cruz put this critique to her directly, asking if the Fed should have eased monetary policy more quickly in 2008. She seemed confused by the question, noting that the Fed had been in the process of cutting rates at the time, but fans of Market Monetarism quickly took note of Cruz's line of questioning.

Yellen's confusion gets at the debate between Market Monetarists and mainstream economists like Yellen, former Fed chair Ben Bernanke, or Harvard's Greg Mankiw, who tend to see the 2008 Fed as having been in the process of loosening credit conditions to fight the recession: The federal funds rate was cut that year in March and April, twice in October, and again in December. It hasn't gone up since.

But Market Monetarists like Scott Sumner and David Beckworth argue that Yellen and Bernanke are looking at the wrong measures. Forget rates in the second half of 2008, and look at the stock market, bond yields, and foreign exchange rates, all of which indicated deeply tightening credit conditions. By standing pat from April to October, the Fed, they argue, was in effect tightening--it should have resumed the rate cuts sooner, and gotten an earlier start on additional measures, like the asset purchases otherwise known as quantitative easing (which didn't get announced until November that year).

The holy grail for these economists is an approach to monetary policy called nominal GDP level targeting. . . . This paper (pdf) offers a more detailed explanation of the idea.

The Market Monetarists' analysis implies that, since 2008, monetary policy has been far too tight, with nominal GDP (NGDP) growth approaching 5% in just three quarters. That has put the group in the strange position of aligning with more liberal critics of the Fed to defend the central bank's various QE programs and urge a delay in raising rates.

Which, in turn, puts Cruz in a funny position: Beyond right-wing bromides comparing the Fed to a torture chamber, his rhetoric mocked "this incredible experiment of quantitative easing, QE1, QE2, QE3, QE- infinity," and warned that high inflation is crushing poor moms at the grocery store as the dollar crumbles. Market Monetarists like Sumner, a professor at Bentley University and the director of the program on monetary policy at the libertarian-leaning Mercatus Center at George Mason University, would say the opposite--that more must be done to loosen monetary policy, inflation isn't a problem right now, and the dollar is getting too strong.

"Every conservative who's been complaining that Bernanke's running an inflationary monetary regime needs to read this post, and verify the accuracy of my NGDP and CPI data," Sumner wrote in a 2012 blog post. "And then admit they made a tragic mistake."

If Cruz can admit he's been worried about the wrong problem, then there are good reasons for him to embrace Market Monetarist theories. If we assume his love of the gold standard and his wailing about Obama and Bernanke debasing the dollar has more to do with fitting in with the know-nothing Republican crowd than any real thought on his part, and that he is thus willing to set those things aside, there are plenty of conservative attractions in Market Monetarism.

In particular, it draws from a strain of conservative thought dating to Milton Friedman that suggests a well-run monetary policy--one that limits or obviates recessions--will make it far less likely for the government to intervene directly in the markets through bailouts, taxes, and spending. These ideas stands against the idea that fiscal stimulus is a good idea, which is one reason economist Paul Krugman isn't a huge fan.

The Market Monetarist approach also provides a better foundation for conservative demands that the Fed follow mechanical monetary-policy rules. . . . Nominal GDP targeting could strike a balance between the discretion Fed officials want, and the accountability the public desires in an institution whose targets and forecasts remain hard to square with the recent results.

If Cruz still needs convincing that he can sell these arguments next to the Trumps and Carsons of the world, there's still a kooky, right-wing utopia at the end of the nominal GDP rainbow. Sumner argues that under his fully evolved monetary policy regime, the Federal Reserve would mostly respond to a nominal GDP futures market where speculators bet on future economic output.

"In essence, the market, not the central bank, would be setting the monetary base and the level of interest rates," Sumner writes. "[O]nce government is that far removed from the process, it is relatively easy to move to free banking"--that is, a regulation-free financial system. Now, we're talking Tea Party. And Cruz, it seems, is listening.

Check out the link to Krugman not being a fan. That brought a smile to my face. Give Tim Fernholz an award for best set of links in a 2015 blog post. Read the whole thing.

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COMMENTS (10 to date)
Danny Kahn writes:

It's gotta be frustrating. Market Monetarism has now filtered down and been fully absorbed by even some b-team level econ journalists. And yet the Fed still seems so far behind the curve. Of course they've made significant progress over the years and would not make the same mistakes again, but they are not yet ready to adopt the policies that will actually be effective. Kocherlakota seems to get it, but of course he's on his way out. When Yellen starts blogging after her term is over she'll probably make a lot more sense than she does now. I guess that just begs the question: who are these diabolical Fed staffers that so constrain the actions and statements of the leadership? That prioritize interest rate levels over inflation and employment? Is this just extreme institutional conservatism or is it possibly a more nefarious banking influence?

Philo writes:

Yellen was confused by Cruz's line of questioning. Surely she knows what Market Monetarism is, but is it possible she has given it no serious consideration and is unprepared to respond to its critique of Fed policy?

Andrew_FL writes:

I stopped reading after I got referred to as a know-nothing kook. Read the whole thing? No thanks.

John writes:

I had to laugh at that Krugman article. 2013 really did prove the critical role of fiscal policy! Just not quite the way he suggests…

Benjamin Cole writes:

Cruz also recently defied right-wing orthodoxy by stating "We don't have a dog in this fight" about Syria.

Will the "New Cruz" stick?

Is Cruz just trying to temporarily differentiate himself from the usual GOP blowhards? (Dem. blowhards are just as bad).

For that matter, in between Trump's ghastly commentary, he has also made some sensible comments that perhaps the US does not have vital interests in absolutely every nation in the arc from Tunisia to Indonesia.

Time will tell. I suspect there is too-powerful a constellation of interest groups, dependent on federal fat, to do much about "national security" outlays. A GOP candidate must promise to boost federal spending to such groups.

But could a GOP President call for easier money?

Reagan did it. Nixon did it. Why not Cruz?

John writes:

@andrew_fl I don't think he was talking about all Republicans, just armchair goldbugs.

Scott Sumner writes:

Danny, Yes, of course it's frustrating at times. But consider that there was never any prospect that the Fed would quickly change their policy---central banks are fundamentally very conservative institutions. (As they should be.) I've always viewed this as a long term project, and on that basis I'm optimistic that we are making progress.

Before changing the Fed we need to change the zeitgeist.

Philo, I wondered about that too.

Ben, With presidents, it's hard to predict what you'll get---events often shape the policies.

John, Not sure that will make Andrew feel better . . .

Brian Donohue writes:

Great post. That Krugman link is up there with his cluelessness about interest rates during the Bush years. Full steam ahead, no time for reflection!

Andrew_FL writes:

Quite right it does not.

Brian writes:

Wait a minute was not Scott Sumner's position before the Crash the position most monetary economist agreed with? Then when the Crash happened everyone ran scared of the politician ramification and suddenly forgot all the research and their own position papers they wrote before the crash?

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