Blaming the Party

It’s depressing people blaming Obama for everything wrong that happened since 2009. Actually, since 2007, but whatever. It’s a great tragedy people stopped looking at the fundamental reasons we went into recession and why we’re still in a recession. It’s as if it’s always the president to blame for everything. Not congress. Not the Federal Reserve. Not the states. Not the global market. Just the president – specifically Obama.

Conservatives, although liberals as well, fall for the same old trap. I guess it’s really great to be the chairman of the Federal Reserve. Ultimately, you’re the one guy who controls the economy and the majority of the people don’t know it. Everyone forgets about you and the role you’ve had in either the booms and the busts. Everyone’s forgotten about the monetary fundamentals in 2008, and didn’t learn the one absolutely important thing that everyone should have from that experience:

“Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy…”

Friedman was absolutely right, near-zero interest rates are an almost foolproof indicator that money has been too tight. Were he still alive, I can’t even imagine what he would think of the views being expressed by his fellow conservatives…

Actually money has been tight. And those construction jobs were mostly lost in 2007 and early 2008, when employment was still high. The serious unemployment problem developed in late 2008 and early 2009, and reflected a generalized drop in AD across the entire economy. And manufacturing has also shed lots of jobs.

Those quotes are from a blog by Scott Sumner (the first being a quote from Friedman) written a year ago. Sumner has been making this argument since early 2009 when his blog began, if not earlier. As a matter of fact, all the tools at the Federal Reserve’s disposal have shown them that interest rates really need to be NEGATIVE, not simply at ZERO. They can’t actually do that, though (without instituting a penalty on reserves). They do have many other tools at their disposal to loosen money and get the economy going.

People blaming Obama for everything, as too many people commenting to Bruce’s posts do, are completely dismissing the role of the Federal Reserve in this entire fiasco.

The housing bubble burst was contained – it hurt our economy, but it was contained. We would have recovered just fine. All we needed to do was have the Federal Reserve answer the call for more money. They saw that the housing bubble was going to lead to a slower economy, so they shouldn’t have feared inflation. They should have met demand for money with supply, and they failed at that in 2008.

From a friend at at his previous blog:

Beginning in 2006, headlines featuring odd acronyms like “CDS” and “CDO” became more and more common. The story that was unfolding was a grim tale of a housing boom that was coming to a violent end. Markets in California, Arizona, and Florida became inundated with high levels of foreclosures, write-downs, and unsold housing inventories. This seemed to be a regional phenomenon, as the economy continued to growth throughout 2006. 2007 marked the official NBER start of the recession. It also marked the start of an energy price rally — as crude oil began to soar in price. GDP continued to grow weakly throughout 2007 and 2008, along with the continuing rise in oil prices…but starting in 2008:Q3, real cracks began to appear.

In late June/early July, the energy price bubble collapsed, sending commodities downward in a vicious spiral. This is where the Fed enters the story once more (not that they were ever gone, check out the Financial Crisis Timeline to see an exhaustive list of Fed actions).

Recall that the Fed uses a Taylor rule to forecast the setting of the Fed Funds Rate. Well, an integral identity of the Taylor rule is a measure of the previous period’s inflation rate. For its intents, I believe that the Fed uses CPI (but I could be wrong, however, it is no matter — they use a backward-looking indicator). This is a problem, as rises in energy prices cause core inflation to rise. However, due to the energy price bubble, this was highly misleading. During August and September, as the market (as estimated by the TIPS spread — the difference in interest rates between nominal Treasury bonds and indexed bonds [or TIPS] — began forecasting falling real inflation rates (the Fed has an implicit rate of 2%), the Fed held nominal interest rates. This caused money to become inadvertently tight.

The majority of Americans haven’t heard or read any of this – and the media is mostly to blame for this since it’s easier to blame and shout: OBAMA!!!111


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