►Can the Fed Offer a Reason to Cheer?
Tyler Cowen/NY Times
The economy needs help, but monetary policy, which is the Fed’s responsibility, has not been very expansionary. This is true even though the Fed has increased the monetary base enormously since the onset of the financial crisis…If the Fed promises to keep increasing the money supply until prices rise by, say, 3 percent a year, people should eventually start spending. Otherwise, if they just held the money, it would be worth 3 percent less each year…
In failing to push harder for monetary expansion, is Mr. Bernanke a wise and prudent guardian of the limited discretionary powers of the Fed? Or is he acting like a too-hesitant bureaucrat, afraid to fail and take the blame when he should be gunning for success?
We still don’t know which narrative is more accurate, but the Fed is not receiving enough signals of support from Congress.
►US Inflation: What is the “Trimmed Mean” CPI and What Does It Tell Us?
Ed Dolan’s Econ Blog
Monthly inflation figures can sometimes signal a turning point in inflation, but those turning points are just as often masked by random noise. At present, the core CPI and trimmed mean CPI show that US inflation is still on a downward trend. Expect the Fed to stick to its easy-money policy until the trend shows a clear upward turn.
►Consumer Sentiment in U.S. Hurt by Delay in Extending Tax Cuts
Shobhana Chandra/Bloomberg BusinessWeek
Concern that U.S. personal income taxes will increase next year caused an unexpected decline in consumer confidence in September, indicating the biggest part of the economy will struggle to pick up.
►Case closed: Milton Friedman would have favored monetary stimulus
Scott Sumner/The Money Illusion
Friedman would have understood that the financial crisis was a special case that led to a rush for liquidity and safety, and a temporary fall in M2 velocity. He would have seen the low interest rates and low TIPS spreads as indicators of tight money. He would have favored temporarily allowing higher M2 growth to offset the low velocity, until the economy was back to normal. Somehow modern conservatives seem to merely recall the bumper sticker message “stable money growth” but overlook the nuanced and highly sophisticated monetary analysis that made Milton Friedman an intellectual giant.
►Storm Clouds, but Maybe No Rain
Paul Lim/NY Times
If the financial markets predict economic health several months down the road, a quick survey of recent stock and bond performance seems to point to some major problems ahead.
►Gold settles at new high; silver notches 30-year best
Claudia Assis and Myra P. Saefong/MarketWatch
Goldman Sachs said gold futures could reach $1,300 an ounce sooner than the investment bank expects if quantitative easing resumes. Quantitative easing, usually defined as a new round of monetary stimulus, “would likely accelerate the move to our 6-month price target and provide upside risk to our forecast,” analysts at Goldman said in a note to clients Friday.
►High-Fee Passive Advisor Hypocrisy
The passive advisors are right! Index fund investing is a better choice. Of course, that’s assuming you buy the right index funds and ETFs in the right amounts, and don’t pay an arm and a leg to an advisor for portfolio advice and management services.
Unfortunately, many passive advisors talk the talk but don’t walk the walk. They preach low-cost, but it doesn’t apply to their own advisor fee. Many passive advisors will berate the brokerage industry and the fund companies for charging high fees, and then stick their clients with the same high fees for investment advice and portfolio management! That’s not what a true believer in passive investing would do. It’s what a hypocrite would do.
►The Second Austrian Moment
We are now witnessing many important developments that will affect economics and public perceptions for a long time to come. It is perhaps too late in their careers for most established economists to be much affected. They will go the epicycle route: rationalize, complicate, and immunize against criticism. Fine, this is in part what the “old guard” is supposed to do. And those with different ideas must struggle against them.
But look around. We are witnessing the clear unraveling of the New Deal legacy. The relative modest beginnings of the New Deal turn out to have been relatively unimportant. What was important were the tendencies that were set in motion. All those unreconstructed Republican opponents of FDR who talked of “socialism,” “the foot in the door,” “fascism,” and so forth had a substantial point. A new world was being set in motion. The pragmatic case-by-case problem solvers were ignoring a whole set of consequences – the dynamics of interventionism. Expanding entitlements became the way that countless politicians, both Democrat and Republican, were elected and re-elected.
►Which Comes First: Inflation or the FOMC’s Funds Rate Target?
Daniel L. Thornton/St. Louis Fed
Monetary policy has already been effective in improving economic activity: It is extremely likely that real gross domestic product will be at or above its prerecession peak level in the third quarter of 2010, and most forecasters expect economic growth at or near potential in 2011, even though growth is now expected to be slower than previously forecast for the remainder of the year. As Kocherlakota conjectured, employment growth could remain sluggish for some time and the unemployment rate uncomfortably high even as output grows at or near potential, but there is little that monetary policymakers can do to increase employment apart from promoting economic growth. Monetary policy alone cannot correct the dislocations in the labor market that resulted from the severe contractions in residential and commercial real estate and the recession more generally.
►A reckless bailout for Harrisburg
Nicole Gelinas/Philadelphia Inquirer
Gov. Rendell threw the state’s debt-laden capital city a financial lifeline this week. But by swooping in to help Harrisburg avoid default on a bond payment, Rendell will make things worse for municipal borrowers and their lenders in the long run.