Baum on Money: Upside Down Economics
Good morning, all. Welcome to the new week, which features a Fed meeting, delayed economic releases and your always compelling daily reading list.
Bad ideas never die
Like the one that the Federal Reserve should target higher inflation to fix the economy. Not permanently, of course. Just a "sustained burst of moderate inflation," Harvard's Ken Rogoff tells Binyamin Appelbaum of the New York Times. The front page article on Sunday, "In Fed and Out, Many Now Think Inflation Helps," was short on who exactly at the Fed would sign on to Rogoff's idea. Janet Yellen, nominated to replace Ben Bernanke, has said higher inflation would help -- and Appelbaum cites a paper by her husband, George Akerlof -- but I seriously doubt that the central bank, which just formalized a 2 percent inflation target last year, is considering moving it to 4 percent or 6 percent. Just remember how targeting the money supply worked out in the late 1970s, early 1980s.
'Half-truths' about efficient markets
Economist Robert Shiller, winner of the 2013 Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen, uses his "Economic Scene" column in the New York Times to explain the differences in their views on asset prices. Shiller agrees with the part about the amateur investor being unable to get rich quick by trading stocks based on publicly available information. He challenges the part that imputes a "wisdom" to market prices and views them as "oracles." He says markets "are not perfect, and really need regulation much more than Professor Fama's theories would allow."
Warning from Wicksell?
Aficionados of the yield curve as a leading indicator are probably familiar with Knut Wicksell, a Swedish economist who lived in the late 19th, early 20th, century. For those who aren't, Wicksell introduced the idea of a "natural rate of interest," which today would be the equivalent of a long-term interest rate. Wicksell theorized that if the natural rate (a proxy for the return on investment) were higher than the market rate (the rate at which banks lend, comparable to the fed funds rate today), businesses would borrow and invest. The Economist magazine reminds us of Wicksell's observation that the natural rate is "never high or low in itself," but only in relation to profit. The Fed's critics accuse it of holding the funds rate below the natural rate, "but this is at odds with plenty of other evidence," the Economist writes. "If investors thought today's low rates were unsustainable, bond yields would be higher." Just something to think about.
And now for something totally wacky
If lowering interest rates to near zero doesn't work, try raising them. That's what Stanford economist Ronald McKinnon suggests in a Wall Street Journal op-ed. Forget tapering. Raise rates first, taper later. McKinnon wants all the central banks that are holding their benchmark rates close to zero -- the Fed, the Bank of Japan, European Central Bank and Bank of England -- "to admit that they were wrong in driving interest rates too low in the pursuit of non-monetary objective such as the unemployment level." He says raising the funds rate to 2 percent over a prescribed period would encourage more lending. Uh-huh. Raise rates to stimulate borrowing. At least long-term rates would fall as the economy craters: If that is the Fed's goal, this would be a sure way to achieve it.
A well in every driveway
It's noisy. It's smelly. But sometimes it comes with a nice check. It's an oil or gas well coming to a backyard near you, courtesy of fracking. "At least 15.3 million Americans lived within a mile of a well that has been drilled since 2000," according to the Wall Street Journal. In Johnson County, Texas, there are more than five wells per square mile on average. If residents own the mineral rights to their land, the oil company cuts them a monthly check for leasing the property. It makes the noise and smell easier to swallow.
Well, someone got fired!
The smiling lady on Healthcare.gov is gone from the website.
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