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The standard arguments against monetary policy responding to asset prices are the claims that it is not feasible to identify asset price bubbles in real time, and that the use of interest rates to restrain asset prices would have big adverse effects on real economic activity. So what happened with central banks and house prices prior to the financial crisis of 2007-2008?
Looking in detail at what the Federal Reserve Board (Fed), the European Central Bank (ECB) and the Bank of England (BoE) thought and said about house prices from the beginning of the 2000s, it appears that the Fed was so convinced of the standard line (monetary policy should not respond to asset prices but just stand ready to mop up if a bubble bursts) that it did not allocate much time or resources to discussing what was happening.
The BoE, on the other hand, while equally committed to that orthodoxy, felt the need to argue it out, at least up till 2005, and a number of speeches by Steve Nickell and others explained why they believed that the rises in house prices were a response to changes in the fundamentals (notably, the much lower levels of inflation and interest rates from the mid-1990s) and were therefore not a cause for concern. But after 2005 the BoE seems to have lost interest in the issue even to that extent.
Bank of England headquarters, London
The ECB was in principle more willing to consider the issue and to think about a response, but developments were very different between euro area countries (with Spain and Ireland experiencing strong house price booms but Germany and Austria seeing almost no change in house prices), and this would seem to be the main reason why the ECB never raised interest rates to restrain the house price booms in the former (which it correctly identified).
Since the crisis the Fed and the BoE have produced analyses suggesting that monetary policy bore almost no responsibility for the house price rises, on the one hand, and that using interest rates to restrain them would have caused sharp downward pressures on income and employment, on the other. The trouble with these analyses is that they consider only the effect of interest rates being a little higher before the crisis, with everything else equal. But of course the advocates of ‘leaning against the wind’ (the minority view which has favoured using interest rates to head off large asset price booms) have always emphasised that the existence of such a policy needs to be known in advance, so that it feeds into the public’s expectations of asset prices and helps to stabilise them. The absence of any such expectations effect in these analyses means that they are wide open to the Lucas Critique, and their results cannot be taken as an argument against leaning against the wind in this case.
What this all amounts to is our conclusion that the failure to adequately monitor developments in the housing markets means that the central banks of the United States and the United Kingdom, in particular, cannot reasonably claim to have done all they could have done to mitigate the house price movements that were crucial to the incidence and depth of the financial crisis.
The main outcome of the crisis for the operations and strategy of monetary policy so far has been the creation of instruments and arrangements for ‘macro-prudential’ policies, which will indeed offer central banks some additional ways of addressing problems in asset markets. However, central banks need to take some responsibility for the debacle of 2007-2008 and its effects. And they need to find some way in the future to incorporate an element of leaning against the wind into their inflation targeting strategies, in case macro-prudential policies turn out to be inadequate.
It is not beyond the wit of man or woman to establish a central bank remit which has a primary focus on price stability but allows the central bank to react to other developments in extreme situations, as long as it makes clear publicly that this is what it is doing, and why, and for how long it expects to be doing it.
Such a revised remit would and should incorporate useful expectations-stabilising effects for asset markets. The transparency and accountability involved would also help to shore up the independence of the central banks (particularly the BoE) at a time when there is so much pressure on them from the political authorities to ensure economic recovery.
Oxford Journals has published a special issue on the topic of Monetary Policy, with free papers until the end of March 2014.
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Image credit: Bank of England, Threadneedle Street, London. By Eluveitie. CC-BY-SA-3.0 via Wikimedia Commons
UCLA economist Roger Farmer was in England at a conference on “The Great Moderation” — based on the premise that the economy had become much more stable since 1980 — when the bottom started to fall out of the market.
Mervyn King, the governor of the Bank of England was supposed to be the host of the event, but he never turned up, and Rachel Lomax, the bank’s deputy governor, disappeared many times throughout the evening. The next day Farmer, who has served as the chair of UCLA’s Department of Economics since July of 2009, learned that the Bank of England was negotiating with Northern Rock, the first financial institution to collapse in the current economic crisis.
In a new book, Farmer attempts to help investors make sense of the bewildering series of events that followed. Designed for the average reader, How the Economy Works: Confidence, Crashes and Self-Fulfilling Prophecies serves partly as a lesson in the history of economics. Writer Meg Sullivan talked to Farmer about how society can avoid similar crises in the future.
Meg Sullivan: What caused the current recession?
Roger Farmer: Stock market wealth accounts for roughly three-fifths of all tangible wealth in the United States. The other two-fifths is in houses. In the fall of 2008, people lost confidence in the value of both those assets at the same time. They stopped spending, firms laid off workers and the drop in wealth was self-fulfilling.
SullivanL How is this crisis similar to the Great Depression?
Farmer: There have been 10 recessions since World War II, including the current one. In every previous recession, the Fed immediately cut interest rates to stimulate demand. But now the Federal Funds Rate — the interest rate on overnight loans — has fallen to zero. The Fed has run out of ammunition; it can’t lower the rate any further. The same thing happened in the 1930s.
Sullivan: Do you think the Fed was right to bail out the banks?
Farmer: Yes, I do. I understand that always bailing out banks provides incentives that encourage risky behavior but the consequences of not bailing them out would’ve been much worse.
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0 Comments on A Few Questions for Roger Farmer as of 1/1/1900
Marhsall Goldman is a Professor of Economics Emeritus at Wellesley College and Senior Scholar at the Davis Center for Russian Studies at Harvard University. In his book, Petrostate: Putin, Power, and the New Russia , Goldman chronicles Russia’s dramatic reemergence on the world stage, illuminating the key reason for its rebirth: the use of its ever-expanding energy wealth to reassert its traditional great power ambitions. In the article below Goldman reflects Russia’s role in increasing energy prices.
As energy prices rise to record heights, most consumers are unaware that it’s not only OPEC members who are the beneficiaries, but Russia which today actually produces more petroleum that Saudi Arabia. Russia has been the world’s largest producer of petroleum several times in the past including at the beginning of the twentieth century and again in the 1950s. But its role today when energy prices are at record levels has made Russia an especially important economic and political power, more so than ever before in the country’s history.
In more recent times, the bounty brought in by Russian petroleum exports has transformed Russia from near bankruptcy in August 1998 to levels of prosperity unmatched not only in Soviet but Czarist history. The Russian government today has built up nearly $500 billion in foreign currencies—not bad considering that less than a decade ago, in 1998, Russia’s treasury was effectively empty. Moreover the Russian company, Gazprom, the world’s largest producer of natural gas has just recently become the world’s second largest corporation as measured by the combined value of its corporate stock, a distinction that until just recently was held by General Electric. Today only Exxon-Mobil is larger than Gazprom, but Prime Minister Putin has promised that he will do all he can to help Gazprom reach first place. More than that Putin has begun to question why it is that the dollar is the world’s currency standard. As the US dollar loses value, the ruble has strengthened, gaining 20 per cent in recent weeks.
Not surprisingly both Putin and his protégé, Dmitri Medvedev his successor as President, have begun to demand that the ruble be included as a world currency (not bad considering that only a few years ago the ruble was not even convertible into other currencies) and that Russia have a say in selecting the leaders of international financial groups such as the International Monetary Fund and the World Bank.
Given the likelihood that energy prices will remain at high levels for some time to come, it is likely that Russia will seek to use its new wealth to reassert itself as both an energy and a political superpower.
Giant Golden Book of Biology - An Introduction to the Science of Life c1961
Text by Gerald Ames and Rose Wyler - Illustrated by Charley Harper
It doesn’t get much better then this. This is Charley in his prime.
“In a style he called “minimal realism”, Charley Harper captured the essence of his subjects with the fewest possible visual elements. When asked to describe his unique visual style, Charley responded:
When I look at a wildlife or nature subject, I don’t see the feathers in the wings, I just count the wings. I see exciting shapes, color combinations, patterns, textures, fascinating behavior and endless possibilities for making interesting pictures. I regard the picture as an ecosystem in which all the elements are interrelated, interdependent, perfectly balanced, without trimming or unutilized parts; and herein lies the lure of painting; in a world of chaos, the picture is one small rectangle in which the artist can create an ordered universe.[cite this quote]
He contrasted his nature-oriented artwork with the realism of John James Audubon, drawing influence from Cubism, Minimalism, Einsteinian physics and countless other developments in Modern art and science. His style distilled and simplified complex organisms and natural subjects, yet they are often arranged in a complex fashion. On the subject of his simplified forms, Harper noted:
I don’t think there was much resistance to the way I simplified things. I think everybody understood that. Some people liked it and others didn’t care for it. There’s some who want to count all the feathers in the wings and then others who never think about counting the feathers, like me.”
Israel -the land of the Bible Tourism posters by Jean David (L) c1954 (r) 195? produced for the State of Israel Tourist Centre
My Knowledge of Jean David (Sometimes referred to as Jan David) is limited. However, what work I’ve seen from him has been nothing less that stellar. Just look at the posters above. I could easily see someone slanging these at a Flatstock poster convention. Dang, I totally nerd out when I see this stuff. Its just so good.
Looks like the whale is riding a boat of waves. Meanwhile, Jonah is relaxing after downing a keg of Vitamen C. Just look at all that orange!
Flickr user ex.novo has posted some amazing examples of spanish modern design in advertising from the 1950s, 60s and 70s. The ads are taken from magazines/ journals titled “Clínica Rural” and “Glosa”. Anyone know anything about these journals? Most of the advertisements seem to be related to pharmaceutical products so it’s a great follow up to my previous post on Swiss modern design in the chemical industry.
Big ups to Mike from Burlesque for dropping this gem on me.
Westvaco Inspirations was a promotional journal produced by the Westvaco Corporation, formerly known as the West Virginia Pulp and Paper Company. The purpose of the journal was to highlight the printing processes and quality of paper achieved by the Westvaco paper Mills. Bradbury Thompson (1911-1995) served as designer and editor for over fifty issues of this publication including the issue featured above.
Things magazine..wheew sweet mother! They have put together a kick butt gallery of penguin book covers. Includes beautiful covers overseen by Jan Tschichold as well as the late typographer Hans Schmoller. My favorite years are between 1961-1972 when Italian art director Germano Facetti was in charge of design. Facetti enlisted Polish graphic designer Romek Marber to redesign the look of the Penguin series and the rest is history.
Side note: Watched Jules Dassin’s Brute force last night. Great Flick. I also recommend Riffifi which was directed by Dassin as well.
Alain Gree - l’electricitie c1969 vintage kids book Published by Casterman as part of the Cadet-Rama Collection
Woah! Pastel overload! Someone went crazy with the pink crayons. I love it though. Alain Gree’s illustrations are great. I can’t get enough of the bubble heads, mod clothes, pop colors and psychedelic scenery. In this book, Alain looks at electricity and how its used. It’s filled with teal buses, pink trolleys and mustard colored sewing machines.
On a related note, I have to give a birthday shout out to my friend Sean. Sean introduced me to Alain’s work so this post seemed fitting for today.
Hotel Astoria Lucerne was located in Luzern, Switzerland. As they claim in their promotional material, they were the “most modern Hotel of Central Switzerland”. After looking at this I brochure, I believe them. I’m not sure if the hotel still exists. I was able to find some information on a Hotel Astoria Lucerne designed by Herzog & De Meuron but, I’m not sure if bears any relation. I realize Herzog & De Meuron are modern day architects, but possibly they renovated the existing structure? Anyone have any info on this?
Kieler Woche is a festival that takes place each year in Kiel, Germany. The festival includes nautical competitions as well as cultural events. Each year 5 designers are invited to submit 3 sketches for the event’s poster. The rules are simple. The text on the poster must be limited to only Kieler Woche and the year. The type for Kieler Woche must be set in Adrian Frutiger’s Univers. Lastly the the image must give equal weight to the sailing competition as to the cultural aspects of the festival.
Designers that have contributed to this event include: Wim Crouwel, Michael Engelmann, Celestino Piatti, Anton Stankowski, Waldemar Swierzy, Otto Treumann, Hans Schweiss, Jean Widmer, Ruedi Baur, Ben Bos, Siegfried Odermatt and Rosemarie Tissi. For those interested, I uploaded the Otto Treumann poster to the grain edit flickr account.
