"QE1" and Monetary Disequilibrium

Steven Horwitz

In the comments on Pete's last post, I have been called a "staunch supporter of QE1."  As this is coming from one of our commenters who regularly misrepresents my views, I thought I would take a minute to, once again, set the record straight.

It's clear this commenter is using "QE1" as a synonym for any increase in the monetary base the Fed might have or did undertake in 2008.  Unfortunately, that only reveals his confusion about what exactly QE1 was.  According to most sources, it refers to the expansion undertaken by the Fed beginning in late November of 2008, the core of which was the purchase of GSE debt and mortgage-backed securities and then, in March of 2009, some longer term Treasury securities, to the tune of well over $1 trillion in total. 

These were radically new and different policies adopted by the Fed that required it unilaterally taking on powers it did not previously possess.  That is why it is called "quantitative easing" not "expansionary monetary policy" or some other standard term.  It is also why the recent purchases were termed QE2 as they too involved longer-term bonds and other strategies not part of the Fed's traditional toolkit.

So now that we all understand what QE1 was about, let's be clear:  I was NEVER in favor of it.  You can read through anything I've written or said about the crisis and recession and not find me supporting what the Fed did.  In fact, I've explicitly said that the taking on of new powers and the particular ways the Fed went about expanding the base were wrong and dangerous. 

What I have said is that in the heat of the crisis in September of 2008 (note, two months before QE1 was put into place), the responsible thing for the Fed, or any central bank, to have done was to follow the traditional practice for such banks during a crisis:  which is to be prepared to create liquidity to match the need for it by lending to sound banks.  That's Bagehot's rule and that's all I've ever defended. (And, it goes without saying, this is all in the world of the second best.  Given a central bank, this is what sound monetary economics says, in my view, it should have done.)  As I've pointed out on multiple occasions, the Fed did precisely the opposite of that by lending to distressed banks and then compounded the problem with the strategies of QE1 and QE2.

Now some may say this is splitting hairs, but I think there are crucial issues at stake here.  To say I am a "staunch defender" of QE1 is to say that I was in agreement with the size of that expansion, the securities that were purchased, and the dangerous powers the Fed unilaterally seized.  And all of those would be false as the written and spoken record would clearly reveal.  I have explicitly said that the Fed could have done what was necessary with its existing powers following its long-standing practices. And I have explicitly said that the size of QE1 was excessive as well.  QE1 was a large mistake in all the ways noted above.

As we've gone over and over again on this blog, there are legitimate disagreements with the position I actually took, but that's a far cry from the false claim that I was a "staunch supporter" of QE1.

Before people shoot their mouths off, it would behoove them to know what they are talking about.  In this case, it would be helpful to know exactly what QE1 was and what I've actually said about what the Fed should and should not have done.

Comments

[Steve Horwitz]

In case anyone gives a damn:

My contribution to the first Steve Kates volume, which lays out an Austrian take on the crisis, contains no defense of monetary expansion whatsoever and suggests free banking as the proper long-run solution.

My contribution to the follow up volume (with Will Luther) does defend the idea that "some" expansion in the monetary base was appropriate in the fall of 2008, but notes that any good that would have come from that was more than offset by the Fed's policy errors, including its grab of discretionary powers. That chapter also contains a long section calling for free banking to replace the Fed.

"The House that Uncle Sam Built" (co-authored with Pete) includes further criticism of the Fed and no argument for expansion in 2008. It also includes a graph of the exploding monetary base which I've used in a number of public talks (including last week in London). When I show that graph, it's just after saying "even though there is disagreement among Austrians and other free market economists over what the Fed should have done in September of 2008, no one wanted THIS." "This" refers to the graph of course, which clearly shows the effects of QE1.

In none of those do I staunchly defend QE1.

Again, I don't mind when people criticize the positions I've actually taken, but I do mind when they just make shit up when the textual evidence doesn't support what they want me to have said or written.

[Lode Cossaer]

I care about your opinion and you can't put it any more clearer than this.

I'm just surprised you still care about the specific person you mentioned. A lot of people have had a lot less patience than that.

[Steve Horwitz]

I don't care about said person. I care about getting the truth out.

[NIkolaj]

Steve,

it's really flattering to see you writing an entire essay to refute one word I wrote; "a staunch".

As you yourself concede, you supported printing money to get the economy out of depression, but not to the extent Fed did it and not by using all the tools they used. Yet, your only objection is the public choice reservation: they usurped the powers they did not have previously by doing what they did. But, the economic effects and causal lines are the same - printing money to "stimulate" the banking sector, to "stimulate" the economy (prevent "general glut", address the problem of "excess" demand for money etc). You, Bernanke, Krugman and others agree that this causal line leads out of recession; there are just some minor tactical and technical differences about how best to effect that same policy.

[NIkolaj]

P.S. Here is what Bagehot believed the lender of last resort should be doing. It includes many things that Bernanke did, including the purchase of government securities:

"The way in which the panic of 1825 was stopped by advancing money has been described in so broad and graphic a way that the passage has become classical. “We lent it,” said Mr. Harman [one of the Bank’s more senior directors] on behalf of the Bank of England, “by every possible means and in modes we have never adopted before; we took in stock on security, we purchased Exchequer bills, we made advances on Exchequer bills, we not only discounted outright but we made advances on the deposit of bills of exchange to an immense amount, in short by every possible means consistent with the safety of the Bank..."

[Jerry O'Driscoll]

I agree with Steve.

IF there is a central bank, its most essential function is acting as lender of last resort. (I elaborated on this in a December WSJ op ed, "Why Do We Have a Central Bank?") If you object to that, you are objecting to the idea of a central bank.

Judged on central bank doctrine, the Fed was way behind the curve in the second half of 2008. By the time QE2 began, the liquidity crisis was over. Then easing was executed wrongly for all the reasons Steve brings out. Now we have Charles Plosser, President of the Philly Fed, saying much the same thing. (See my post on this at TM.)

There remains the issue of what an "Austrian" monetary policy with central banking should be, and we are never going to settle that with blog posts and comments. If one believes that MV should be held constant, then there was an argument for easing (but not for the securities bought and their maturities). There should never have been bailouts of particular institutions.

To echo George, there is the question of what the best possible policy under central banking banking should be. In an imperfect world, some policies are less bad than others. I have great problems with inflation targetting and have voiced them. But zero inflation, however defined, beats trying to manage real variables.

[ZacharyP]

Nikolaj did you really read what Professor Horwitz wrote? It seems you may suffer from a lack of reading comprehension, or an inability to count, but the Prof. clearly wrote and expanded upon two points that you completely ignore. Yet you still claim the only opposition to QE1 that Horwitz offered was merely the public choice reservation (which isn't a problem in itself, unless you're a useless ideologue).

So can you not read, or do you purposefully misrepresent his arguments?

Better yet, don't answer that, I enjoy the thoughtful and intelligent posts and comments on this blog, and you certainly don't contribute in that regard.

[Bill Woolsey]

Perhaps it is just wishful thinking, but to me "quantitative easing" refers to efforts to increase the _quantity_ of money. Quantitative tightening would be efforts to decrease the quantity of money.

This is as opposed to interest rate targeting, where easing means lowering the target for the federal fund rate and tightening means raising that target.

When the interest rate target for the fed funds rate had been reduced to about 2 percent, and many economists, journalists, and politicians were saying monetary policy was out of ammunition (seeing zero so close,) and so we needed fiscal policy, it became clear that this tool of manipulating short term rates, that appeared to work well during the late eighties, ninties and the first part of the 2000s, was breaking down. It was time to focus on the quantity of money rather than interest rates.

I don't support Baeghot's approach to monetary policy. Rather than have the central bank lend to sound banks at a penalty interest rate if there is an increase in the demand for base money, I favor having the Fed make open market purchases of government bonds to accomodate the increase in the demand for base money. The base money would go to whatever banks sell the bonds, or whatever bank is utilized by the nonbank firms or households that sell be bonds. The market can handle moving reserves to sound banks that need reserves. Banks that cannot obtain reserves will fail. They should be closed and reorganized. Rapidly.

I suppose I don't trust the Fed to follow rules about only lending to sound banks. Years ago, I was persuaded by Friedman's argument that the discount window should close. I don't think "penalty interest rates" should be part of the process. Interest rates should depend on market forces. If Fed purchases of governement bonds results in lower rates for government bonds, that should be a worry. Whether the interest rates at which various banks on the market can borrow rise or fall should also not be a concern.

To some degree, my approach is that the Fed needs to offset changes in the money multiplier (in the currency deposit ratio or reserve deposit ratio) by changes in base money, to prevent changes in the quantity of money. However, I don't really favor stablizing the quantity of money, and believe that the quantity should change to offset changes in the demand to hold money.

Sometimes rather than break things down between base money, money multiplier, the quantity of money in the hands of firms and households, and the demand to hold that money, I just focus on the quantity of base money and the demand to hold it. It has some value. If the demand for base money rises, the central bank should increase the quantity to match. The market can determines the quantity of deposits people want to hold. On the other hand, the relationship between the quantity of deposits and the demand to hold them plays a key role in the process by which inbalances in the demand for base money and the quantity of base money actually impacts spending on output, prices, and production.

The actual policy of the Fed in 2008 was mostly focused on supporting loan securitization. It did involve an increase in base money, which was what was needed. But it also was directed at getting markets where banks made loans, sold them, investment banks bundled them, and then sold asset backed securities. The theory is that the demand for these securities was low because they had become illiquid--they couldn't be sold. If the Fed jump started this market, then everything would go back to where it was before 2008. If people were confident they could sell the securities when they wanted, they would be willing to buy and hold them.

From a monetary disequilibrium approach, this would work to solve the problem because people were holding money rather than these asset backed securities, perhaps indirectly through mutual funds. If they went back to holding the asset backed securities, then the demand for money would fall to pre-crisis levels.

The benefit to this approach has to do with lending markets. If banks hold loans on their balance sheets, regulations require that they fund it partly with capital. And so, by making loans and selling them, the loans can be funded by investors without banks (or anyone) providing capital.

The alternative would be for banks to make the loans, hold them on their balance sheets, fund them with deposits, and sell new stock to meet capital requirements. This process would take time, and in the meantime, lending would be disrupted. The price response to this would be high loan rates and low deposit rates. The increase bank earnings both provides an incentive for investors to purchase new issues of stock and for banks to build capital with retained earnings.

Of course, banks held large portfolios of asset backed securities, particularly mortgaged back securites and so suffered loss, and less capital already, which further caused problems with lending.

So, there was method to the Fed's madness. But I was always skeptical that it would work. And it didn't. Asset securitization has not recovered, and the problem is that the demand for money is higher.

In the past, my view had been that the Fed should buy T-bills when there is an increase in the demand for base money. If the Fed bought all of the T-bills that exist, and there is still too little base money, they should start moving up the yield curve. 2 year bonds, 3 year bonds, and so on. If they end up with the entire national debt, then start looking to agency debt, AAA private securities and so on. But I didn't expect to ever get there.

Because of the crisis, I have changed my mind. When the yield on an asset gets so low that holding currency is better (which is probably slightly negative,) then the Fed should stop buying and move up the maturity curve to something that still has a positive yield.

Also, it is embarrassing to admit this, but I didn't realize to what degree the Fed's asset portfolio was already heavy with longer term government bonds. Open market operations in T-bills was apparently something from textbooks.

So, I think the quantity of base money has been too low for the last several years. And I think the Fed should continue to purchase government bonds with positive yields (which all of them have, but the 4 week ones and even 6 month ones have pretty low yields.)

And so, I support quantitative easing. And, when the demand for base money falls, as I expect it will, and hope it will soon, I will support quantitative tightening.

[Mario Rizzo]

I echo Jerry O'Driscoll's point about less bad. The problem is to ensure that MV does not fall without picking winners and losers (as through bailouts or purchasing mortgage-backed securities). This is not an easy balance but there are less bad ways of doing it. Fed policy should not turn into capital allocation policy.

[Nikolaj]

Zacary,

I see, you like to call people names, but don't like them responding to that. :)

Bill Woolesely

"Perhaps it is just wishful thinking, but to me "quantitative easing" refers to efforts to increase the _quantity_ of money. Quantitative tightening would be efforts to decrease the quantity of money.

This is as opposed to interest rate targeting, where easing means lowering the target for the federal fund rate and tightening means raising that target".

Exactly! And that was my reason to portray Steve generally as a supporter of quantitative easing. I think that he even mentioned once in a debate here last year that he supported the initial quantitative easing by Fed (meaning conventional lowering of the interest rate), but opposed the bailouts.

In this matter I agree with you, rather then with him, because you are more consistent. If the goal of monetary policy is really to stabilize the "nominal income" and prevent the further collapse of the money supply (so "let market decide" is not an option) then what the Fed was supposed to do when the target rate was approaching zero and the largest banks were on the brink of collapse? It could either "let market decide" (do nothing, what I advocate) or start printing money to buy the government bonds and bail out the banks. I don't see any further option.

Citing Bagehot's account of 1825 panic in Britain I quoted in my previous post (and which did not include only borrowing to the good banks but much more than that!), Friedman advocated a more active and unconventional role for the Fed during the Great Depression.

Either it is a task of Fed to prevent deflation and slump, or it is not. If you say "it is", you cannot then in the very next sentence to say "forget about that, I do not like the method they used (although I myself am unable to propose any alternative method to achieve the same goal I share)".

[Nikolaj]

*My previous comment should be deleted, because I wrongly interpreted one assertion by Bill Woolsey

Zacary,

I see, you like to call people names, but don't like them responding to that. :)

Bill Woolesely

In this matter I agree with you, rather then with him, because you are more consistent. If the goal of monetary policy is really to stabilize the "nominal income" and prevent the further collapse of the money supply (so "let market decide" is not an option) then what the Fed was supposed to do when the target rate was approaching zero and the largest banks were on the brink of collapse? It could either "let market decide" (do nothing, what I advocate) or start printing money to buy the government bonds and bail out the banks. I don't see any further option.

Citing Bagehot's account of 1825 panic in Britain I quoted in my previous post (and which did not include only borrowing to the good banks but much more than that!), Friedman advocated a more active and unconventional role for the Fed during the Great Depression.

Either it is a task of Fed to prevent deflation and slump, or it is not. If you say "it is", you cannot then in the very next sentence to say "forget about that, I do not like the method they used (although I myself am unable to propose any alternative method to achieve the same goal I share)".

[Bill Woolsey]

There is no need for the Fed to bail out banks, large or otherwise, to avoid monetary disequilibrium and keep money expenditures on a stable growth path.

Accomodating an increase in the demand for base money is only a bailout if you start with the assumption that banks should be able to withstand a recession and deflation.

But banks (large and otherwise) can fail even if there is no recession or deflation. If they make loans to firms that fail. Perhaps too many loans to firms that happen to be in a contracting sector of the economy. I think banks who do this should suffer losses, and if they are bad enough, those banks should fail.

But, all during this process, any increase in the demand for base money should be accomodated by the Fed. Money expenditures on output should be maintained. But even with stable growth in money expenditures, some firms can lose money and fail. Entire sectors of the economy can have lower money sales, and have many firms that lose money and fail. And banks that lend to much to those firms that fail can lose money, and they can fail.

One thing this crisis has shown (me) is that it is possible that all banks could fail, even though the quantity of base money accomodates an increase in demand and money expenditures continue to grow. All banks failing would be really disruptive, and a way of reorganizing them fast is important. Shutting down all the banks for weeks would be a disaster, much less months or years.

But making sure that banks never fail is a really bad solution. But none of this really has much to do with whether the quantity of base money (and money more broadly conceived) should adjust to meet the demand. Or, really, whether the nominal quantity should rise. Obviously, the quantity of money _should_ rise to meet the demand, the real question is whether it should be the nominal quantity of money or the real quantity of money.

[Bill Woolsey]

My understanding of Horwitz's view is that the quantity of base money is now much too large, and that some combination of rebasing the growth path of money expenditure and long and variable lags for the impact of changes in base money explains why he rejects the views of the Krugman-christened "quasi-monetarists" that more base money is the least bad option now.

Selgin especially, but also Horwitz, White, and the rest, are kissing cousins to Sumner and the rest of us. At least I see it. And the connection is taking monetary disequilibrium seriously. I think there is a continuum, really. Beckworth, Sumner, Rowe, Henrickson, and I am sure many others don't all see eye-to-eye.

In my view, the Rothbardians are out there with the real business cycle theorists. Very wrong.

On the other hand, I don't have much use for big government Keynesians either, but there is a continuity there. I think Rowe pointed out that my view of the crisis has a lot in common with DeLong. We talk about it differently, and we have different proposed solutions.

[Dan]

Bill Woolsey: "In my view, the Rothbardians are out there with the real business cycle theorists. Very wrong."

I have Mises' Human Action here with me (at my disposal practically always).

Can you please show me or point me to anywhere in that book where Mises even hints or vaguely implies that monetary disequilibrium is a problem that should be taken seriously.

[Nikolaj]

Bill Woolsey,
OK, I don't want now to enter the general debate who are the "Rothbardians" and whehter they are wrong or right. You actually proved my point. The reason for this whole debate (and for the Steve's lengthy post) was the following problem: prof Beottke proposed Horwitz, Selgin and White as the more appropriate debating partners for Krugman on the Austrian cycle theory than Rothbardian Murphy to whom Krugman's response was directed. I said the same thing you said here, that Horwitz, Selgin and co understand monetary theory in a way which is congenial to Krugman's, and that the difference between them and Krugman and De Long (or Backeworth for that matter) is relatively minor and tactical one. For example, Selgin wrote that the main problem with QE2 was the bad timing - the economy already started to recover so this newest monetary stimulus would be ineffective. But they share the most important theoretical assumptions with the Keyensians and the peopel like Sumner; as you rightly point out, they are the "kissing cousins" of those guys who favor QE2.

So, the debate Krugman-MET on monetary policy and theory would an internal dispute about some minor technical details among the people who share the same paradigm (Horwtiz calls it Austro-monetarist synthesis or something like that), and hence less interesting than the Krugman-Murphy debate, which would be a head on clash of two distinct and irreconcilable paradigms (Keynesian-monetarist "stabilizationism" vs ortodox Austrianism- liquidationism of Mises, early Hayek and Rothbard).

[Michael]

Two important things are missing from this thread.

1) Misinterpreting Horwitz on an issue that he has written this much on is lazy.

2) White and others understand fractional-reserve banking, this is a hurdle that should be jumped before discussing any banking issues. [Not everyone agrees with this statement.]

[Niko]

I must admit that I am kind of amused by Prof. Boetke's proposition. So Bob Murphy tries to make a challenge, finally gets a response and now we have some experts that would be better equipped to handle Krugman.

PS: Nikolaj, maybe you could try to write a paper for RAE about what you find wrong with Selgin and co. Daniel managed to get one published, and it a pretty bad one, in my humble opinion. I'm just saying...

PPS: Prof Selgin, we I thought that if an idea is good, it should hold. In the end you do say that QE is advisable because the free market cannot do its job. It is just that you obfuscate the message, not that different from what the FED does. Should I be banned also for not seeing something else in what you say?

[Nikolaj]

Michael,

Horwitz wrote on this same topic the following:

"Whether the same situation as we faced in 1930 was in place last fall remains a debatable question. However, if velocity was falling in the way some folks believed, doing nothing would have invited a potential repeat of the early 30s, and now we can say with even more certainty that Hayek, at least, would have recommended that the Fed act to avoid it. (Of course, nothing in this paragraph is an endorsement of the extreme to which the Fed went, nor the other really stupid things it did last fall and since.)"

http://austrianeconomists.typepad.com/weblog/2009/10/hayek-on-deflation-and-the-great-depression.html

I don't know how would you interpreted this, as a support for QE or not? I interpreted it as a support, although not necessarily in the concrete form it has been done. Moreover, in a comment on the same post, his co-blogger Prychitko interpreted it in the same way:

"It's interesting that Hayek didn't appear to make that argument before 1979.
My only concern, again, is how much quantitative easing today? The knowledge problem is unavoidable, and the public choice problem is over-inflation."

As far as I could see, prof Horwitz did not correct his co-blogger. But, wrote an entire essay to correct me and my malicious misrepresentations of his views, when I repeated the same thing. :)

Niko,
the subject of this controvery is not who is right - Selgin, Horwitz, White and co, or people like Murphy, De Soto or Salerno, but why would one think that Horwitz or Selgin are a better choice to debate Krugman from the Austrian positions than Murphy (as prof Beottke axiomatically asserted)?

[David Stinson]

It's crucially important to distinguish between the size of the Fed's balance sheet (quantitative easing) and its composition (credit allocation or credit easing).

Mayor Bill Woolsey:

"Selgin especially, but also Horwitz, White, and the rest, are kissing cousins to Sumner and the rest of us. At least I see it. And the connection is taking monetary disequilibrium seriously."

Yup.

I have come to the conclusion that the central impediment to understanding is the framing of monetary policy as "stimulus" or "contraction", i.e., as government fine-tuning and direction of the economy.

I supppose bad monetary policy could certainly fall into those categories but not optimal monetary policy. Optimal monetary policy should be to maintain monetary equilibrium, or some desired relationship between money supply and demand. This is something that would occur even in the absence of central banking (as long as fractional reserve banking was permitted).

The question then becomes: are we currently in monetary equilibrium or have we achieved the desired relationship between money demand and supply? This is where all the different targets come in - zero/low inflation targeting, Selgin's "less than zero", Hayekian/Woolseyian/Sumnerian income/expenditure targeting, etc.. They are markers of monetary equilibrium/disequlibrium and stem, it seems, from different perspectives on the demand for money, on what people do when they have excess money balances, whether you believe in sticky prices (and in what sectors and for what reasons) and how one defines monetary equilibrium. Or something like that.

I keep thinking that the solution is to derive, if it has not already been done, an “as if” monetary policy rule from a theoretical free-banking environment that can be explicitly applied in a central banking environment. Maybe someone's already done that?

Just my two cents (pun not intended).

[Steve Horwitz]

"Whether the same situation as we faced in 1930 was in place last fall remains a debatable question. However, if velocity was falling in the way some folks believed, doing nothing would have invited a potential repeat of the early 30s, and now we can say with even more certainty that Hayek, at least, would have recommended that the Fed act to avoid it. (Of course, nothing in this paragraph is an endorsement of the extreme to which the Fed went, nor the other really stupid things it did last fall and since.)"

So, in other words, I said in October of 2009 EXACTLY WHAT I CLAIMED I had said in the post above. And better yet, the world can see just how lazy and devious you really are in attempting to attribute another view to me.

Apology accepted Nikolaj. Oh wait, you didn't apologize for misrepresenting (also known as lying about) my views. Don't worry, I won't wait for one. You don't have that level of integrity.

(I also like how I'm guilty of supporting QE1 because I didn't respond to Dave P's point. Good to know that the absence of a response to a criticism constitutes endorsement of the criticism. Interesting theory of conversation and scholarship behind that claim, not to mention its implicit assumption that my time faces no scarcity constraint.)

[Steve Horwitz]

@Dan:

On Mises and monetary (dis)equilibrium see:

http://www.coordinationproblem.org/2010/05/reply-to-salernos-four-propositions-on-mises-and-the-free-banking-school.html

and

http://austrianeconomists.typepad.com/weblog/2009/09/mises-defining-inflation-the-monetary-equilibrium-way-in-1951.html

[Steve Horwitz]

@Niko:

I would second your call for Nikolaj to write up his criticisms and submit them to the RAE (just as Daniel K did). I think it would be good to see him have to make accurate use of source material and construct an actual argument, instead of simply repeating the same old bromides and misrepresentations. I think it would also be good to see his brilliance subject to some blind peer review.

As Daniel's experience shows, critics of us bloggers here at CP will indeed get a fair shake at the RAE.

[Dave Prychitko]

He chooses not to continue my quote, where I say:

"Given these, I'm pessimistic that the Fed can adjust the money supply appropriately to meet money demand."

[JP Koning]

Nikolaj:"Here is what Bagehot believed the lender of last resort should be doing. It includes many things that Bernanke did, including the purchase of government securities"

No.

Central banks transact with the public by bidding for the publics' securities and offering its own reserves in return (or vice versa). The public and the central bank meet somewhere between the bid & ask price in a bid-ask spread, with the bank bidding x worth of reserves for securities and the public asking x+y worth of reserves for securities.

There is a material difference between the central bank passively sitting on the bid (or low end) of this bid ask spread, which is what Bagehot advocated, and the central bank aggressively transacting near the upper end of a bid ask spread, which is what Bernanke's QE1 and QE2 are.

Bagehot explicitly advocated lending at a penalty rate. What he meant by this is that the central bank should never move from the bottom of the bid-ask spread... that the bank should only offer those wanting to sell securities a below-market price (at or below the bid). QE2 is about paying above-market prices (at or above the offer), and is contra Bagehot.

Without contradicting himself, Steve can advocate the Fed increase the money supply while not advocating QE1 and 2 because he thinks (a la Bagehot) that the Fed should not be moving up to top of the bid ask spread, up to the price offered by the public for securities, but should passively provide money to all comers at the much lower bid price. Bill Woolsey can agree with Steve about the need to increase the money supply, but thinks the Fed should move up to the offer (and probably push that offer up dramatically).

This is just Mengerian price theory. Bid ask spreads and all.

On a side note, I would disagree with Steve about illegality questions. The Fed broke none of the rules in the Federal Reserve act when it bought MBS.

[Dan]

Steve,

Your constant attempt to try to make the connection between Mises and Monetary disequilibrium/equilibrium theory on the basis of a couple of definitions of inflation is a rather poor choice of strategy to advance your theory in my opinion. Not only are the inferences you make from them extremely wild and cannot be substantiated any further, but you are forced to do away with hundreds of pages of monetary theory that are simply irreconcilable with most of your perspective on this matter.

The only reason I raised this issue with Bill is because I see this constant reference to the "Rothbardian school" (as oppose to the MET school or whatever), as a rather dishonest and poor form of argumentation.

[William Luther]

Dan,

There has been a long debate about the *true* Misesian position. And that debate is unlikely to be settled anytime soon. Using the labels "Rothbardian" and "MET" allows one to ignore this debate and focus on substantive issues. That is, we can accurately characterize the two positions and discuss the merits of each without having to settle an old debate on "What Mises Really Meant" up front.

I'm not sure how this could be seen as a "dishonest and poor form of argumentation."
It is not dishonest. The position held by Rothbardians is in fact the position that was advocated by Rothbard. And the position held by Monetary Equilibrium Theorists is in fact the position held by those historically concerned with monetary equilibrium/disequilibrium (e.g., Harry G. Brown, Herbert J. Davenport, Clark Warburton, Dennis H. Robertson, William H. Hutt.)

It is not a poor form of argumentation because the terms are not meant to settle the debate on what is Misesian. Saying that something IS Rothbardian does not necessarily imply it IS/IS NOT Misesian. Nor does saying something IS MET necessarily imply it IS/IS NOT Misesian. It leaves that question unanswered so that other (arguably more important) questions might be considered. If another set of terms like Misesian/MET or Rothbardian/Misesian were used, I would agree that it is dishonest and a poor form of argumentation. But the terms actually used avoid this problem.

If anything, it is a step forward.

[Nikolaj]

Steve,

you did not claim in the cited paragraph that you were against the QE. Far from it. That's the whole point. Otherwise, why did not you correct Prychitko's characterization of your views as advocating QE? At minumum, it was not my fault to interpret your views that way, because other people did the same and you were silent.

You accepted that the situation in the Fall 2008 was extraordinary and that "something had to be done". You did not say that you were against the Fed's purchasing of government securities in principle. You did not say you were against the very idea of bailouts in principle (at least not in the quoted post). If you write, as you did in the named post that deflation must be avoided in the cases like 2008 financial crisis, and if mere targeting the interest rate cannot stabilize MV (as it was the case in the Fall 2008), what would be your choice: to say, go ahead and do something new? Or stop, who cares about MV stabilization if Fed usurps the powers it should not have? It seems that if situation was really extraordinary as you implied, you would have to sacrifice either your "minimalist" targeting the interest rate approach, or you would have to sacrifice MET, i.e. the idea of stabilizing MV. However, you were all the time so furious in defending MV stabilization at this blog that I was free to conclude (just as Prychitko did) that you would allow at least some "unconventional" central banking policies in order to effect your supreme monetary ideal.

If you now say that you would under no condition accept any kind of unconventional policies (that were the only option in the Fall of 2008 if one wanted to stabilize MV), then ok, I retract my previous characterization of your views. But, you don't have much reason to blame me for your own unclear and inconsistent presentation, or even worse, for your change of mind in the meantime. As we've seen, tou succeeded in convincing much less malicious persons than me (such as your friend Prychitko) that you actually supported QE. :)

[Dan]

"It is not a poor form of argumentation because the terms are not meant to settle the debate on what is Misesian."

It is because any possible objection here to MET is considered "Rothbardian".

[Steve Horwitz]

So a refusal to claim I'm against X means I'm for X? Again, more interesting "logic".

N: "You did not say you were against the very idea of bailouts in principle (at least not in the quoted post)."

SH: "Let me be clear to those new to this ongoing discussion: I am NOT making a case for the bailouts or any of that nonsense. Nor am I saying what the Fed *actually* did was the right thing. My point is more narrow: faced with what appeared to be a significant drop in velocity/rise in the demand for money last fall, the appropriate monetary response to have taken was to provide additional liquidity to meet that demand. That's all."

http://www.coordinationproblem.org/2009/10/192021-and-the-great-depression.html?cid=6a00d83451eb0069e20120a60d7ba4970b#comment-6a00d83451eb0069e20120a60d7ba4970b

Not the same post, but in a thread in which you were an active participant. Again, I wonder about your reading skills.

Do you REALLY think that a life-long libertarian, and an an-cap one at that, would ever make a case for bailouts? Do you really think I'm that stupid, or are you just projecting?

[Dan]

Steve,

Your position on this matter with Nikolaj is problematic:

Steve: " My point is more narrow: faced with what appeared to be a significant drop in velocity/rise in the demand for money last fall, the appropriate monetary response to have taken was to provide additional liquidity to meet that demand. That's all.""

It is not possible in our present day monetary systems to provide "liquidity" without to some extent bail out banks or at least provide them with relief or minimize their risk of facing further liquidity crisis that would threaten their solvency.

So are in fact seem to be holding both positions. Against and for.

[William Luther]

Dan,

"It is because any possible objection here to MET is considered "Rothbardian"."

I'm not sure I follow. Most of the objections here to MET *are* "Rothbardian," that is, they are the arguments made by proponents of Rothbard's view. This isn't too surprising. Austrians monetary theorists are basically split into MET and Rothbardian camps. So critiques of MET on an Austrian blog are almost always coming from non-MET austrians, i.e., Rothbardians.

Are you suggesting that being labeled "Rothbardian" carries with it a negative connotation? I'm not sure why that would be the case. Many of those who subscribe to the MET view think highly of Rothbard. I don't believe "Rothbardian" is meant as a derogatory label. Indeed, I think it is an accurate description of the views held by a group of Austrians. (Consider, for example, the the LvMI dedicates its video "Money, Banking, and the Federal Reserve" to Rothbard.)

How would you prefer these two groups be labeled?

[Dan]

"Are you suggesting that being labeled "Rothbardian" carries with it a negative connotation?"

No, and this is an example of what I'm talking about.

"So critiques of MET on an Austrian blog are almost always coming from non-MET austrians, i.e., Rothbardians."

This is such a non-sequitur, but it's been pointed out here so many times, which is why this line of argument is very dishonest on your part.

I can argue the position against MET without a single reference to Rothbard.

[Steve Horwitz]

Dan,

At some level, you are correct, which is why free banking is the best of all worlds. But even with a central bank, it's possible to provide liquidity without bailing out bad banks. It's been done historically, so it IS possible. Holding both positions isn't contradictory. We might disagree on how likely such an outcome is, but that's different from saying it isn't possible.

My own estimation of how hard it is, is part of why central banks need to go.

[Mathieu Bédard]

I suppose it's somewhat normal that when banks have (almost) no capital every penny lent to them will look like a bail out... in fact without the notion of excess demand discussed in the post above I'm wondering if there is a way to differentiate both.

[Bill Woolsey]

Given the government's supression of competing police firms, calling for government law enforcement to catch and punish bank robbers is clearly a "bailout" of the banks.

Allowing banks to enforce their contracts in government courts, particularly against borrowers, is clearly a bail out of the banks.

Because recession and/or disinflation would injure those who have debts, including those that banks lent too, and if bad enough, result in default. And because the default of those in debt to banks would hurt the banks, then an expansion in the quantity of base money that avoided recession or disinflation must be a bailout of the banks.

If you hate banks enough, then maybe all of this makes sense.

Further, I think there is a bottom line to all of this. Economics are focused on the market as a system of coordination. Fitting peoples plans together. Also, we have a long tradition of appreciating the weath of nations, understood as the flow of consumer goods being produced. And further, some nothing that this can and should increase over time. (Sure, leisure is good too.)

Suppose instead your goal is to maximize the well being of savers?

Expected deflation raises the real income of those holding base money. It also puts a floor under real interest rates on debt contracts. No lower that the rate of deflation. So, it raises the income of debt holders as well. Unexpected deflation is just gravy for those holding base money. And while it may lead to default of those to whom savers lent money, bankrupcty allows the creditor to grab more of the capital.

Deflation is always good. Who cares what happens to income and output? What matters is what happens to the wealth of existing creditors.