Paul Ryan at the Economic Club of Chicago

[Bond]

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Good speech. Interestingly, Paul Ryan will not be running for the Wisconsin Senate seat that was vacated by retiring Democratic senator Herb Kohl. I'm not sure what this indicates concerning his political future, but I suppose we will have to see.

[Professor S]

Parts of that speech sound less like a budget proposal defense, and more like an economic platform for a presidential candidate.

[Bond]

Parts of the speech were somewhat odd as well, particularly when he criticized QEII, which is an economic tactic that Milton Friedman supported / would support. QEII also seems to often be unfairly lumped into the same negative category as the stimulus package.

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[Professor S]

Parts of the speech were somewhat odd as well, particularly when he criticized QEII, which is an economic tactic that Milton Friedman supported / would support. QEII also seems to often be unfairly lumped into the same negative category as the stimulus package.

Huh? How so? From what I've always gathered, Friedman's life work was against such measures since "printing money" basically devalues it and amount to a inflationary tax on everyone. Pumping money into an economy to save it is Keynesian, not based on Hayek, who Friedman often echoed.

If you know otherwise, please share. It would shock the shit out of me.

Personally, I think strategies like QE2 can work, but it is a VERY dangerous endeavor that requires skills far beyond my understanding, and perhaps even the ability to accurately guess the future.

Right now, working in the housing market, I can tell you that artificially keeping interest rates down is hurting business. Money hasn't been made available and underwriting is as tight as ever. Meanwhile, buyers feel zero pressure to buy as prices remain depressed and there is no fear that interest rates are going to rise. I recently helped put together a market statistics video for the Greater Philadephia area and the numbers are scary considering we're supposed to be in a recovery.

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[Bond]

Huh? How so? From what I've always gathered, Friedman's life work was against such measures since "printing money" basically devalues it and amount to a inflationary tax on everyone. Pumping money into an economy to save it is Keynesian, not based on Hayek, who Friedman often echoed.

If you know otherwise, please share. It would shock the shit out of me.
Hokay, I can certainly agree that Friedman would not favor increasing inflation (as you're right, it is an indirect tax on everyone); however, inflationary concerns need to be balanced with concerns for the general economy, and more largely the ability to stimulate economic growth. Inflation is not a current economic concern. It is, perhaps, a long term concern, but certainly not a short term concern. It is true that inflation is currently especially noticeable in gas and food, but the rise in gas prices can be generally tied to turmoil in the Middle East, and food prices are historically quite volatile. Among most economists, there is still a general worry of deflation, not inflation.

Furthermore, when the systemic issues of our economy are examined, such as high unemployment and the debt issue, the only way out of these issues is to increase economic growth. This needs to take precedent over inflationary concerns.

I would also draw a careful distinction between fiscal stimulus, such as Obama's stimulus package, and monetary stimulus, such as QEII. A monetary stimulus can be executed by the Fed very quickly, and can in turn be stopped very quickly in the event of looming inflation. In comparison, fiscal stimulus is a much slower and clunkier instrument, and it additionally increases the national deficit, whereas monetary stimulus does not.

So, while monetary stimulus is better than fiscal stimulus, I would still agree it is not an ideal tool. A better tool that the Fed can use to boost economic growth is to lower interest rates, but as you know, interest rates are currently 0 percent. Monetary stimulus was the best option among a handful of worse options.

Brief excerpt from a WSJ editorial to further my point:

He would look at growth in income. "He considered stable nominal [unadjusted for inflation] income growth desirable because sudden swings in it (and thus in spending) cause huge macroeconomic disturbances when wages and prices fail to adjust quickly," says economist David Beckworth of Texas State University. Income is growing well below historical norms. POINT: For QE.

He would look at bond-market inflation expectations. In his 1992 "Money Mischief," Mr. Friedman said Treasury bonds with an interest rate tied to inflation would produce "a market measure of expected inflation" that would give the Fed "information to guide its course that it now lacks" and a way to "hold it accountable." It could even lead Congress to legislate an inflation target, he said with approval.

Today, we have inflation-tied bonds and what amounts to a Fed inflation target. Markets anticipated low and falling inflation—until Mr. Bernanke began talking about QE2 in late August, a sign that markets believe Fed's bond-buying will boost inflation, as the Fed desires. POINT: For QE.

Milton Friedman held unswervingly to his principles, but was more pragmatic than some of his modern-day followers. He was supremely self-confident, but, as Mr. Lucas puts it: "One of the many lessons I learned in Friedman's class was to work out my own views on questions, using economic logic as well as I can, and not to trust authority—even his."

The Friedman logic, though, makes the case for QE2.

Source: WSJ (http://online.wsj.com/article/SB10001424052702303443904575578202202857136.html?mod=wsj_share_twitter)

Anyway, a lot of hate for the Fed and QEII stems from Ron Paul and Co. While I generally like Ron Paul and his Libertarian views, I'm afraid he isn't quite right on monetary policy. This isn't even to address the debt issue and the insane idea that he would entertain allowing us to default on the national debt.

Right now, working in the housing market, I can tell you that artificially keeping interest rates down is hurting business. Money hasn't been made available and underwriting is as tight as ever. Meanwhile, buyers feel zero pressure to buy as prices remain depressed and there is no fear that interest rates are going to rise. I recently helped put together a market statistics video for the Greater Philadephia area and the numbers are scary considering we're supposed to be in a recovery.
I don't disagree, however I would say this has more to do with general uncertainty concerning the economy than any of the Fed's doings.

[Professor S]

I think monetary stimulus is an effective way to "plug the hole" in a sinking ship, but I don't believe it has ever proven an effective means to spur real growth, and right now we are 3 years in our "recovery". There needs to be a promise of prosperity, not just cheap money to spur lending and spending.

Spending pushes money around. While this serves a purpose, its a terrible scenario for basing an economy 3 years after a crash. Savings and investment grow wealth, and these rates and cheap money aren't incentivizing either, IMO.

As for inflation, I understand that most economists only measure CPI-U and not CPI (due to volatile markets included in CPI), but that doesn't make them any less impactful. Also, costs to producers have skyrocketed, and while market forces are keeping prices stable now, well, I am not as confident as you that inflation is only a long term concern. I hope you are right, but right now I'm fearing at least a mild double-dip because our economic growth is being consumed by increased costs at almost every level of production and consumption. God help us if the rest of the Western world manages to stabilize their debt and currency...

EDIT - To not overstate my case: I'm glad we handled TARP and QE the way that we did, but IMO its time to turn off the spicket and allow the economy to find it's own equilibrium. As you said, uncertainty is a huge issue, and uncertainty is caused by unstable markets AND populist government interference.

[Professor S]

I found this:

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A great explanation of the purpose of the Fed and the cause of the Great Depression.

[Bond]

Yup, and at around 1:30 he reinforces the view of quantitative easing. I like Friedman a lot, he's somewhat of a happy medium between the Keynesians and the Austrians.

[Professor S]

Yup, and at around 1:30 he reinforces the view of quantitative easing. I like Friedman a lot, he's somewhat of a happy medium between the Keynesians and the Austrians.

Yes, but it also makes a statement that QE should be used to prevent a crash, but said nothing of using it to spur recovery.