Straight Talk from Benjamin Cole

Our very own Benjamin Cole (actually he’s not our very own because the peripatetic Mr. Cole shows up all over the blogosphere, but he’s like family) has recently written a guest post for another frequent commentator on this blog Lars Christensen whose blog is a must read. Working in the private sector, Lars has an entrepreneurial eye for what will appeal to the market, and so he is always ready and willing to open up his own blog to guest bloggers with something interesting and worthwhile to say. One more reason to always keep Lars’s blog on your radar screen.

Regular readers of this and other blogs know that Benjamin is a no-nonsense guy who is interested in results not idle chatter. So everyone could expect that when Benjamin got the opportunity to give us all a piece of his mind, he would get right to the point and talk about how to implement Market Monetarism with a sophisticated understanding of the issues and in simple and direct terms that ordinary people can follow. And that’s just what he did.

Benjamin makes a strong case that adopting a simple and transparent policy that the public can understand can monitor. So he recommends that the Fed commit to buy $100 billion of securities a month for up to 5 years in order to achieve a target annual growth rate of NGDP of 7.5% over the next 5 years.

The recommended concrete sum of $100 billion a month in QE is not an amount rendered after consultation with esoteric, complex and often fragile econometric models.  Quite the opposite—it is sum admittedly only roughly right, but more importantly a sum that sends a clear signal to the market.  It is a sum that can be tracked every month by all market players.  It has the supreme attributes of resolve, clarity and conviction. The sum states the Fed will beat the recession, that is the Fed’s goal, and that the Fed is bringing the big guns to bear until it does, no ifs, ands, or buts.

Now every so often I have recommended that the Fed and Treasury announce that they would target the dollar/euro exchange at a level 20% below the current dollar/euro exchange rate (something like $1.50 or $1.60 per euro), through open market operations and unsterilized purchases of euros in foreign-exchange markets  and would continue to do so until a suitably defined price level rose by 20 percent. This would mean that the only way for the Europeans to avoid an increase in the euro’s value against the dollar would be for them to inflate at nearly the same rate as the dollar was inflating. But once the new higher price level was achieved, the policy of driving down the dollar’s exchange rate against the euro would be terminated. Benjamin’s proposal is similar in the sense that is easily articulated and easily monitored, and therefore, credible. If the policy is credible, the public will believe in it and adjust their expectations accordingly, thereby ensuring its ultimate success.

Just to show that I am not a complete pushover, let me just mention a couple of points on which I don’t entirely agree with Benjamin. Benjamin opposes further extensions in the duration of unemployment insurance, but I am not so sure. Theoretically, the effects cut in both directions, so it is doubtful whether limiting unemployment insurance would do very much to reduce unemployment. Perhaps a better approach would be to scale back the benefit when extending unemployment insurance rather than terminate it altogether. Nor do I think that reducing federal expenditures to 18% of GDP, as Benjamin proposes, is a realistic goal given the increasing age of the population, meaning that the government will be paying more and more for the medical bills of an aging population. Discretionary non-defense spending has already been reduced as a percentage of GDP to historically low levels. So I think people are kidding themselves if they think that spending can be cut just by picking a number like 18% out of thin air. If you want to cut the budget, Benjamin, tell us what you want to cut.

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6 Responses to “Straight Talk from Benjamin Cole”


  1. 1 Lars Christensen December 19, 2011 at 10:36 pm

    David, thanks for the kind words. I surely recommend to everybody to have a look at Benjamin comment on my blog. He takes no prisoners!

  2. 2 Mike Sproul December 20, 2011 at 1:11 pm

    Why use a sledge hammer approach like this? The Fed only needs to watch the level of free reserve in private banks. When that gets too low, the fed can issue more money. When free reserves are high, the fed only needs to sell bonds to soak up the excess cash.

    (Of course, we could also dump the fed and allow free banking.)

  3. 3 MG December 20, 2011 at 6:15 pm

    How many people, I wonder, oppose Fed action because of a true fear of inflation, as opposed to those who oppose it for their own reasons, which have nothing to do with economic outcomes, or at least, economic outcomes that are concerned with the public good. I’m not talking about the man in the street (who won’t be reading these types of arguments anyway), but rather, the people with money and power, the people whose opinions matter. Not many, is my guess and experience.

    Still, I suppose the inflation mole must take its turn and get its head whacked, even if another mole will soon take its place. Let’s see, there’s inflation fears, “liquidation;” (courtesy, whatever his actual intent or beliefs, of your friend Hayek); nothing works, so just wait it out (“suffer, b%$^&es, I’ve got mine”); “debasing the currency” (which is different from straight inflation, as it’s a moralistic rather than practical complaint); and I’m sure I’m missing a few. Whack away, and watch a new mole pop up in place of the old.

  4. 4 Benjamin Cole December 20, 2011 at 8:38 pm

    I am red-faced with embarrassment at this notice from David Glasner!

    And I am glad Glasner took his chance to critique me, as I do from time to time on his excellent blog.

    In my defense, I post only on Market Monetarism blogs, not everywhere on the Internet—I actually have work to do offline. I will confess to being MM’s biggest cheerleader,and I also send e-mails etc to officials, and ask that others do too.

    On the question of federal outlays at 18 percent of GDP. Glasner’s point is serious–but my methods for cutting would be serious too. We should be able to provide for our national defense at 1 percent of GDP, not 6 percent. Do we really need a USDA anymore? How about the Labor Department? Commerce? HUD? Can we privatize the VA, and give vets vouchers? Federal agencies bloat and ossify, and should be sunsetted from time to time, including defense (btw, we used to demobilize, nearly entirely, after a war).

    Unemployment insurance–I am only talking about limiting it to 26 weeks. Not eliminating it. Hopefully, with an aggressive Fed, the demand for UI will be far less, so the question becomes somewhat moot.

    I do think a clear, aggressive Fed objective such as 7.5 percent growth in NGDP, and $100 billion a month in QE would do the trick.

    Recessions are hell on average people. And a whole lot of us are average.

    My plan is a layman’s offering–and I would be happy to see better or more-refined concrete proposals emerge (as long as they are easy for the public to grasp). So far, I have the best plan I have seen yet.

    Sometimes you run it up the middle to get it in the end zone, with the biggest fullback you have. If you get the touchdown, then fine.

  5. 5 David Glasner December 21, 2011 at 9:23 am

    Lars, You are so welcome!

    Mike, How do you define free reserves? Required reserves are pretty minimal aren’t they? So don’t free reserves differ only slightly from actual reserves?

    MG, You seem to think that everybody really does get it and the reason that they are against doing the right thing is that they are bad people. The problem with that argument it seems to me is that a lot of the people you think are bad are opposing policies that really are in their own self-interest, like creditors who will lose everything as their assets become worthless rather than allow inflation to reduce the value of their assets by just a fraction. I think that they really don’t get it. Then there are some people who are driven by an ideological world view that clouds their judgment and causes them to misunderstand where their own self-interest lies. You seem to think that their ideology is just a cover for their self-interest. There may be people like that, but there are also people for whom ideology is primary and self-interest is perceived through the lens of their ideology.

    Benjamin, You said,

    “In my defense, I post only on Market Monetarism blogs, not everywhere on the Internet—I actually have work to do offline. I will confess to being MM’s biggest cheerleader,and I also send e-mails etc to officials, and ask that others do too.”

    I don’t see anything wrong with posting on blogs that aren’t of the Market Monetarist persuasion. But the fact is that I have caught you red-handed posting on Williamson’s New Monetarist Economics blog, which is about as far from Market Monetarism as you can get, despite the title. So, Benjamin, you have just ruined your hard-earned credibility. Good thing you’re not a central banker, because we all know how important for central bankers to have credibility

  6. 6 mg December 21, 2011 at 2:47 pm

    I think people understand what’s convenient for them to understand. That doesn’t (necessarily) make them bad people in a normative sense — it just makes them people. It does, however, make them bad people to deal with.

    To put it differently, it isn’t that they know what the “right” thing is and are consciously against doing it. It’s that they don’t care enough what the “right” thing is to approach things in a way that will allow them to figure it out. Other things being equal, sure, they’d like prosperity for everyone. But as we know quite well, other things aren’t equal.

    Billionaires, at a time when poverty is at the highest level we’ve seen since the Depression, and income and wealth inequality are at the highest level we’ve ever seen, are complaining about how mean everyone is to them, about how they are somehow victims. That isn’t a sign of people who are looking at the world with a clear set of eyes.


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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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