Originally posted at Business Insider.
Last Friday, September 7th, 2012, everyone was like this at 8:29am:
But at 8:31am, everyone was then like this:
Because an absolutely terrible jobs report came out. This, once again, put pressure for the Federal Reserve to act, which it may possibly do this week.
Fed action this week was also primed by the Jackson Hole conference from a few weeks ago. There, two important papers and a statement by Ben Bernanke set the tone of the future of monetary debate during the Great Recession. Let’s examine them in animated gif format.
One of the big obsessions with political elites is the idea that our unemployment situation is “structural.” That’s like this:
But replace “girls” with “employers” and “boyfriends” with “employees.” All the boyfriends have lame skills, so all of them are striking out. This means that detachment and “hysteresis” will set in for the unemployed, as it seems impossible that anyone will be able to get a new job:
This theory works very well for political elites, because the implication is that there is little to do in the short-term. This gives cover for political elites to not have to do anything about the crisis, which is useful because most political elites are like this when it comes to the unemployed:
Into this debate comes conservative economist Ed Lazear with a paper, and he’s all like this about the structural unemployment argument:
Among many other things, Lazear pointed out that industries are symmetric into and out of the recession – the businesses that lost the most rebounded the most. Wage and income increases aren’t going up that quickly, and employers aren’t trying hard to fill their job openings.
So instead of thinking about our labor force like this:
We should be like this:
For those of us who have been arguing this a long time, we were like this:
Because it means that there is room for more stimulus.
Let’s now look at Ben Bernanke’s speech. He outlines all the action that was taken over the past four years.
First off, Bernanke made sure there was plenty of liquidity in the markets during 2008-2009.
He then printed a bunch of money….
…and went on a shopping spree.
And he treated himself to large scale asset purchases of agency MBS, agency debt, and longer-term Treasury debt during a process called quantitative easing (QE). They also made announcement about keeping rates low several years into the future, which is often referred to as forward guidance.
Bernanke, in the speech, announced that the actions had the desired effects. They lowered long-term Treasury yields, as well as both corporate bonds and MBS. So the Fed is all proud of itself:
And they’ll probably do QE3 soon to try and get the recovery back on track.
However something doesn’t feel right about all this. Every time QE is executed in order to give our economy a shove, allowing it to take off on its own, it quickly ends up like this:
What’s gone wrong? In comes Michael Woodford with an answer provided in his gigantic paper. He argues that Bernanke’s policy is like this:
Why doesn’t QE seem to work? First off, because Bernanke executes QE by just buying a bunch of stuff and then is like this:
He conveys no sense of where he wants to go. Meanwhile the rest of the economy is like this:
And as the recovery slows down, and Bernanke once again looks like this guy:
The problem is that when Bernanke does these purchases, it doesn’t give the market any sense of what to expect on future action. And monetary policy needs to be grounded in expectations of future actions:
And the problem with expectations is that they require commitments. Making a commitment involves things like this:
But they also involve things like clearly stating the destination of where you want to end up, as well as what you are willing to do until you get there.
As Paul Krugman pointed out in the 1990s for Japan, if Bernanke tried to set expectations that he wanted a full recovery without any kind of serious commitment, the markets would go like this:
So unless the central bank is up for a serious commitment to getting to full employment, it’ll likely find itself with very little to show for it. Bernanke needs to commit like this to a recovery:
But instead of a ring, a permanent increase in the size of the monetary base would be a good commitment. Or a commitment to keep rates low not until a certain amount of time has passed, as he’s doing now, but until the economy hit a certain level of nominal GDP.
Because right now, through QE, the commitment is failing and it is more like this:
Woodford says we have to be like this:
Where the “there” is an nominal GDP (NGDP) level. The Federal Reserve clearly promises to go “are we there yet?” while looking at the desired level of NGDP. And if the answer is no, then we do more monetary policy until the answer is yes. And we commit loudly in advance that we’ll keep interest rates low until we are there.
Because without it, the capital markets go in circles, starting up and then slowing down again based on trying to figure out what Bernanke wants, wondering:
Woodford thinks that Bernanke is setting some commitments with his forward guidance language, but instead of clear language the market isn’t sure if the statements indicate future actions or are the prediction of a weaker forecast, as well as what happens when the deadline is reached. So this guidance language sounds more like this to the markets:
Woodford also thinks that QE can set expectations. He actually thinks QE is only working through setting expectations. Because QE shows that Bernanke has committed to being like this when it comes to fighting deflation:
But when it comes to tolerating above-trend inflation to reach our NGDP level, especially if you picture above-trend inflation as a mechanical toy mouse, Bernanke is all like this:
This is odd, given that Bernanke has long argued that central bankers could get stuck as a result of a self-induced paralysis. Is Bernanke all like this inside his heart?:
It is hard not to read personality into the papers and statements. At times Bernanke sounds like this in his press conference:
But Woodford seems to be like this to Bernanke:
One could imagine, if the Woodford question came up at Bernanke’s next press conference, Ben could be all like this:
But for us, when you realize the Fed could be doing something but isn’t you are first like:
Because when it comes to what the Federal Reserve could to stabilize the economy it’s like this:
then you are like:
Either because (a) you agree and the Fed is sitting on its hands not doing anything which is completely awful or (b) you think all this expectations stuff is nonsense and Republicans should stop being d-bags and let a JOBS bill through already.
But either way, QE3 is likely coming soon. We’ll have more animated gifs as we continue to cover it.
Mike Konczal is a Roosevelt Institute Fellow who blogs at Next New Deal. Follow or contact the Rortybomb blog: