Wednesday, August 29, 2012

Richard on Gold

The inclusion of a plank supporting a commission to study a return to the gold standard in the Republican platform has prompted a number of economists to explain (again) why it is a bad idea.

In an LA Times op-ed, my Wesleyan colleague Richard Grossman writes:
History provides ample evidence that the gold standard is a bad idea. After World War I, the major industrialized nations established the gold standard, which is widely seen as having contributed to the spread and intensification of the Great Depression. The gold standard tied the hands of monetary policymakers, forcing them to maintain high interest rates in order to maintain the price of gold, thereby making a bad economic situation even worse.
See also Paul Krugman.  My version of the case against gold is in this earlier post.

Tuesday, August 28, 2012

Dirty Mario?

From a story by the Times' Landon Thomas about ECB President Mario Draghi:
“You do not go back to the lira or the drachma or whatever,” Mr. Draghi declared at that same early-August news conference. By alluding to the former currency of his home country, Italy, and seeming to place it in the same category of woebegone Greece, Mr. Draghi — who played a crucial policy role in the euro’s creation — signaled that he was taking the bears’ skepticism personally. 

“It’s like Dirty Harry saying, ‘Make my day,”’ said Stephen Jen, a former economist at the International Monetary Fund who now manages a hedge fund based in London. “You can’t imagine Greenspan or Bernanke saying something like this,” he said, referring to the previous and current U.S. central bank chairmen, Alan Greenspan and Ben S. Bernanke. “It was very Italian and very powerful.” 

Mr. Draghi’s weapon of choice, of course, is more subtle than the Smith & Wesson .44 Magnum favored by Clint Eastwood in the “Dirty Harry” movies. But from a financial markets perspective, there is no less firepower in his suggestion that the E.C.B. might buy the bonds of countries like Spain and Italy if they commit to tough measures to reduce deficits and restructure their economies. 
Of course, what made Eastwood's Inspector Callaghan "Dirty" was his willingness to break the rules.  If he really means to save the Euro,  Mario Draghi may need to show a similar disregard for legal niceties.  I'm not an expert on the ins and outs of the Maastricht treaty, so I won't take a position on whether large-scale purchases of the bonds of distressed governments by the ECB exceeds its authority (or on the related question of whether the "European Stability Mechanism" is constitutional), but some - particularly in Germany - have been making that case (see, e.g., here and here).

Some of the relevant language from the Maastricht treaty:
Article 104 1. Overdraft facilities or any other type of credit facility with the ECB or with the central banks of the Member States (hereinafter referred to as “national central banks”) in favour of Community institutions or bodies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments...

Article 104b 1. The Community shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
If Draghi is serious about doing whatever it takes to save the Euro, he won't let that slow him down.
Critics of intervention can make appeals - perhaps with some validity - to the "rule of law," but this is a case where following the letter of the law (at least if its interpreted strictly) would lead to a real human disaster if the Euro cracked up in a crisis.

Some people found Dirty Harry's rule-breaking objectionable (Pauline Kael called it "fascist medievalism"). But John Wayne's perspective - in the context of explaining why he turned down the role - might be instructive for Draghi:
I thought Harry was a rogue cop. Put that down to narrow-mindedness because when I saw the picture I realized that Harry was the kind of part I'd played often enough: a guy who lives within the law but breaks the rules when he really has to in order to save others.
A little rule breaking is part of the tradition of central banking - as Brad DeLong explained, modern central banking came into being when the Bank of England acted outside its legal authority by assuming the role of "lender of last resort" during the panic of 1825.

Unlike Dirty Harry, whose magnum had six bullets, there will be no question of whether or not Dirty Mario has run out of firepower.  The question that remains is the extent of his willingness to use it, even if it means risking having to turn in his badge later.

Draghi probably wouldn't like the analogy, but I'd imagine its preferable to being called "Super Mario" all the time.

Tuesday, August 14, 2012

Rich and Paul

From Ryan Lizza's New Yorker profile of Paul Ryan:
In 1988, Ryan went to Miami University, in Ohio, where he got to know an economics professor named William R. Hart, a fierce and outspoken libertarian in a faculty dominated by liberals. The two quickly discovered their shared fascination with Rand and Hayek. Ryan got his first introduction to movement conservatism when Hart handed him an issue of National Review. “Take this magazine—I think you’ll like it,” he said.
Rich Hart (nobody calls him "William" or "Bill") was a colleague of mine for several years when I worked at Miami.  He certainly was "outspoken" - I figured that much out on my visit to Oxford as a job candidate, when I quickly realized politics probably wasn't the safest subject. After one of his colleagues - Rich wasn't the only conservative there - described Hillary Clinton as a "communist" I changed the topic.  After getting know Rich a little better, I'm sure he wouldn't have held the fact that our political views were very different against me.  Indeed, he was always quite kind in his dealings with me and supportive of the junior faculty.

I never had a precise sense of what Rich taught in his macroeconomics class, but, while he may have reinforced the political inclinations Paul Ryan brought with him to Miami, I highly doubt he could be held responsible for Ryan's absurdly ignorant take on monetary policy:
Perhaps Ryan’s most unconventional opinion on monetary policy came in the summer of 2010, when he told Ezra Klein that the Federal Reserve should actually raise interest rates even as the U.S. economy was still struggling: “[T]here’s a lot of capital parked out there, and we need to coax it out into the markets,” he said. “I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.”