"Wow I was close on Nominal GDP
I doubt a week has gone by since last summer during which I haven't seen some pundit or other trot out Walter Bagehot's dictum that in the event of a credit crunch, the central bank should lend freely at a penalty rate. More often than not, this is contrasted with the actions of the Federal Reserve, which seems to be lending freely at very low interest rates.
Ben Bernanke, in a speech today, addressed this criticism directly:
What are the terms at which the central bank should lend freely? Bagehot argues that "these loans should only be made at a very high rate of interest". Some modern commentators have rationalized Bagehot's dictum to lend at a high or "penalty" rate as a way to mitigate moral hazard--that is, to help maintain incentives for private-sector banks to provide for adequate liquidity in advance of any crisis. I will return to the issue of moral hazard later. But it is worth pointing out briefly that, in fact, the risk of moral hazard did not appear to be Bagehot's principal motivation for recommending a high rate; rather, he saw it as a tool to dissuade unnecessary borrowing and thus to help protect the Bank of England's own finite store of liquid assets. Today, potential limitations on the central bank's lending capacity are not nearly so pressing an issue as in Bagehot's time, when the central bank's ability to provide liquidity was far more tenuous.
I'm no expert on Walter Bagehot, and in fact I admit I've never read Lombard Street. But I'll trust in Bernanke as an economic historian on this one, unless and until someone else makes a persuasive case that Bagehot's penalty rate really was designed to punish the feckless rather than just to preserve the Bank of England's limited liquidity."
I believe that Bob Murphy is correct. I believe that is has to do with the way you view the Productivity Numbers. You say that workers are holding out. I say that Employers are Proactively laying workers off in anticipation of the depth of the downturn. In other words, the layoffs are exceeding the fall in demand. Hence, a temporary rise in productivity. My evidence amounts to quite a few posts showing that this is exactly what employers and employment experts are now saying is happening. Remember, I said that this would happen months ago. A Proactivity Run is a consequence of a Calling Run. These are my own terms for Fisher's Debt-Deflation, which I think is turning out to be a very useful model for what's happening. Based on Fisher, I also predicted a Savings Spree which is now occurring as well.
The current numbers are in line with what I said, only worse. I too thought that GDP would only go down 1%. The real fall is very worrying, because for me it means things are moving faster than Fisher's view would indicate. This is more like falling dominoes. If the projections were using unemployment numbers, then I see that the real drop is less than the drop expected given unemployment. Hence, more evidence that jobs are being shed far ahead of the actual amount of the downturn. Having said all this, I ,quite frankly, find these numbers more dubious than most as a general rule. They are useful, but no more. I admit to not being an economist. I'm just a citizen trying to understand the world. I have to admit that your productivity point does seem important, even though I disagree on what it means.
By the way, I enjoy any comments that help me understand these issues.
January 30, 2009 8:55 AM