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April 27, 2005

Roach To Fed: J'Accuse! (The End)

My obsession concludes.

I may appear to have been a bit defensive in this series of posts.  Perhaps it is so.  But statements like this...

The Fed is not only hard at work in the engine room in keeping the magic alive with a super-accommodative monetary policy but is has also become the intellectual architect of the New Macro. Time and again, since Alan Greenspan rolled out his New Paradigm theory in the late 1990s, senior Federal Reserve policy makers have taken the lead role as proselytizers of a new macro spin that condones the saving, debt, property bubble, and current-account excesses of the Asset Economy.

... are just plain silly.

OK.  I'll be generous and chalk that up to creative writing for effect.  But a really constructive conversation would tackle these sorts of questions:

-- I gather the prescription favored by those who feel the same as Stephen Roach is for the Fed to be more aggressive in tightening policy.  Fine, but is that what you really would have done in 1997, confronted with the circumstances at the time?  In 1998?  Would you have been impervious to the global financial stress I noted in the second post?

-- Would you choose to ignore the fact that employment growth in the U.S. has consistently struggled to gain traction?   Would you be confident enough that bubbles exist, and that monetary policy can do something about them if they do, to tighten monetary policy if you had some concerns about the underlying strength of the real economy?   

There is a reasonable debate to be had on all of these issues.  Let's have it.

Did you gather that I didn't particularly care for the Roach column?  Right. The critics, on the other hand, loved it: Resonance says "If you're into this topic, go read the whole thing"; The Housing Bubble bubbles "Mr. Roach is right on the mark again and the article is worth the few minutes it takes to read"; Bill Cara advises "I think you ought to be reading Stephen Roach’s daily commentary as I do"; The Cunning Realist claims "Stephen Roach, one of the few Wall Street pundits worth listening to, put out an excellent piece..."; James Wolcott agrees that, in that of which Roach speaks, "Fed chief Alan Greenspan has ignobly, disastrously, almost incomprehensibly failed"; The House of Cards endorses Wolcott;  Moon of Alabama exclaims "Go read the whole piece, it provides more in-depth explanations of how the Fed has dug itself deeper at every turn, by inflating a new, bigger bubble whenever the previous one threatened to burst".

UPDATE: In my initial post I complained about the dearth of critical reaction to Roach's comments.  Not to fear. Calculated Risk has filled the void.

April 27, 2005 in Federal Reserve and Monetary Policy | Permalink


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» Judging Fed Policy from Global Trader's Diary
While defending Roach's piece is a bit difficult, I am not that comfortable absolving the Fed either. [Read More]

Tracked on Apr 28, 2005 1:50:32 PM

» Judging Fed Policy from Global Trader's Diary
While defending Roach's piece is a bit difficult, I am not that comfortable absolving the Fed either. [Read More]

Tracked on Apr 28, 2005 1:53:57 PM


The British have an - remarkably amusing for non-native english speaker - expression for what is going on: Roach blew a gasket quite a while ago.

Having resisted the productivity acceleration thesis throughout the nineties, he finally succombed in the very late nineties (in the meantime he was calling for the USD to fall). The precise time when a few sane people where on the lookout for a downturn - national savings topped in the US in mid-1999, and some of us thought that might be important.

Once the recession started, he expected no end to it - all of this is DOCUMENTED ON THE RECORD -.

Now that that the expansion has been under way, he warns us all the time of policy mistakes: Mr. Greenspan is in the centre of his targeting range. I have no special interest in Mr Greenspan, and I am not old nor knowledgable enough to be able to compare him seriously with the Fed boss at the time of Roach's spell whithin the Fed. What I do know as a serious macro forecaster is that Mr. Roach has got it wrong (with hindsight, I do not pre-judge the future) for a long time indeed. There are several people in his team for whom I feel greater respect.

All of this is not to construed as a "defense" of Mr. Greenspan - he does not need me, obviously -. Where I do feel that Mr. Grenspan erred, is in his tacit approbation of a massive fiscal expansion that was decided - and this is crucial - even before the tragic events of 9/11. Of course, he gave qualifiers to his approval, but we all know, and he knows, that qualifiers are instantly forgotten by politicians and their spin-makers. He should have pointed out forcefully that projections of long-range future surpluses were extremely uncertain and should be dealt with as if they did not exist.

On the other hand - hey, I'm an economist -, I credit him and former President Clinton with a deal with the Clinton administration (tight budget, soft money) that proved admirable, and I also credit him and probably others with a deal in Asia that I called back in 2002 the "global convoy system". Unfortunately at that time, I had decent knowledge of Japan and the US, but did not insist properly on China's coming role in the system.

Guess I won't be working for M-S any time soon.

Posted by: Godement | April 28, 2005 at 04:57 PM

Michael Paulding,

Ok. Fair enough.

1. I have a major recommendation posted over at Brad Sester's blog regarding trade policy imbalances.

The comfortable road to ruin ...

2. Cut the U.S. federal budget by $100-300 billion per year for a while.

3. Stop complaining about foreign savings and purchase of U.S. securities. Let's be honest and admit that our trade policies are driving our import-export imbalances.

4. Advise citizens to pay off their most expensive debts quickly, excluding home mortgages.

5. Protect the core social programs, as we're going to need them shortly.

6. Tell the next Fed Chairman to concentrate on monetary policy and limit public remarks on fiscal policy, variable vs. fixed mortgage interest home loans, and social programs.

Posted by: Movie Guy | April 28, 2005 at 07:54 PM

Mortgage Refinance

Posted by: Mortgage Refinance | May 11, 2005 at 06:36 PM


Posted by: releasing | June 21, 2005 at 09:13 AM

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