The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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August 28, 2008

Monitoring the inflation bees, striving not to get stung

As pure blogging fodder, Willem Buiter’s Jackson Hole “advice” to the Fed is a gift that keeps on giving. From Buiter’s paper:

“It has not always been clear whether the Fed actually targets core inflation or whether it targets headline inflation in the medium term and treats core inflation as the best predictor of medium-term inflation.”

As luck would have it, our boss (Federal Reserve Bank of Atlanta President Dennis Lockhart) had a few words to say on exactly that topic yesterday:

“Attempts to measure the aggregate rate of price change—no matter how sophisticated—remain imperfect. As a result, when it comes to measuring inflation, judgment is needed to distinguish persistent price movements that underlie overall inflation from the relative price adjustments. Separating the inflation signal from noise involves much uncertainty—especially when making decisions in real time. Discerning accurately the underlying trend is difficult.”

The difficulty of precisely “separating the inflation signal from the noise” is not a new problem. In fact, this difficulty can be traced at least as far back as the development of index numbers to measure economic aggregates—and aggregate inflation in particular—by the famous economist Irving Fisher. Fisher struggled with the idea of being able to separate out the general movement in prices from the relative price disturbances:

“It would be idle to expect a uniform movement in prices as to expect a uniform movement for bees in a swarm. On the other hand, it would be as idle to deny the existence of a general movement of prices ... as to deny a general movement of a swarm of bees because the individual bees have different movements.”

The distinction between the direction of the swarm and the individual bees is an important one that is the direct path to discussions of measures of “core” inflation. The conceptual issues were nicely articulated in a recent article by Dallas Fed economist Mark Wynne, and they go something like this: Suppose we thought of the percent changes in prices of individual goods and services between two periods as containing a common component (core) and price changes that are unique to the supply and demand conditions of a particular products markets. The object of our desire (the honey if you like) is the level and direction of the common component. The problem is how to measure it.

In his commentary on the “will-o’-the-wisp of ‘core’ inflation,” Professor Buiter decides on a selective concept of core:

“The only measure of core inflation I shall discuss is the one used by the Fed, that is the inflation rate of the standard headline CPI or PCE deflator excluding food and energy prices. Other approaches to measuring core inflation… will not be considered.”

We added the emphasis because we want to contrast that comment with these words from President Lockhart’s speech:

“It is essential for those of us who have responsibility for responding to these trends to use a wide variety of core measures and inflation projections to make the most informed judgment we can.”

The variety of core measures is in fact wide. Some are familiar—the traditional statistics that exclude food and energy prices, the Cleveland Fed median CPI, and the Dallas Fed trimmed-mean PCE are examples. Some important, but less familiar, measures focus on persistence over time in individual price changes and exploit correlation over time in the common and product-specific components. Work by Michael Bryan and Steven Cecchetti and Domenico Giannone and Tyler Matheson  are examples.  An alternative approach is to define core inflation by decomposing headline inflation measures into permanent and transitory components, identifying core inflation as the permanent component. Examples include research by Jim Nason and James Stock and Mark Watson.

Michael Kiley just recently extended the Stock and Watson approach and found the common trend in inflation during the 1970s and early 1980s was attributable to persistent movements in both energy/food and nonenergy/food prices. More recently, that trend has been less influenced by food and energy inflation.

Maybe that isn’t all good news. It is noteworthy that the traditional measures of underlying trend inflation have moved higher over the past year or so, some more than others.

Consumer Price Index Year-Over-Year % Change

As President Lockhart noted at several points in his remarks yesterday:

“No matter how you measure it, the aggregate inflation we are experiencing in the United States at the moment is uncomfortably high…

“Measures of core inflation in the United States suggest that overall price pressures have been on the rise, perhaps because higher commodities costs have begun to affect prices paid by consumers and businesses across a broader range of other goods and services…

“I'm acutely aware that the current FOMC has inherited the inflation policy credibility that was hard won by our predecessors. One thing that has impressed me since taking my position last year is the seriousness with which my colleagues approach the duty to protect that legacy. I am confident that the Federal Reserve's institutional commitment to maintaining low and stable inflation will prevail.”

Professor Buiter raised several theoretical challenges to the core inflation concept that deserve discussion. It really is time, however, to lay to rest the straw-man assertion that central bankers are diverted by a pursuit of single and overly simplistic notions of core inflation.

By John Robertson, vice president in the Atlanta Fed’s research department, and David Altig, senior vice president and research director at the Atlanta Fed

August 28, 2008 in Federal Reserve and Monetary Policy, Inflation | Permalink


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Thanks for the excellent post gentlemen.

Thankfully, I am not so blind as to believe that the Fed is pursuing single and overly simplistic notions of core inflation.

I sincerely don't know how any person could read ANY of the analysis coming from the Kansas City, Cleveland, Atlanta or even Dallas Feds could come to such a conclusion. I'm simply baffled.

At any rate, I'm a little intriuged by your metaphors of bees in this post.

First, I'd like to ask if you gentlemen feel that it is appropriate to use some Wiener's work, the foundations of statistical mechanics, improving Einstein's modeling of Brownian motion.

Some have found statistical mechanics to be extraordinarily useful in modeling group behaviors containing stochastic processes.

Although I clearly am not a mathematician, my judgment is that statistical mechanics might be a very helpful supplement to vector autoregression analyses, especially if you think, as I do, that the swarming behavior of bees is a useful metaphor for modeling markets.

Any such models would then of course be supplemented by the examining the role of less-informed hornets (such as Buiter and Cramer) upon the direction of those swarms.

Secondly, can you point me to any papers that would expand the work of Nason and Stock and Watson to include migration of variables from transitory to more permanent expectations?

Although that is obviously a slippery concept, such math would attempt to model rational consumers like myself who KNEW after Volcker's Belgrade moment on October 6, 1979 that the NEXT long term trend in inflationary expectations was CLEARLY downwards and indeed that was the case for at least 29 years now.

So I would like to see the "stickiness" funtion measured of inflation expectations as well.

Please forgive my mathematical shortcomings obvious from the post. I am working sincerely and diligently to correct them.

Matt Dubuque

Posted by: Matt Dubuque | August 28, 2008 at 03:29 PM

Another way to frame what I seek is some links to quantitative analyses describing how the anchoring of inflation expectations changes over time, and why.

Thanks for the good work,

Matt Dubuque

Posted by: Matt Dubuque | August 28, 2008 at 05:35 PM

I'm not sure I understand why measuring the movement of the swarm of bees is of much practical use. In keeping with the agricultural analogies, to help illustrate my point; isn't measuring the swarm's movement akin to measuring the cows that have run out of the barn after the barn door was left open? It doesn't get us to the answer of how to keep the barn door shut, or how to keep the swarm from moving in one direction or another. Rather, measuring movements of the swarm simply tells us a problem is already occurring. There is nothing in this proposed excercise that allows us to stop the swarm from moving once it is in motion. In fact, the tools we have to stop the movement of the swarm are widely believed to work with a significant time lag. It seems to me that the debate should be over what can be done to keep the swarm from moving in the first place, rather than simply measuring it once it is already in motion. Said another way, should we not be focused on keeping the barn door shut rather than simply counting cows? Professor Friedman taught us how to do this, and Professor Taylor refined the approach into something quantifiable. Still, we avoid their lessons and somehow are focused on counting cows. I just don't understand the practical implications of this debate.

Posted by: Ken | August 29, 2008 at 11:56 AM

For me, the practical implications of this debate are how do we learn about and model differential inflationary expectations among consumers that "swarm" and aggregate around certain points and means, and co-vary in different ways.

Increased inflationary expectations feed through directly into elevated "real" interest rates that are so harmful to us all. Nobody wants this and our goal to faithfully fulfill the mandate of the Fed is not at issue.

In terms of modeling swarms of bees (and the math behind this can be quite sophisticated and is used by Google in server allocation planning in cloud computing scenarios, for example) the DIRECTIONALITY of the swarm (up or down) can be modeled with these tools.

Surely inflationary expectations can COLLAPSE as well as rise.

If the Fed DRAMATICALLY (and inexplicably) raised the target for the Fed funds rate to 36% tomorrow morning while simultaneously taking several other highly restrictive steps, surely inflationary expectations would collapse.

Inflationary expectations can BOTH rise and fall.

Bee swarms can also RISE and FALL.

Cows only move in two dimensions, within a planar topological space as it were.

ALL OTHER THINGS BEING EQUAL, adding another dimension to these analyses can make our tools more powerful.

Mathematics did not stop progressing in the 1960s, when Friedman published his best work. Fast Fourier transforms are probably the most obvious example of this to the lay person.

Why should we unduly halt new analytical frameworks with higher granularity from better informing our decisions and judgments?

Medical science has certainly adopted some of these new tools and so has the National Security Agency.

Let's not condemn the Fed to analytical tools that are becoming increasingly blunt instruments in this noisy and deregulated banking environment.

Matt Dubuque

Posted by: Matt Dubuque | August 29, 2008 at 06:03 PM

"It really is time, however, to lay to rest the straw-man assertion that central bankers are diverted by a pursuit of single and overly simplistic notions of core inflation."
As one of the 14 or so "strawmen" savers remaining, let me respond: NONSENSE, UTTER NONSENSE!
Welcome back, Dave A.

Posted by: Bailey | August 30, 2008 at 11:55 AM


Just wanted to let you know, US month to month CPI/ Core CPI as well as annual CPI can be found under Prices and Indices tab in FXEconoStats (http://www.fxeconostats.com)
In case you want to compare CPI across multiple countries check the comparative charts section.

Posted by: Sogol | September 19, 2008 at 10:20 AM

I have to agree with Bailey, I don't think there are significant advantages to waiting around for your savings to mature.

Posted by: Mike J. Riley | November 07, 2008 at 05:09 AM

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August 26, 2008

Deep questions from Jackson Hole

If one were to judge importance by press attention, the key events of this past weekend’s annual Jackson Hole economic symposium hosted by the Federal Reserve Bank of Kansas City would be the bookend contributions of Fed Chairman Ben Bernanke’s opening address and Willem Buiter’s 141 pages worth of Fed criticism. Understandable, in the former case for obvious reasons and in the latter for the grand theoretical pleasure of Buiter’s (shall we say) forthright critique and discussant Alan Blinder’s equally forthright (and witty) defense of the Fed. (The session’s tone is nicely captured in the reports of Sudeep Reddy from the Wall Street Journal and Bloomberg’s John Fraher and Scott Lanman.) [Broken link to the Bloomberg article fixed.]

Though Professor Buiter’s (of the London School of Economics and Political Science) assertions were certainly provocative, for me the truly thought-provoking aspect of the symposium was the collective effort to address some deep questions that still seek answers. There are a lot of them, but here are a few at the top of my list.

How do you know “loose” monetary policy when you see it?
Charles Calomiris—whose paper received attention at Free exchange, and is summarized by the author himself at Vox—says it is the real (or inflation-expectations adjusted) federal funds rate. I suspect that conforms to the definition favored by many, but the significance of defining the stance of monetary policy in this way was hammered home by Tobias Adrian and Hyun Song Shin:

…some key tenets of current central bank thinking [have] emphasized the importance of managing expectations of future short rates, rather than the current level of the target rate per se. In contrast, our results suggest that the target rate itself matters for the real economy through its role in the supply of credit and funding conditions in the capital market.

There is a fair amount at stake in understanding which of these views is correct:

Chart of Interest Rate Spreads

Are longer-term interest rates relatively high while the real federal funds rate is so low because policy is quite loose and inflation expectations are rising? Or are the elevated long-term rates a sign that policy is really restrictive? Or is the picture just a symptom of a combination of currently weak returns to capital (keeping short-term rates low), the prospect of better times ahead (and higher long-run returns to capital), and a return to more realistic pricing of risk, all of which would be consistent with the proposition current policy is neither too easy nor too tight? The question is not academic.

Is there crisis after subprime?
A primary component of Calomiris’ thesis is (in the words of his Vox piece) “loose monetary policy, which generated a global saving glut.” That global saving glut connection would come up again, most prominently in MIT professor Bengt Holmstrom’s discussion of the contribution by Gary Gorton (itself an essential read if you have any questions at all about the way subprime markets work, or what they have to do with SIVs, CDOs, and ABXs).   The starting point of Holmstrom’s argument—a variation on earlier themes from Ben Bernanke (for the general audience) and Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas (for the economists in the crowd)—goes something like this: Surplus saving in emerging economies has driven up the demand for liquid assets. Liquidity being a specialty of the United  States in particular, the excess demand drives down interest rates here, stimulates spending, and expands deficits on the country’s current account.

The story, I believe, goes back to the late 1990s. One important difference between then and now is that the liquid assets most in demand at the close of the past decade were highly concentrated in long-term Treasury securities. Another is the fact that the related private-asset appreciation in the late 1990s was manifested in equity markets. After the tech-stock bust, however, the fundamental global imbalances remained and found a new home in debt created by the subprime housing market. As Professor Holmstrom and others noted, collateralized debt markets, based as they are on leverage and low levels of information flows, are much more complicated animals than equity markets.

The question that remains is obvious. What is there to stop the next crisis if global imbalances persist? And if they do, is “better” monetary policy—whatever that might be —a sufficient condition for avoiding future problems?

Which leads me to…

Is there a better way to prepare for future bouts of financial market turmoil?
One answer—shared by many at the symposium—is that we can do so imperfectly at best, and that ultimately governments or markets or both just have to clean up the mess afterward. That approach feels a bit costly at the moment, so it seems a prudent thing to explore proactive measures that may at least mitigate the impact when problems arise. On this front, the biggest buzz of the symposium was probably generated by Anil Kashyap, Jerome Stein, and Raghuram Rajan, who proposed the development of “insurance policies” that would infuse the banking sector with fresh capital when they need it most. I’ve run on too long now, so for further elaboration I will refer you again to Sudeep Reddy – or to the paper itself.

A related reading PS: You will find more on the Chairman’s speech at Free exchange, at Calculated Risk (here and here), and at the William J. Polley blog. On Professor Buiter’s session you will find no shortage of commentary. The Daily Reckoning, naked capitalism, Economic Policy Journal, and Equity Check provide what I am sure is just a sampling.

August 26, 2008 in Federal Reserve and Monetary Policy, Interest Rates | Permalink


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{the biggest buzz of the symposium was...“insurance policies” that would infuse the banking sector with fresh capital when they need it most.}

David --- such 'options on contingent capital' were proposed by [Myron] Scholes shortly after the LTCM crisis. I will look for the reference, but I believe it was an interview in Risk magazine.

Posted by: MW | August 26, 2008 at 02:06 PM

I have a question of my own. Why is the Fed holding the discount rate so low (i.e., making medium-term ultra-low-interest loans) that banks can perform arbitrage with GSE debt for zero-risk profits?

See http://dealbreaker.com/2008/08/trade_of_the_day_buy_freddie_p.php

Posted by: Nemo | August 26, 2008 at 02:24 PM

Deep questions from Jackson Hole

I am just a Ph.D. chemist, but I believe that this question is unasked because the answer is a YES that's too hot to touch!

In your opinion,
will asset-market extreme mispricing be well-deterred,
if and when
real inflation-corrected asset-market price histories are well-apparent to the people?

Exampling such histories, please see first and last charts here:
“Real Dow & Real Homes & Personal Saving &
Debt Burden” at

Posted by: Ed | August 26, 2008 at 05:24 PM

The subprime risk problem resulted from the banking sector’s lack of macroeconomic imagination, in filtering the interpretation of “risk statistics” for a product with little economic history.

The Fed has done a good job of responding to the crisis, after a not so great job of assessing the risk ex ante, although in the latter matter it was constrained by a dysfunctional alignment of related regulatory responsibility, beyond its own scope at the time.

The current Treasury yield curve is quite reasonable, even healthy. What is obviously not healthy in the same context are credit spreads, including mortgage spreads, which is why the combination of the treasury curve and credit spreads make monetary policy meaningfully tighter than indicated by the funds rate on its own.

The global savings glut is a bad, distractive economic paradigm. It explains nothing because it is not meaningful. It matters not whether the explanation for the imbalances is that China has not purchased enough imports (savings glut), or the US has purchase too many (expenditure glut). The result is the same. Foreign surpluses fund US deficits, and wouldn’t exist without them. The two are co-dependent, rather than causal, in either direction. Sub-prime was created by an aggressive domestic intermediation machine, and sold to a foreign one – not vice versa. Foreign surpluses did not cause the US to go and buy more houses.

Posted by: JKH | August 26, 2008 at 08:40 PM

All insurance schemes are subject to agency problems. They are either solved through a combination of risk premia/underwriting standards, or by regulation.

So the introduction of an "insurance capital" scheme would hardly present a solution to the current problem. What its proponents miss is that, the more insurance, the more asymmetric the returns, the more risk the banks will want to take.

The Fed tends to see "moral hazard" as a problem to be addressed in the future. And yet, as any market participant will tell you, the belief in a "Fed Put" created moral hazard that landed us in the present crisis, and that the cost of each successive hazard-generated crisis is higher.

The credit crisis is part of a continuum that began with the 1998 LTCM rescue. What's clear is that this is still very much a minority view among Jackson Hole participants and Fed Governors.

Posted by: David Pearson | August 27, 2008 at 10:17 AM

As the finanical industry loses public support for bailouts, we will continue the approach towards the zero bound.

While many may see this as a bad thing as it requires fiscal policy stimulus and therefore politically guided spending, they should be reminded that 'nonpolitical' monetary policy got us here.

It appears the financial infrastructure may have shot itself in the foot this time (as it did in Japan) and is making itself irrelevent as people start to realize the financial drain banks attach to the economy.

Posted by: Winslow R. | August 27, 2008 at 12:55 PM

JKH -- I am not sure your argument fully address Bernanke's argument, which is explicitly casual. He claims that if an expenditure glut drove the US deficit, it should have manifest itself in higher us and global rates -- with the high rates needed to pull funds into the US. Conversely, if high savings abroad drove deficits elsewhere (whether in the US or increasingly in europe), rates would be expected to be low both in the US and globally, with the low rates inducing more borrowing. In effect, Bernanke argues that US market rates tell you whether there is an expenditure glut or a savings glut.

In that sense, a rise in savings v investment in the emerging world (a fact shown in the IMF's WEO data) would induce lower rates, and lower rates could reasonably be expected to push up home prices and encourage non-residential investment. Perhaps not to the extent that they did -- the internal dynamics of the US credit market played a role -- but certainly directionally it would tend to work in that way. Some part of the US and European economy would need to borrow at the low rates and run a deficit that is the counterpart to the emerging world's surplus.

Dr. Altig -- I will confess I always find the academic discussion of "liquidity" as a speciality of the US rather frustrating. After all recently the US seems to have produced an enormous quantity of highly illiquid assets(which are causing a bit of trouble in the banks, last i checked). Even some Agency bonds i suspect are increasingly illiquid. Setting aside the fact that Europe's government bond market isn't as homogenous as the US bond market (a function of a single issuer v multiple issuers), I am not sure there is a meaningful difference in Europe's ability to create safe and liquid assets v the United States ability to do so. I certainly would have accepted a slight loss of liquidity by holding bunds rather than treasuries in exchange for an asset that has held its external purchasing power better over the last five years. And I don't think that there is strong evidence that the US is all that much better at Europe at creating "liquid" assets that private investors want to hold -- I would note that all net foreign purchases of Treasuries and Agencies (from june 06 to june 07 -- the last data points based on the survey data) came from the official sector.

It often seems to me that the United States comparative advantage at supplying liquidity is asserted rather than proven. Are Fannie and Freddie pass-throughs (China holds a lot of them) significantly more liquid than Italian treasury bonds, and held by the PBoC for that reason?

It seems like the most parsimonious explanation for large central bank inflows into the US is not the intrinsic quality of the US market but rather policy decisions on the part of key emerging economies to peg their currencies primarily to the dollar.

Finally, I don't find a story that argues that there has been one continuous deterioration in the US external deficit since 1997 all that compelling. It glosses over two facts: over that time the sources of funding changed from private investors to official investors and the sectors running the deficit in the US changed from the corporate sector to the household and government sectors. Understanding the sources of that shift strike me as important -- afterall one potential result of the end of .com driven investment (and the associated fall in private demand for US assets, net of US demand for foreign assets) would have been smaller deficits -- not bigger deficits combined with bigger net official flows.

Did Holmstrom's comment (which i need to read) or the discussion that followed recognize the enormous role the official sector now plays in the financing of the US deficit -- and the possibility that central banks might be buying dollar assets not because of the intrinsic desirability of dollar asset but rather becuase of a policy decision to peg to the dollar? Caballero, Farhi and Gourinchas do not, and as a result their paper never struck me as offering a useful model of the world we currently live in. Central banks -- not private investors -- are the ones buying us assets right now, and domestic savers in the emerging world increasingly have wanted to hold their own assets not foreign assets (see all the hot money moving into China. Both Dr. Feldstein and Dr. Summers understand the role the official sector now plays in financing the US well (total official asset growth is running at about two times the size of the US deficit), so i would expect the issue came up -- though it doesn't appear in your (quite useful) summary.

Posted by: bsetser | August 27, 2008 at 01:23 PM

While I like the paper on insurance policies, it seems that the authors are ignoring major parties who should buy the insurance. The FDIC is one regulatory authority which should own such insurance, as long as it isn't perceived as weekening their incentive to regulate properly.

Posted by: some investor guy | August 27, 2008 at 04:29 PM

bsetser – I was perhaps unnecessarily excessive in my characterization of the savings glut thesis, although I think you would acknowledge it is a debatable subject that indeed has been debated vigorously at times. The level of interest rates certainly fits well with the savings glut thesis, and taken as evidence it certainly suggests a savings glut rather than an expenditure glut. Nevertheless, I keep doubting that the savings glut is the critical explanation for low rates per se. My own preferred explanation is that the expected path of the funds rate, given the level of inflation and inflation expectations, has weighed heavily in the outcome. E.g. I think this factor was largely overlooked as an explanation for the yield curve “conundrum”. The yield curve was historically steep when the funds rate started its historic ascent from the low level of 1 per cent. The curve at the start discounted a substantial cyclical increase in the funds rate, arguably including the actual extent of the ensuing funds rate increase. Considered on that basis, there was little reason for treasury yields to move higher from the start, notwithstanding the unusual departure from the yield pattern of the typical tightening cycle. And I would add that the expected path of the funds rate is a valuation input that can be considered by foreign as well as domestic investors in the process of bidding on treasury bonds.

Posted by: JKH | August 27, 2008 at 05:01 PM

Contingent capital options:
Scholes, M., (1999), "Liquidity options: Scholes explains", Risk, Volume 12, Number 11, November, pp. 6

Posted by: MW | August 27, 2008 at 08:14 PM

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August 21, 2008

The “What’s Fair” contest

At Café Hayek, George Mason’s Russell Roberts opens up a brand new “Inequality Chart Contest.” The chart in question is based on work by Thomas Piketty (professor, Paris School of Economics) and Emmanuel Saez (professor, University of California Berkeley), the essence of which is that the rich have gotten richer and everyone else not so much. (You can find a link to the Piketty-Saez paper, as well as updated data and executive summaries, on Emmanuel Saez’ homepage. Russell links to more information from the Center on Budget and Policy Priorities.)

Here’s the picture…

Figure 2

… and the contest is to construct “ONE sentence explaining ONE thing that is wrong with concluding that these numbers are evidence that the U.S. economy has become more tilted toward the rich at the expense of the poor.”

In the spirit of prompting reflection on issues of inequality and fairness, I invite you to think about the following three pictures, generated from Internal Revenue Service (IRS) tax data through 2006:

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Avg Tax Rates by Income Percentile

Let’s focus on the 1 percent of income-earners (by IRS defined Adjusted Gross Income, or AGI). If you look at the average federal tax rate paid by this group—that is, taxes paid divided by AGI—it did fall substantially over the period from 2000–2006. The average tax rates for other income groups fell as well, but not as dramatically.

If you instead prefer to look at taxes paid, the share the top 1 percent forked over to the federal government rose from 37.4 percent in 2000 to 39.9 percent in 2006. The share paid by the next highest 4 percent rose only slightly over this period, and the share paid by all other groups actually fell or stayed roughly the same.

On the other hand, concentrating on the share of taxes paid relative to the share of income earned by each group would lead you to the conclusion that not much had changed between the year 2000 and 2006.

So here’s the contest: Explain in one sentence which one of those pictures tells us whether the federal income-tax system has become more or less “fair.”

August 21, 2008 in Inequality, Taxes | Permalink


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The top 1% earns 350,000+

The top 0.1% earns 1.6 million+

The top 0.01% earns 5.5 million+

The disparity _among_ the top 1% dwarfs that between them and the remaining 99%.

Any study that does not go further into the top 1% is essentially dishonest

It’s like Bill Gates walks into a bar and average income of the patrons is into millions..

This has been well-documented, but still everyone screams about the top 1% is paying a lot.

But among that 1%, who pays?

Those earning more than $10 million a year now pay a lesser share of their income in these taxes than those making $100,000 to $200,000.

Tax rates increase with income, *except* for the top 0.1% - yes that’s 0.1 - thats only 145,000 households.

And that is just reported income on tax returns, leaving aside all the legal and illegal shelters that this 0.1% use.

This grand con - shifting the taxes onto the working “rich”, by the hyper-rich is the hallmark of the plutocratic conservatives

Posted by: bumble | August 21, 2008 at 06:03 PM

The 'fairness' just depends on the average tax rate. The ranking for each group should be the same in graphs one and three - I'm not sure what is added by dividing the average tax rate for each group by the average tax rate for the economy, as is done in the third graph.
Fair for who? The top 2% to 5% have not gotten the breaks that the rest seem to have enjoyed.

Posted by: don | August 21, 2008 at 07:05 PM

Changes in average tax rates have been limited but the income and therefore the tax share of the top 1% has grown greatly over the last 20 years, largely at the expense of the top 6-25%, though the tax share relative to income share has changed little. One does wonder whether their entire growth in income since 2000 was simply compounding of their tax cuts. With their rates at a low, it wouldn't be a surprise to see them rise.

Posted by: Lord | August 21, 2008 at 09:10 PM

I am not sure the question should be 'what is fair' so much as 'what is desirable'. I am not sure the disappearance of the middle class is.

Posted by: Lord | August 21, 2008 at 09:18 PM

"Fair" is not a capitalist concept.

Posted by: Ken | August 21, 2008 at 10:31 PM

Figure 2 clearly demonstrates our tax regimen is less fair than it used to be.

Posted by: Gegner | August 22, 2008 at 03:30 AM

If a rapidly increasing income is multiplied by a decreasing tax rate, does the resulting increase in the product mean that the wealthy are contributing more in taxes, or that the wealthy are sharing a smaller piece of a larger pie?

Posted by: pmorrisonfl | August 22, 2008 at 01:22 PM

Error: These charts and the words around them imply that the wealthy and the high income earners are the same people.

It is possible to be extremely wealthy with little income.

Bill Gates did not get rich by drawing huge paychecks. He got rich through appreciation of assets he owned (MSFT stock).

High income tax inhibits high income and keeps the richest on top.

If I'm winning a race I'm all in favor of adopting strict speed limits as soon as possible.

Posted by: Name | August 22, 2008 at 02:49 PM

Figure 1, by itself, demonstrates nothing about equity, unless you believe in equality of result rather than equality of opportunity. It would need to be accompanied by some explanation for the divergence in growth. For example, if the result shown comes largely from international trade or illegal immigration, is that 'fair'?

Posted by: don | August 22, 2008 at 04:57 PM

Didn't the best "improvement" in income disparity occur during the Great Depression?

Posted by: Empircal Conservative | August 22, 2008 at 05:43 PM

How did you control for the changes in the way AGI is calculated over these years?

Posted by: Patrick R. Sullivan | August 22, 2008 at 06:57 PM

Since about 25% have bachelor's degrees and most are likely in the top 25%, it does rather severely undercut the argument the disparity is due to education, other than graduate and professional education. It now looks like a substantial group of college educated will not profit from it, at least anytime soon.

Posted by: Lord | August 22, 2008 at 07:01 PM

All 3 charts show that the American tax system is unfair: although we are supposedly all equal, some of us are paying more than others, in both absolute and relative terms, for public goods and services -- a situation that would not be tolerated for non-public goods and services.

Posted by: TSowell Fan | August 22, 2008 at 07:16 PM

Unless I missed something, none of these pictures (graphs?) show how valuable paying customers/bosses found each individual person being measured.

Posted by: SteveO | August 23, 2008 at 12:46 AM

None of these graphs tells us about the fairness of the current tax structure.

The fairness is measured in the debt burden we are passing on for future generations to pay off.

That graph is here; http://zfacts.com/p/318.html

As far as inequality two major factors spurring that have been the Bush tax cuts and the Feds cheap credit policy combined with unregulated financial wizardry of Wall Street paper pushers using ponzi schemes and the backing of the US Treasury to steal wealth from the people who actually do things and make things for a living.

Posted by: muirgeo | August 23, 2008 at 01:28 AM

Ken's comment, "'Fair' is not a capitalist concept" is absolutely correct under the form of capitalism that we practice to varying degrees throughout the capitalist world.

Those who have acquired wealth by birthright or by government favor frequently oppose pure capitalism as it lets in the riff-raff or fosters competition that might shift wealth from the old guard to the innovator.

On the other hand, the bourgeois often view capitalism with suspicion as it appears to them that the hurdles to be crossed to achieve business success are insurmountable. Unfortunately those hurdles are not limited to competition provided by more capable competitors but, rather, a regulatory structure crafted and lobbied for by such competitors. Such chicanery exists as a component of the government's management of capitalism.

Posted by: sot | August 23, 2008 at 09:59 AM

Fairness is an issue only when special treatment by the government depends on defining a group. (If the definition is by race, creed, sex, etc. the issue transcends fairness and becomes unconstitutional.)

"Rich" as a group definition appeals to the human foible of envy, and seduces us into thinking it's only fair. Most other group definitions do not enjoy that political advantage.

Unfair group definitions are always arbitrary. In the case of progressive taxation, it's worse. The IRS changes the group definitions every year, when it updates the tax code's income brackets.

That is a dead giveaway. But we don't notice, because envy makes us believe it's only fair.

Posted by: John Mason | August 23, 2008 at 12:11 PM

Inequality is not the result of tax policy. It is the result of monetary policy. We have designed a system that goes to any measure to keep wages (i.e., inflation) low and asset values high. As a result only those who own assets get wealthy. Even now, with inequality known to be a problem, we have the Fed doing everything possible to keep rates low and add liquidity. These measures will flow directly into asset values and not into wages. Things got so bad that the average person felt there was no way to get ahead over the past decade other than by participating in a housing bubble.

Posted by: mlb | August 23, 2008 at 07:33 PM

Based on the figure plotting tax shares by income percentile - "The tax policies have been fair over the past two decades as the contribution to the tax pie by the top 1% has kept pace with the (albeit unfair) increase in their income."

Posted by: Venkatesh | August 24, 2008 at 11:55 PM

Fair is where grown men go to play games. A taxation system should not be judged based on fairness – a term so loaded it lacks a definition - but upon its efficacy to raise revenue.

Posted by: septagon49 | August 25, 2008 at 08:33 PM

The standard exemption is $5-10k. Does anyone think this represents a realistic estimate of the expenses of generating those incomes? I don't know of anyone that could even pay the rent with that. The income tax only appears progressive.

Posted by: Lord | August 26, 2008 at 04:13 PM

A taxation system should not be judged based upon its efficacy to raise revenue but upon its tendency to encourage growth in productivity. The less revenue the better, I'd say.

Wealthy people are statesmen entitled to organize resources through the market rather than our biannual plebiscites, and the market is a far more democratic process. Growing income of the wealthy is not the problem as much as a growing entitlement to consume the income, as opposed to reinvesting it.

We need a progressive consumption tax that would reverse a growing entitlement to organize many resources for the exclusive benefit of a few, both by limiting the personal consumption (as opposed to investment) of the very wealthy and by limiting the incredibly excessive consumption of the state sector.

Posted by: Martin Brock | August 28, 2008 at 05:37 AM

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August 19, 2008

Did the stimulus package actually stimulate?

One of the big questions of the policy season is surely “Did the $100 billion of tax rebates distributed to households in May, June, and July actually work?” “Work” in this case means “stimulate consumer spending.” You may want to sit down before I tell you this, but so far economists disagree. In one corner you have Christian Broda at the University of Chicago and Jonathan Parker at Northwestern University:

The Economic Stimulus Act of 2008 was aimed at increasing disposable income temporarily through tax rebates in the hope this would stimulate spending and end or at least mitigate the severity of a U.S. economic slowdown. We find that to a significant extent they succeeded. The stimulus payments are initially being spent at significant rates. These rates are slightly higher than those observed in 2001 when fiscal policy has been credited with helping end the 2001 recession.

In the other you have Martin Feldstein:

Although press stories emphasizing that the rebates induced additional consumer spending were technically correct, they missed the important point that the spending rise was very small in comparison to the size of the tax rebates.

A recent, widely reported academic study by Christian Broda and Jonathan Parker showing that the rebates led to increased spending on nondurable items (like food and drugs) does not contradict the implication of the more comprehensive data—on national retail sales and total consumer spending—that the induced rise in consumer outlays was small relative to the size of the rebate.

Oh boy. Let’s back up a step. Before the fact, here is what people said they were planning to do with their rebates (by at least one report):


So what did the people receiving the rebates do with them? Well, if we could answer that one, it would be easy to resolve the Feldstein vs. Broda-Parker dispute. It does seem undeniable that a pretty good piece of those rebates was saved, at least in the first two months.


Can those elevated saving rates recorded in May and June reflect an outbreak of thriftiness? The real answer is “who knows?” but we can do a little back-of-the-envelope arithmetic to put things in perspective. Ignoring the Katrina-related dip in August 2005, the average saving rate from the beginning of 2005 through this past April was about 0.61 percent.

So, here’s the question: Assuming that consumers saved out of nonrebate income at the rate of 0.61 percent, how much would they have had to save out of the sums distributed in May and June to raise the overall saving rates to the observed values of 4.9 and 2.5 percent?

If you do the annualized calculation for the $43 billion of rebates in May and $28 billion in June you get some pretty striking numbers: An implied saving rate out of the rebates of somewhere in the neighborhood of 83 percent in May and 63 percent in June.

You can argue that there is a sense in which even these figures are understated. Durable goods purchases, for example, are theoretically a form of household saving, and the Broda-Parker survey respondents did indicate that about 20 percent of their rebates went toward the purchase of durables. However, if that is so durable expenditures without the tax rebates would have been really low. Though expenditures on durables grew at an annualized rate of 5.8 percent in May—not bad—they shrank by 17.4 percent in June.

These back-of-the-envelope calculations are pretty rough, of course, but they are broadly consistent with evidence from the 2001 tax rebates. That evidence also suggests that about one-third of the rebates were spent in the quarter following their disbursement, so the spending effects of this year’s model may yet have legs.

On the other hand, even if the rebates do prop up consumer spending in the short run, that would hardly settle the debate about whether they were the best way to spend $100 billion. But that’s a different debate for a different time.

August 19, 2008 in Saving, Capital, and Investment, Taxes | Permalink


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By Fester: The point of a short term stimulus package is to encourage people to spend money. The reason is to kick-start demand because the problem is primarily seen as a short term crisis of confidence. An effective stimulus package [Read More]

Tracked on Aug 21, 2008 7:44:56 AM


Looking forward to our class starting next month.

A possibly dumb question from someone who has not had macro in 15+ years, but are the savings rates shown in these charts permanent?

Say I get a check for $1000 and I deposit it in my savings account with the best of intentions, but 2 weeks later I see a great new gizmo I cannot live without and spend the entire amount I had 'saved'.

Initially, I saved the money and later I consumed with it. How does the data handle such a situation? To me, it looks like my actions might be double counted as both saving and spending.

Posted by: Diorex | August 19, 2008 at 06:30 PM

I will bet that not a penny of the rebates will be left in personal or family "savings" by December 24, 2008.

Yes, I read both of your references. Interesting assessments. Not sure what to think. But I will stick with my prediction.

Posted by: Movie Guy | August 20, 2008 at 12:38 AM

I hypothesize that the remainder of the stimulus will be spent in direct relation to a turnaround in consumer sentiment.

Posted by: Marco Loureiro | August 20, 2008 at 08:49 AM

Looking at the 2001 episode, I can see no basis for tha argument that any of the rebate was saved - unless there is another explanation for the downward spike in the saving rate that occurred after the upward spike.

Posted by: don | August 20, 2008 at 04:22 PM

1. You state, "the spending effects of this year's model may yet have legs". Does this not miss the point of the stimulus? I thought the point of a fiscal stimulus was to get money in the hands of consumers faster (so they can spend it) than could otherwise be done through monetary policy initiatives.
2. Doesn't this simply prove what you taught us about the marginal propensity to consume? Since the increase in disposable income (tax rebate) is temporary and not permanent, the incentive to increase consumption will be (has been) limited. Perhaps you should teach your Macro course up on Capitol Hill so that we don't have to have this debate in the future!

Posted by: Ken | August 20, 2008 at 08:47 PM

I am not American but I suspect that people spent their money on the petrol and food instead of saving.

Posted by: Man | August 21, 2008 at 01:01 AM

Why is there no discussion of the import share of spending from the stimulus checks? One survey (the Fed's beige book?) said that a lot of the PCE was for electronics, almost all of which are produced abroad. To the extent that the stimulus was spent on imports: the US borrowed money from abroad, sent checks to almost all households, who used a portion of the money to buy imported goods. Brilliant policy! Great for China; not for the US.

Posted by: Charlie Poole | August 21, 2008 at 12:36 PM

A couple of responses: To the question of whether the change in saving is permanent, the simplest response is probably "no.” The evidence of the 2001 tax cut clearly suggests that the "marginal propensity to consume"—that is, the fraction of the extra income spent—is smaller in the quarter the rebates are disbursed than it tends to be over several quarters. Does that run counter to the intent of the policy? I'd be inclined to say "no" here as well: If there is a fairly strong impact on spending for the year as a whole, I would count that as stimulating consumption spending even if the bulk of the impact occurs with a delay of a quarter or two.

The issue of whether or not rebate checks were spent on food and gas is an interesting one. One of the observations in the Parker and Broda study is that sales shifted from traditional grocery stores to supercenter outlets. The latter of course are more likely to sell fuel. As an example, in Wal-Mart's second quarter revenue report, fuel sales accounted for about half of the growth in sales at their Sam's Club stores.

I'll note that it is not too hard to construct a story that an outsized (by which I mean bigger than theoretically predicted) response to spending would be a perfectly rational response if consumers were actually expecting the pullback in oil and gasoline prices that has actually occurred. If the tax rebates are expected to more-or-less match higher energy prices, which themselves are also believed temporary, it would be perfectly reasonable for consumers to react by smoothing the impact on other types of spending by allocating the rebates to their bills at the pump.

As to whether the rebates went to imports, I don't know. The foregoing discussion of gasoline spending would be consistent with that—though China would not be the destination in this case. But more to the point, import growth did fall off substantially in the 2nd quarter, which is actually one of the bigger stories of the year's first half: http://www.marketwatch.com/news/story/economic-preview-big-upward-gdp/story.aspx?guid=%7BA62AF198-2B21-42D7-A11C-601643E74137%7D&dist=hpts.

Posted by: David Altig | August 25, 2008 at 06:02 AM

There is nothing in this post that suggests income tax refunds also start arriving in May,June,and July. Some that may have spent more heavily around that time may have been inclined to put something back from the rebate. This would help explain the pre - May downward spike bfore the upward boost.
Does this data include the entire spectrum of incomes? If so tax refunds were falling on those in the upper brackets, who did not set up their withholdings to minimize government use of their incomes, as well.
That could also affect the savings rate as those in the upper incomes may have been hedging, and their savings rate has the potential of being much higher, enogh to affect the aggragate picture.

Posted by: Dennis | September 18, 2008 at 10:28 PM

How about redistributing purchasing power through the tax system?

Poor people generally spend more of an extra dollar than rich people do. So redistribution can be expected to boost aggregate demand without simultaneously boosting public deficits.

Even weak households can of course be expected to save some of the extra dollars. Given their indebtedness, that’s not a bad thing.

One may argue that poorer people spend their dollars differently from richer. But many products sold lately were anyway meant to satisfy needs for rather conspicuous consumption. More resources must be allocated to the satisfaction of (slightly) more basic demands.

Growing inequality is a major explanation for the crises. For many households credit growth has worked as a substitute for wage growth.

This process will have to be reversed one way or another. We must make sure that wage differentials decreases rather than the opposite. In addition to tax breaks for the weaker households, mortgage assistance is needed.

When you run out of helicopters, distribute fresh money through increased unemployment benefits. This will improve the bargaining power of the weakest employees. But make sure the informal economy doesn’t explode. ID-cards for all wage earners are needed!

Jan Tomas Owe

Posted by: Jan Tomas Owe | January 13, 2009 at 08:12 AM

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August 14, 2008

What the Fed did during macroblog's vacation

To state the very obvious, it has been quite an eventful twelve months since I last committed fingers to laptop. I might well have titled this post "Four Fed programs that did not exist one year ago." Over the four months from December to March, the Federal Reserve Board of Governors and the Federal Open Market Committee, or FOMC, introduced an alphabet soup of new lending programs to address acute stress in financial markets, some of which required the invocation of emergency powers based on "unusual and exigent circumstances."

I know that in some quarters—maybe the one where you reside—all this activity had a certain frenetic, whack-a-mole feel to it. But I think it appropriate to view the Fed's actions over this period as what I believe them to be: A measured and logical sequence of steps to address very specific liquidity distress in financial markets.

If I had to choose one picture to describe the crux of the "liquidity" problems to which I am referring it would be this one:

LIBOR - OIS Spread chart

In effect, the OIS (overnight index swap) yield is a measure of the rate that banks charge one another for overnight loans and the LIBOR (London Inter Bank Offered Rate) yields represent the rate charged for slightly longer-term (30- and 90-day) lending. The explosion in this spread in August 2007 was the marker for the emergence of a severe disruption in the means by which lending institutions typically finance their ongoing operations.

A brief chronology, then:

August 17, 2007: The Board of Governors cuts the primary credit rate (or discount rate), the interest rate Federal Reserve Banks charge on direct loans made to banks.

September 18, 2007: The FOMC cuts its target for the federal funds rate, the first in a string of seven consecutive rate reductions.

December 12, 2007: The Board of Governors introduces the Term Auction Facility (or TAF), initially a mechanism for providing loans to banks for a period of 28 days (as opposed to the typical overnight maturity associated with standard primary credit loans). Last week, the Board announced the program would be extended to make loans available for a term of 84 days.

March 7, 2007: The FOMC authorizes the New York Fed to conduct open market operations using Term Repurchase Agreements. Like the TAF, the term repo program allowed the Fed the flexibility to conduct operations over periods of about a month rather than the overnight basis that is typical in more normal environments.

March 11, 2008: The FOMC approves the creation of the Term Security Lending Facility (TSLF), which authorized swapping Treasury Securities (over a period of 28 days) for "other securities, including federal agency debt, federal agency residential-mortgage-backed securities (MBS), and non-agency AAA/Aaa-rated private-label residential MBS."

March 16: The Board of Governors creates the Primary Dealer Credit Facility (PDCF), authorizing direct loans to broker dealers who are authorized to engage in securities transactions with the Federal Reserve.

What do I want you to see? As I noted above, I see a progression of logically consistent steps that neither lurched to extreme solutions nor ignored the imperatives of the problem at hand:

  • The first step was to invoke the usual tools of monetary policy (in the form of discount window lending and federal funds rate adjustments).
  • Then it became obvious that injecting liquidity into overnight markets alone was not solving the problem of funding being unavailable for periods of time even as short as one to three months. The next step, then, was to lengthen the maturity of loans and asset exchanges in policy operations (in the form of the TAF and Term Repurchase Agreements). (An additional salutary effect of the TAF was apparently the lack of "stigma" that is thought to be attached to borrowing from the discount window.)
  • From there, it became clear that Treasury securities were rapidly emerging as the only widely accepted form of collateral to support short-term borrowing and lending, a function that securities backed by real estate assets were simply unable to perform. Some relief to this problem was already inherent in the form of the broader-than-Treasuries collateral options in the TAF. Further relief was provided by the TSLF, which in effect implemented a swap of in-demand Treasury securities from the Federal Reserve's balance sheet for less liquid mortgage-backed assets.
  • Finally, the potential systemic consequences of acute stress in the primary dealer network led us to the PDCF, in effect broadening the class of institutions to which the central bank would stand ready to infuse short-term liquidity.

Once again, in my view there is a methodical progression to the whole process that is too commonly overlooked: Start with the standard tools (the discount rate and federal funds rate), move on to a lengthening of the maturity in the term of those standard tools (TAF and Term Repurchase Agreements), on to a broadening of the collateral used to support monetary policy operations (TSLF), and finally expanding the class of institutions to which the Federal Reserve will lend (PDCF).

It is not entirely obvious that the new long-run level of the OIS-Libor spreads pictured above will once again converge to the values that prevailed prior to August 2007, but I would argue that the still-elevated levels of these spreads implies we have a ways to go before financial markets are again fully functional. Though the lending programs put in place in the past year have not been, and could not be, a magic elixir for solving all financial market woes, I would take the bet that they are least providing enough stability for the market to continue the painful process of healing itself. Getting to this point has not always been pretty in real time, and there is plenty of room for debate about the long-run costs and benefits of each step along the way. But given a little time for perspective I believe we will find a certain beauty to it all.

August 14, 2008 in Federal Reserve and Monetary Policy | Permalink


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Welcome back.

Just to point something out about this post; something that is emblematic of Fed commentary on policy in general.

Of course, the Fed's various tactics helped to stabilize the "system", just as the Fed's 1% policy rates and "measured" hikes helped avert a deeper 2002 recession. And yet, one never, or rarely, hears a discussion from the Fed of the costs of such actions.

So, I invite you to post again, and this time to discuss the long term cost of each successive stabilization. One could argue that we see in higher commodity prices, higher dollar-peg country inflation, and, last but not least, the very sticky problem of how to remove the policies without "killing the patient". It was just such a "measured" removal in the 2005/2006 time frame that contributed to the housing bubble.

Posted by: David Pearson | August 14, 2008 at 12:32 PM

I second what David said.

Posted by: tyaresun | August 14, 2008 at 01:29 PM

Is there any risk in taking MBS in what I understand to be trade for treasury securities?

I imagine a lot of folks would be willing to trade mbs for equal dollar amounts of treasuries.

Maybe some of this is just over my head but it seems your, read the tax payer's, collateral is questionable at best.

Posted by: wayne | August 14, 2008 at 02:57 PM

There are no questions about costs but any discussion of costs of the action taken but this has to be weighed against the cost of not doing anything.
I wonder if the shrinking of balance sheets by the GSE's via reduced interbank lending is contributing to the pressure that has re emerged in the TAF to Libor spreads we have seen this week.

Posted by: Terry Spenst | August 14, 2008 at 03:36 PM

Well, bailing out Bear doesn't seem quite consistent with "a progression of logically consistent steps that neither lurched to extreme solutions.."?

The reality is the Fed and the Treasury were scared that Bear going under would throw the entire financial system into chaos because they didn't know or understand the effects on the CDS market.
Thus leading to nationalization of a major Wall St. broker and also allowing those still among the "solvent" access to the discount window.

If that's not extreme, I'm unclear on the definition...

Posted by: gab | August 14, 2008 at 04:49 PM

Welcome back, Dr. Altig.

Two questions:

1) The phrase "Bear Stearns" appears nowhere in this post. Why not?

2) Bagehot wrote that in times of crisis, a central bank should lend freely against good collateral at a penalty rate. I see the Fed lending freely (boy howdy), and reasonable people can disagree about the collateral... But whatever happened to the penalty rate?

Posted by: Nemo | August 14, 2008 at 05:46 PM

What contributed to the whole "frenetic whack-a-mole feel" wasn't the actions taken, but the insistence that it "was all contained" .

If you keep insisting to the crowd, that nothing bad is happening, or going to happen, then turn around and implement a series of emergency facilities you lose credibility.

PS:I'm not sure restarting your blog is a good idea. There is a lot of anger out here, and if you are seen as a mouth piece for the fed, you will receive a large helping of it.

Posted by: bitteroldcoot | August 14, 2008 at 06:50 PM

The market overlooks not only the aspect of logical progression in the objectives of these programs, but also that their long-run “costs” are currently reflected as risk rather than debatable fact. We simply don’t know yet. And we don’t know whether the eventual costs will be surprising to the upside or to the downside. Indeed, it’s not clear that the market even reflects an analytical expectation for such costs beyond the notion of general worry.

The identification and analysis of ultimate “cost” is also part of the logical progression. In the interim, it is risk rather than cost.

Posted by: JKH | August 14, 2008 at 08:05 PM

Welcome back.

I think the Federal Reserve responded to meet the exigencies of some very unusual circumstances and they have bought the system time.

But the Fed has a strange trade on in which it has emptied its balance sheet of big blocks of pristine treasury paper for an eclectic pile of financial flotsam and jetsam. The problem that I observe is that there is no way for the Fed to exit those trades.

The FOMC is betting all on the assumption that time heals all wounds and that over time former relationships will be restored.

I think that the Open Market Desk will be rolling these repos for years to come.

Posted by: john jansen | August 15, 2008 at 01:19 AM

I don't think that your destinction between OIS and LIBOR is totally accurate..
When one looks at OIS.. no one cares about where O/N Fed funds are... OIS.. is and I think it best for conceptual clarity to call it exactly what it is a FED FUNDS Future.. and I mean exactly.. as OIS can and is only hedgeable with FED FUND futures..
OIS is simply the markets best guess today as to the path of FED activity..One Month OIS.. may or may not be interesting depending on the calendar...

But even there.. its a futures contract..
(set in arrears as you know)

The appropriate comparison.. by the way..
and of course the one that the market pays most attention to .. indeed to the extent that next month the CME to salvage the declining fortunes of Eurodollars. (LIBOR) is starting will be a Three MONTH OIS contract to trade side by side with the 3 Month LIBOR contract..

THE KEY DISTINCTION.. is that then both of these will be futures.. with no risk of principal to trade...

Libor.. cash libor.. has full credit risk..
if i do a trade i risk never getting my money back.. any of it..

If I do OIS.. its an exchange for differences.. my loss is just the maximum change in FED funds average due to FED action..

In this environment zero?

Comparing the two.. is truly apples and oranges..

by the nice to have you back

Posted by: stan jonas | August 15, 2008 at 09:39 AM

Welcome back, Dr. Altig.

1) If the current concerns in the financial markets fit the definition of a "very specific liquidity distress," one wonders what a solvency crisis would look like.

2) We do have a ways to go before financial markets are fully functional. However, I hope we can have a discussion on the precise definition of "functional." FIRE isn't the economic driver of a functional economy, yet the eventual contraction to a sustainable level of FIRE involvement appears to be something prevented by the alphabet soup of lending.

3) I, too, believe there's a certain beauty to be found. This crisis is the denouement of the deregulated financial services industry. Moving forward, we as a nation will be better off if and only if stiff regulatory laws on banking are both passed and enforced.

Thank you for your willingness to discuss your thoughts!

Posted by: Unsympathetic | August 15, 2008 at 11:05 AM

missing "bubbles" is impossible. missing forecasts is impossible. all transactions clear thru bank debits. all lags are constant. both reserves & bank debits mirror one another.

the money supply can never be managed thru any attempt to control the cost of credit (fed funds rate).

when the financial institutions regulatory relief act goes into effect it will simply mimic the fed funds bracket racket introduced in 65 (some say corridor).

the money supply is unknown & unknowable

Posted by: flow5 | August 15, 2008 at 03:29 PM

Very good points.

Ben and the governors earned their money on this one. Well done in my judgment.

Posted by: Movie Guy | August 15, 2008 at 07:16 PM

Mr. Altig-

I've not seen this question addressed anywhere. Perhaps (I'm hoping), you can help:

Why did the Federal reserve allow, and some might say, even encourage, these troubles to happen in the financial sector?

I mean, is it not true that the Federal reserve has at least some regulatory powers over lenders? Why did they fail to exersize those powers?

Surely, they knew there was a heap of fraud out there in the mortgage markets for several years now.

How else would the price of houses rise from the traditional 2 X income to 5-15 X income?

Why did the Fed deny the bubble existed and, why did they purposely feed it through not regulating where they could?

If you can shed any light on this, please do.

And thankyou for the blog.

Posted by: concerned | August 15, 2008 at 07:24 PM

The first rule of reserves and reserve ratios should be to require that all money creating institutions have the same legal reserve requirements, both as to types of assets eligible for reserves, as well as the level of reserve ratios.

Monetary policy should limit all reserves to balances in the Federal Reserve banks (IBDDs), and have UNIFORM reserve ratios, for ALL deposits, in ALL banks, irrespective of size.

Encouraged by our "deregulated" environment and the prevailing administrative "climate", institutions that provide a "financial smorgasbord", including the capacity to create money have proliferated.

We have discovered, too late, that money creation cannot be exposed to the forces of a free market. The money supply is not self regulatory. If private profit institutions are to be allowed the "sovereign right" to create money, they must be SEVERELY REGULATED in the MANAGEMENT of both their ASSETS and their LIABILITIES.

Partaking of this smorgasbord, since we seem to have forgotten the financial crisis lessons of the Great Depression, we will again learn what the pangs of real financial indigestion are like. The Fed can rescue "a bank". But it cannot rescue the System

Posted by: flow5 | August 16, 2008 at 02:23 PM

Richard Fisher, November 2, 2006: - Fed "In retrospect [because of faulty data] the real funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been. In this case, poor data led to policy action that amplified speculative activity in housing and other markets. The point is that we need to continue to develop and work with better data."

There is only one interest rate that the Fed can directly control:the discount rate charged to bank borrowers. The effect of Fed operations on All other INTEREST RATES is INDIRECT, and VARIES WIDELY OVER TIME, and IN MAGNITUDE.

Posted by: flow5 | August 16, 2008 at 02:30 PM

Thanks for many thoughtful comments. My intent in the post was really to step back and muster as much objectivity as I could about the nature of the decision-making process over the past 12 months. I think the whole sequence of interventions, from the first discount-rate action in August 2007 to the PDCF in March, says a lot about the nature of central banks—not least that they are institutions that inherently take a measured approach. Which is exactly as I think it should be.

Several of you have brought up the issue of costs associated with these actions, including potential losses to taxpayers from the Fed taking riskier classes of assets onto its balance sheet and the potential introduction of perverse incentives that usually go by the name of moral hazard. These issues have been widely discussed within and without the Federal Reserve, and I would in no way desire to characterize them as anything other than legitimate and serious concerns. Indeed, the possibility of these bad outcomes actually occurring is exactly my point: It is the fact that interventions involve costs as well as benefits that would argue for taking things one step at a time—to take, if you will, “a progression of... steps that neither [lurch] to extreme solutions nor [ignore] the imperatives of the problem at hand.”

That, of course, assumes that the benefits of the policy choices made during the past year really did ultimately justify costs that might ultimately emerge. I feel pretty comfortable that it is so, but I respect the contrary view. We will, fortunately, have plenty of opportunity to hash this one out.

One final comment, on Bear Stearns. When I say “the potential systemic consequences of acute stress in the primary dealer network led us to the PDCF,” it is exactly the Bear Stearns episode to which I am referring. I’ll simply quote from Chairman Bernanke’s comments on the matter, as delivered at the Federal Deposit Insurance Corporation’s Forum on Mortgage Lending for Low and Moderate Income Households on July 8: “We supplemented our actions regarding Bear Stearns by establishing the Primary Dealer Credit Facility (PDCF). … The Fed also created the Term Securities Lending Facility (TSLF) which allows primary dealers to borrow Treasury securities using other types of assets as collateral. These new facilities assured the secured creditors of primary dealers that those firms had sufficient access to liquidity, reducing the danger of runs like the one experienced by Bear Stearns.”

So, there you have my opinions. Thanks to all of you for sharing yours.

Posted by: David Altig | August 17, 2008 at 10:07 PM

Dr. Altig,

Thanks for reviving Macroblog.

Obviously the Fed has been very active in mitigating the potential damage of large over-leveraged institutions that were "too big to fail".

My question is this: Do you think the Fed's actions have correctly balanced the overall health of the system against the moral hazard that might prevent future failures due to over-leveraging?

I'm just an lay person here, but I don't understand why short-term low interest loans to Bear's creditors to "cushion the blow" wasn't the thing to do. Why should Bear's creditors be bailed-out outright?

Posted by: Mark Weinberg | August 19, 2008 at 12:51 PM

My Fed Challenge team and AP Macro missed your clear writing and explanations last year. So happy you are back!
We saw you last when you judged the semi-finals at the 2007 national competition.
You were missed as we prepared for the 2008 competition--and we were not in D.C. in 2008!! Thank you for the recap of the past year. Your blog is first on the reading list for my new AP Macro class.

Posted by: julie | August 19, 2008 at 07:31 PM

Dave hit it head on.

Posted by: Timeshare Leads | November 09, 2008 at 01:20 PM

Great post very informative and will recommend to a few friends! Also added you to my rss reader!!! -Victor

Posted by: Vaction Rentals | March 10, 2009 at 08:17 PM

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August 12, 2008

macroblog returns

With this posting, I’m pleased to announce the return of macroblog, which has been on hiatus since I came to the Federal Reserve Bank of Atlanta as its research director in August of last year.

I originally launched macroblog in 2004 as an independent blog, but it will now be run through the Atlanta Fed on our Web site. Macroblog will feature commentary by me as well as other members of the Bank’s research department. The purpose of the blog is to help inform readers with commentary and observations on a variety of current economic topics, including monetary policy, macroeconomic developments, financial issues, and Southeast regional trends. I do need to emphasize that the views expressed in macroblog will not necessarily be those of the Atlanta Fed or the Federal Reserve System – feel free to quote me on that.

A few logistics: Postings to macroblog will be made on Tuesdays and Thursdays. Though we will continue to post articles during the Federal Open Market Committee (FOMC) blackout period (which runs from the week before the FOMC meeting until the Friday after), we will not be commenting on monetary policy during that period. In addition, I will not personally post content during the blackout period.

We view macroblog as a venue for economic discussion, and to facilitate that discussion we will provide the opportunity for you to post comments. However, please be aware that you will need to follow standards that we have established for the blog and that we will not routinely respond to comments. A link to the comment standards can be found under the About section on the main page.

I invite you to bookmark macroblog and return for the next posting on Thursday, August 14. We hope that you find macroblog to be an informative addition to your economic reading.

August 12, 2008 in Federal Reserve and Monetary Policy | Permalink


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Listed below are links to blogs that reference macroblog returns:

» Macroblog returns from Econbrowser
It's back! [Read More]

Tracked on Aug 12, 2008 4:51:15 PM

» Back again from New Economist
The very welcome return of Dave Altig's Macroblog last week has prompted me to consider posting again too. Apologies for the protracted absence. My non-virtual life has been rather hectic in recent months. Now that things have settled down a little, I ... [Read More]

Tracked on Aug 20, 2008 10:57:15 PM


Awesome! Looking forward to the new content!

Posted by: Angry at the Margin | August 12, 2008 at 03:05 PM

Welcome back, Fed communication efforts have sorely missed you...

Stan Jonas

Posted by: stan jonas | August 12, 2008 at 05:45 PM

yay! :D

Posted by: glory | August 12, 2008 at 06:31 PM

Woot! Welcome back!

Posted by: donna | August 12, 2008 at 08:57 PM

Why no RSS?

Posted by: HY | August 12, 2008 at 09:36 PM

any plans to implement an RSS feed for the blog?

Posted by: Kevin | August 12, 2008 at 09:51 PM

Excellent! Looking forward to macroblog's return.

Question: Is this the first official Fed blog?

Posted by: Barry Ritholtz | August 12, 2008 at 10:38 PM

Hi David,

And welcome back to the family. As you said once, interesting times in the Chinese sense.

Good luck!

Posted by: Edward Hugh | August 13, 2008 at 10:18 AM

Welcome news. I hope you are doing well at the Fed and are enjoying our Atlanta hospitality. We look forward to your insights.

Posted by: me | August 13, 2008 at 11:25 AM


When do you want to come up to Lake Burton and kick back?

Let me know.

Posted by: Movie Guy | August 13, 2008 at 01:34 PM

You even sound more Fed-like. Welcome back!

Posted by: Bill Rice | August 13, 2008 at 01:51 PM

Hi Dave,

Welcome back indeeed; it was about time too. Looking forward to hear more.

@ Ritholtz ... I think it is, although I should say that many other Fed sites have been web 2.0ified with RSS etc.


Posted by: claus vistesen | August 13, 2008 at 01:51 PM


I'm glad you're back. I've checked your web log many times.

I started to stop at the Atlanta Fed two weeks ago and look you up, but I was late for a meeting. And that fine Atlanta policeman had his pad out, bent over the hood of a BMW. I rolled on...thankful I was driving a Lingenfelter Suburban. Yeah, politically incorrect, but it will rock on I-85 and I-985.

You're in Blue Bell country.


Posted by: Movie Guy | August 13, 2008 at 11:54 PM

Thanks for the well wishes. To Barry's question, the answer is no: The Chicago Fed actually has three (!) blogs. You can find them here: http://www.chicagofedblogs.org/ .

Posted by: David Altig | August 14, 2008 at 06:38 AM

Does this mean you can't write articles that chastise government entities for taking actions that are economically sub-optimal?

Posted by: Name | August 14, 2008 at 09:10 AM


Great to see you back and blogging. It looks like you had enough of the Cleveland winters.

I hope that you've kept your affiliation with the University of Chicago, and that you'll be back in town from time to time.


Posted by: jdavid | August 27, 2008 at 12:04 PM

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