Friday, August 27, 2010


Jon Hilsenrath had an important article earlier this week about dissent in the Fed's ranks:

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today's unemployment problem is caused by issues the Fed can't solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted. "The Fed does not have a means to transform construction workers into manufacturing workers," Mr. Kocherlakota said in a speech after the meeting.

I have written about this issue before, but this is the first time I've seen it come from a Fed official. From my article in the September 1, 2009 issue of The American Conservative:

[S]ome larger dynamics affect the utility of the output gap as a statistic. If Detroit makes cars that consumers don’t want, leaving large parts of the automobile industry and its associated national supply chain fallow, the output gap will reflect that. So too if a U.S. company outsources manufacturing to China or India. These are long-term, structural changes in the economy, influenced by forces such as globalization, demographics, and consumer preferences. They cannot be solved through monetary policy.

Because of the primacy of the output gap in current Fed policy, this is a critical issue that deserves far more debate. There are a lot of "new normals" these days. One of the most distressing and dangerous is the now widely accepted belief that it is the Fed's job to respond to every bit of weakness in the economy or financial markets -- regardless of the reason for that weakness. Not every problem is appropriate for or responsive to monetary policy. If the public is shunning stocks because of mistrust or disappointment, for example, then the Fed is misusing monetary policy to prop up asset markets. And so on with various underlying afflictions that are totally unrelated to liquidity and interest rates. It's like the fast-food glutton who religiously takes a multivitamin every day to compensate for poor eating and exercise habits.

Where is the high-profile Bernanke speech about how the Fed can only do so much, that it can only help create the conditions for recovery and not the recovery itself?


Anonymous Wild Goose Chase said...

The employee skill mismatch "problem" is a nice story, but the evidence doesn't support it. Check out Krugman:

The truth is that the Fed doesn't want to get blamed for doing something wrong so they'd rather come up with excuses that let them sit on their hands.

8/27/2010 10:23 AM  
Anonymous KAIMU said...


... for example, then the Fed is misusing monetary policy to prop up asset markets.

For starters the US FED should not even exist. There is no Constitutional mandate for a central bank and I honestly do not see what the US FED does that our own US Treasury cannot. The claim that the US FED is independent of politics is at best laughable.

What the US FED does is they "intervene". That is what I call PRICE FIXING. In actuality they fix nothing as they have had since 1913 to "fix" America yet we are continually accumulating more and more debt. Good for bankers bad for governments and freedom loving people. If you think you are Free then quit work and stop paying your mortgage and car payment.

8/27/2010 10:34 AM  
Anonymous Goldhorder said...

Lol. I of course agree with Kaimu... But for the sake of argument. If you are going to embrace central planning of the economy you could at least try and direct your stimulus to the privare sector in an intelligent manner. Kimberly Clark recently opened a plant in China. They were given free land, free utility hookup, no taxes for 6 years, and half of for the 6 years after. It is not just cheap labor. The Chinese actually believe in manufacturing... That it is not some ancient form of economic activity but how you have a real economy. Making the things that the world wants to buy! Who would've thought? Lmao. Americans subsidize their military and financial industries. We think we can steal and kill our way to prosperity. Unfortunately our Napoleons in DC are finding out there are many more people in the world than they thought. And unbelievably dropping bombs on their heads just makes them want to fight you rather than turning control over your country to them. The American empire must end before we can even begin to pull out of this. Until then buckle down and buy gold... Or move to Asia if you have children who want to have any kind of chance at a future that doesn't involve putting bullets into brown skinned peoples bodies. Wow... Am i feeling cynical today.

8/28/2010 5:17 PM  
Blogger Jimmy the Saint said...

Wild Goose Chase:
I agree with you. But the Fed is part of the problem. Why? Because they help blow bubbles which make the mis-allocation worse. See: Housing.

8/29/2010 11:14 AM  
Anonymous Goldhorder said...

Anybody who thinks the fed is the solution is a brain dead moron. Lol! If it wasn't for and there would be nothing worth reading

8/29/2010 9:33 PM  
Anonymous Anonymous said...

no manufacturing = no wealth. Simply put you have to pull something out of the ground and make it worth more if you want to create wealth of any kind. Doctors and lawyers work hard and earn thier money but they are paid by someone who made money by making something that someone wanted to buy. Everybody feeds off of the manufacturing base. Until we recognize that fact there will be no real recovery.

8/30/2010 1:45 AM  
Anonymous b. said...

This is just so much bullshit. The Fed will talk about "structural" unemployment until enough time has passed for the unemployed to be indeed unemployable due to lack og recent practice and experience, or simply age.

There is 30+ years backlog in infrastructure in this country, and a good chunk of it comes done to the kind of labor that, if not done expertedly, can be done reasonably well (and more effienctly than not being done) on short notice. If it is considered "menial" labor that is because of the shit pay society doles out to those who do the least desirable jos, something that can be addressed if we find a consensus that prosperity of the many and the wealth of the few are incompatible.

Or, in more simple terms, if you have weage deflation, you are not going to have consumer spending. I know that that concept ios beyond the intellectual range of Fed retainers, but I was hoping for a bit more common sense on these pages/

8/30/2010 9:58 AM  
Anonymous Goldhorder said...

Did wage deflation just happen? Wage deflation can de traced back to Nixon's decision to leave the gold standard. This caused an explosion of growth in the banking industry, government debt, and military spending. Every form of private sector spending has been coming under more and more strain to feed the parasites on Wall Street and the evildoers in the pentagram. More of the same is not the answer. A smaller military and burning down down wall street is imo.

8/31/2010 9:48 AM  
Anonymous mary said...

I'm with Wild Goose Chase -- the "mismatch" argument doesn't hold water -- but it'll probably become true in a few years, if nothing is done right now:

8/31/2010 7:48 PM  

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