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Why are these President’s Laughing?. The Financial Sector and the Economy Colander, Economics Functions of a Bank Financial intermediation - connecting.

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Presentation on theme: "Why are these President’s Laughing?. The Financial Sector and the Economy Colander, Economics Functions of a Bank Financial intermediation - connecting."— Presentation transcript:

1 Why are these President’s Laughing?

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3 The Financial Sector and the Economy Colander, Economics Functions of a Bank Financial intermediation - connecting savers and borrowers. Banks borrow from savers at a low rate (but high enough to attract savings) and lend at a high rate (but low enough to attract borrowers). Bankers profits are a function of its matching ability and its willingness to bear the risk of illiquidity. Banks create money Banks convert an unacceptable medium of exchange (individual’s promise to repay) into an acceptable medium of exchange (bank’s promise to pay upon demand). The banks ability to create money means that the collective actions of banks will influence interest rates, inflation rates, and national output. The power of banks has led to the regulation of the banking system by local and federal governments.

4 The Financial Sector and the Economy Colander, Economics Creating Money Numerical example. Joe deposits $1500. Mo requests loan of $1000, which is deposited in Mo’s checking account. Bank now has $1000 in loans, and $2500 in deposits. When a bank makes a loan, the money supply is increased. Why? The debtor now has more money and no one else has any less.

5 The Financial Sector and the Economy Colander, Economics Reserve Banking Bank reserves - assets held by a bank to fulfill its deposit obligations, or, deposits that banks have received but have not loaned out. Reserves are currency and deposits a bank keeps on hand or at the Fed or central bank, to manage the normal cash inflows and outflows 100% reserve banking vs. fractional reserve banking Fractional reserve banking - a banking system in which banks hold only a fraction of deposits as reserves. Bank reserves are only a fraction of total deposits. Reserve ratio = bank reserves / total deposits

6 The Financial Sector and the Economy Colander, Economics Excess Reserves and Profits McGraw-Hill/Irwin Col an der, Ec on om ics 6 The reserve ratio is the ratio of reserves to deposits a bank keeps as a reserve against cash withdrawals Banks can keep more reserves: excess reserve ratio Reserve ratio = required reserve ratio + excess reserve ratio Profits are made from loaning out deposits. However a bank will close its doors if it cannot meet the demands of its depositors. So the bank must balance the demands for depositors with the drive for profit.

7 The Financial Sector and the Economy Colander, Economics Calculating the Money Multiplier McGraw-Hill/Irwin 7  We will call the ratio 1/r the money multiplier The money multiplier is the measure of the amount of money ultimately created per dollar deposited in the banking system, when people hold no currency  It tells us how much money will ultimately be created by the banking system from an initial inflow of money  The higher the reserve ratio, the smaller the money multiplier, and the less money will be created

8 The Financial Sector and the Economy Colander, Economics Determining How Many Demand Deposits Will Be Created McGraw-Hill/Irwin 8  To find the total amount of deposits that will be created, multiply the original deposit by 1/r, where r is the reserve ratio  If the original deposit is $100 and the reserve ratio is 10 percent (0.1), the amount of money ultimately created is: New money created = $1000 – $100 = $900 1/r = 1/0.1 = 10 $100 x 10 = 1,000

9 The Financial Sector and the Economy Colander, Economics Origin of Dollar? McGraw-Hill/Irwin Colander, Economics 9 The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin) There were numerous problems attached to using copper as the nation’s official currency standard, as Sweden had done since For one thing, when copper is stored in bank vaults, it can’t be used for all the other practical uses that it’s good for. And as later governments that tied the value of their money to a precious metal have learned, having a copper-based currency created wild swings in the value of money due to factors beyond any one country’s control. When the German economy was devastated following the Thirty Years’ War, for example, it dramatically drove down the price of copper and thus caused a collapse in the value of Sweden’s currency. Then there was a more practical problem, one specific to a country that had recently begun to issue coinage as not so pocket-sized metal plates: Copper is really heavy. A ten-daler plate, the most common unit of currency, measured about twelve by twenty-four inches and weighed more than forty-three pounds. It was enough to buy sixty-six pounds of butter or thirty-three days of work from an unskilled laborer. The copper plates still turn up now and again in the waters around Stockholm, because when one was dropped while being loaded or unloaded onto a ship, there was no retrieving it. Daler plates were, presumably, hell on bank tellers’ backs.

10 The Financial Sector and the Economy Colander, Economics Origin of Lending? McGraw-Hill/Irwin Colander, Economics 10 The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin) Johan Palmstruch’s first innovation was to hold the giant plates in Stockholms Banco’s vault, while offering a paper note as a receipt. This idea was compelling to King Karl X Gustav. In the bank’s charter, he mentioned the “ good convenience ” Swedish subjects would receive in the form of relief from “hauling and dragging and other trouble that the copper coin entails in its handling.” The success of this innovation led to a great inflow of deposits into the bank—400,000 copper daler by 1660, just three years after its opening, the equivalent of $76 million in today’s dollars. And even sooner, the leaders of the bank came up with another financial innovation. As Palmstruch would later testify, Gustaf Bonde—the shareholder in the bank who was also its chief government inspector—“came to the exchange bank towards spring 1659 in the morning, stood there looking around, and exclaimed with these words: ‘I see here in the exchange bank good stores of money and it seems to me to be best now to make a beginning with the loan bank.’” That is: Hey, guys, we have all this money just sitting around. Why don’t we lend it out and actually make a return on it!

11 The Financial Sector and the Economy Colander, Economics Equilibrium in the Money Market The demand for money is downward-sloping: as the interest rate falls the cost of holding money falls When interest rates rise, bonds and other financial assets become more attractive, so you hold more financial assets and less money Interest Rate Q of Money S i0i0 D 13-11

12 The Financial Sector and the Economy Colander, Economics Market for Loanable Funds The long-term interest rate is determined in the market for loanable funds At equilibrium, the quantity of loanable funds supplied (savings) is equal to the quantity of loanable funds demanded (investment) Interest Rate Q of Loanable Funds Q S 4% = Savings D = Investment 13-12

13 Monetary Policy The 1907 Bank Panic  The 1907 panic resulted in mass bank failure, a self-imposed bank holiday, failure of several major New York banks, and an unemployment rate of 20%.

14 Monetary Policy from Ellis Tillman (2012): The Panic of 1907 [working paper from Cleveland Federal Reserve] Table 1: Time line of Major Events during Panic of 1907  Wednesday, Oct 16 Failure of the Heinze attempt to corner stock in United Copper sparks concerns. Bank runs begin on banks associated with Heinze forces.  Friday, Oct 18 New York Clearing House agrees to support Mercantile National Bank,the bank that Heinze controlled directly, upon resignation of its Board (including Heinze). Run on Knickerbocker Trust begins, apparently the result of rumored association of Charles Barney, President of Knickerbocker Trust, with Charles Morse.  Saturday, Oct 19 Morse (Heinze's associate) banks are struck with runs, and requests aid from the New York Clearing House Association. Newspapers infer an equivocal response on the part of the New York Clearing House.  Sunday, Oct 20 New York Clearing House agrees to support Heinze- Morse banks but requires that Heinze and Morse relinquish all banking interests in New York City. McGraw-Hill/IrwinColander, Economics14

15 Monetary Policy from Ellis Tillman (2012): The Panic of 1907 [working paper from Cleveland Federal Reserve]  Monday, Oct 21 Run on Knickerbocker Trust accelerates. Request by National Bank of Commerce for aid from the New York Clearing House on behalf ofKnickerbocker Trust was denied. J.P. Morgan denies aid to Knickerbocker Trust as well.  Tuesday, Oct 22 Run on Knickerbocker Trust forces its closure with cash withdrawals of $8 million in one day. Run spreads to Trust Company of America, Lincoln Trust and other trust companies in New York City.  Wednesday, Oct 23 J.P. Morgan agrees to aid Trust Company of America and coordinates the provision of cash from New York Clearing House member banks to trust companies.  Thursday, Oct 24 U.S. Treasury deposits $25 million in New York Clearing House member national banks. J.P. Morgan organizes provision of cash (money pools) to the New York Stock Exchange to maintain the provision of call money loans on the stock market floor.  Saturday, Oct 26 New York Clearing House Committee meets and agrees to establish a Clearing House Loan Committee to issue certificates. Also the Committee agreed to impose restrictions payment of cash.  Monday, Nov 4 Trust companies provide $25 million to support other trust companies that endured large-scale depositor withdrawals. McGraw-Hill/IrwinColander, Economics15

16 Monetary Policy J.P. Morgan and the Bank Panic of 1907 The reaction of J.P. Morgan in Id=  Pooled bank funds  Rationed credit Morgan’s ideas followed from the work of the Bank of England, which Morgan was familiar with. In essence, Morgan fulfilled the function of a Central Bank, which did not exist at the time. And this led to the Federal Reserve (established in 1913).

17 Monetary Policy Central Banks Around the World  Most developed countries have a central bank whose functions are broadly similar to those of the Federal Reserve. The oldest, Sweden’s Riksbank, has existed since 1668 and the Bank of England since Napoleon I established the Banque de France in 1800, and the Bank of Canada began operations in The German Bundesbank was reestablished after World War II and is loosely modeled on the Federal Reserve. More recently, some functions of the Banque de France and the Bundesbank have been assumed by the European Central Bank, formed in 1998.

18 Monetary Policy Power of Central Bankers  The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)  Whatever their perceptions or prejudices, central bankers all have an awesome power: the ability to create and destroy money. Why is a piece of paper with Andrew Jackson’s face on it worth twenty dollars? Why can that piece of paper be exchanged for a hot meal or a couple of tickets to a movie? It’s only a slight exaggeration to answer, “Because Ben Bernanke says so.” The bill may have the U.S. treasury secretary’s signature on it, but at the top it reads, “Federal Reserve Note.” Central bankers uphold one end of a grand bargain that has evolved over the past 350 years. Democracies grant these secretive technocrats control over their nations’ economies; in exchange, they ask only for a stable currency and sustained prosperity (something that is easier said than achieved). Central bankers determine whether people can get jobs, whether their savings are secure, and, ultimately, whether their nation prospers or fails. McGraw-Hill/IrwinColander, Economics18

19 Monetary Policy Two Federal Reserve Links  The Federal Reserve The Federal Reserve  Overview of Federal Reserve (pdf) Overview of Federal Reserve (pdf)

20 Federal Reserve Districts from David Colander (2010) San Francisco Kansas City Minneapolis Chicago. Boston Richmond Atlanta St. Louis *Alaska and Hawaii are under the jurisdiction of the Federal Reserve Bank of San Francisco Dallas New York PhiladelphiaCleveland Washington DC

21 Monetary Policy Duties of the Fed from David Colander (2010)  Conducts monetary policy  Supervises and regulates financial institutions  Lender of last resort to financial institutions  Provides banking services to the U.S. government  Issues coin and currency  Provides financial services such as check clearing to commercial banks, savings and loan associations, savings banks, and credit unions

22 Monetary Policy Central Banks Create Money  The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)  Ever since the first central banker set up shop in seventeenth-century Sweden, offering paper notes as a more convenient alternative to the forty-pound copper plates that had been the currency of what was then a great empire, money has been an abstract idea as much as a physical object. The alchemists of medieval times never did figure out a way to create gold from tin, but as it turned out, it didn’t matter. A central bank, imbued with power from the state and a printing press, had the same power. With that power, it creates the very underpinnings of modernity. As surely as electric utilities and sewer systems make modern cities possible, the flow of money enabled by the central banks makes a modern economy possible. By standing in the way of financial collapse, they’ve enabled the gigantic, long-term investments that permit us to light our homes, fly in jumbo jets, and place a phone call to nearly anyone on earth from nearly anywhere on earth. In modern times, when the amount of money exchanged electronically dwarfs the volume of commerce that takes place with paper money, even the physical work of printing paper dollars and euros is something of a sideline for the central banks. The actual work of creating or destroying money in modern times is as banal as it is powerful: A handful of midlevel workers sit at computers on the ninth floor of the New York Fed building in lower Manhattan, or on Threadneedle Street in the City of London, or at the German Bundesbank in Frankfurt, and buy or sell securities with a stroke of their keyboards. They are carrying out orders of policy-setting committees led by their central bankers. When they buy bonds, it is with money that previously did not exist; when they sell, those dollars or pounds or euros cease to exist. McGraw-Hill/IrwinColander, Economics22

23  Inflation and Money Growth or Why Central Bank Independence is Important 13-23

24 Monetary Policy Money Neutrality Changes in the money supply impact aggregate demand (not aggregate supply) Changes in the aggregate demand do not impact real output in the long-run Therefore, money should be “neutral” (i.e. impact nominal variables but not impact real variables) in the long-run. How long is the long-run? McGraw-Hill/IrwinColander, Economics24

25 Monetary Policy Burns and Nixon The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin) The men who led the global economy in the crisis that began in 2007 had come of age in the 1970s, when central bankers were so fearful of an economic downturn—and the political authorities— that they allowed prices to escalate out of control. “I knew that I would be accepted in the future only if I suppressed my will and yielded completely—even though it was wrong at law and morally—to his authority,” wrote Fed chief Arthur Burns in his diary in “He” in this case was Richard Nixon, who insisted that Burns keep interest rates low and the U.S. economy humming in the run-up to the 1972 election. Prices rose so fast that steakhouses had to use stickers to update their menus according to that week’s cost for beef. Central bankers have been vigilant about inflation ever since—for better and, especially in the 2000s, for worse, when some saw inflationary ghosts where there were none. McGraw-Hill/IrwinColander, Economics25

26 Monetary Policy Monetary Policy and the 1970s In the 1970s, oil prices increase This leads to an increase in the price level and a reduction in national output (and increase in unemployment) We could have lowered unemployment with more aggregate demand (but that leads to even higher prices) We could have lowered the price level with less aggregate demand (but that leads to even higher unemployment) Which did we choose? McGraw-Hill/IrwinColander, Economics26

27 Monetary Policy CASE STUDY: Monetary Tightening & Interest Rates from the textbook of Gregory Mankiw Late 1970s: inflation > 10% Oct 1979: Fed Chairman Paul Volcker announces that monetary policy would aim to reduce inflation Aug 1979-April 1980: Fed reduces the money supply by 8.0% Jan 1983: inflation = 3.7% CHAPTER 10 Aggregate Demand I

28 Monetary Policy Monetary Tightening & Rates, cont. from the textbook of Gregory Mankiw  i < 0  i > 0 8/1979: i = 10.4% 1/1983: i = 8.2% 8/1979: i = 10.4% 4/1980: i = 15.8% flexiblesticky Quantity theory (Classical) Keynesian prediction actual outcome The effects of a monetary tightening on nominal interest rates prices model long runshort run

29 Monetary Policy Taylor Rule and the recession McGraw-Hill/Irwin Colander, Economics 29 Taylor Rule: Fed funds rate = 2% + Current inflation x (actual inflation less desired inflation) x (percent deviation of aggregate output from potential) In 2008 we saw approximately the following Unemployment Rate = 9% Natural Rate of Unemployment = 5% Inflation = 2% Desired Inflation = 1%

30 Monetary Policy Liquidity Trap McGraw-Hill/Irwin Colander, Economics 30 from Mark Thoma… In a liquidity trap, (a) short-term interest rates are essentially zero and (b) banks have excess reserves. Normally the Federal Reserve changes people's behavior by trading short-term government bonds (which pay interest) for bank reserves (which allow banks to expand their deposits and loans). Fewer government bonds in the economy means more appetite by banks to buy corporate bonds and thus to finance corporate investment. More bank reserves means banks have more freedom to make direct loans as well. But in a liquidity trap bonds pay no interests, and banks have more than enough reserves to cover their lending to all the borrowers they think are credit worthy.

31 Monetary Policy Monetary Policy in a liquidity trap McGraw-Hill/Irwin Colander, Economics 31 Once interest rates have been effectively pushed to zero, monetary policy is not effective. If the economy is not at full-employment we can  wait for the economy to return by itself to full employment  employ fiscal policy

32 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Duration and Timing of Business Cycles Since 1854 Duration (in months) Business Cycles Pre-World War II (1854 – 1945) Post-World War II (1945 – 2012) Number 2211 Average duration 5066 Length of longest cycle 99 ( )128 ( ) Length of shortest cycle 28 ( )28 ( ) Ave. length of expansions 2959 Length of shortest expansion 10 ( )12 ( ) Length of longest expansion 80 ( )120 ( ) Ave. length of recessions 2111 Length of shortest recession 7 ( )6 (1980) Length of longest recession 65 ( )18 ( )

33 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Great Depression Unemployment Estimates from Weir YearUE Rate All workers UE Rate Non-farm workers %4.1% %12.4% %21.7% %31.7% %30.0% %23.6% %21.1% %14.9% %13.3% %18.3% %16.3% %13.5% %8.4% %4.3%

34 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Prior to the Great Depression According to EH.Net, in 1929 the U.S. economy produced and consumed $1.1 trillion worth of goods and services (in 2011 dollars or in real terms). The U.S. population was almost 122 million So per-capita income – in real terms – was $9,080 (in other words, if you divide how much was produced and consumed by population, you get about $9,000 per person) At this point the economy was at full employment (unemployment rate is estimated by Weir (1992) to be only 2.9%) so aggregate demand equals aggregate supply.

35 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics The Great Depression Reviewed To curb speculation, the Federal Reserve began reducing the money supply in the latter 1920s. This is a contractionary monetary policy (see next slide). So we would have seen the following happen: 1. The Money Supply was reduced 2. which caused interest rates to rise 3. which caused investment (part of aggregate demand) to falls 4. which caused income to fall in the short-run

36 McGraw-Hill/Irwin Monetary Policy from Colander (2010) i Expansionary monetary policy IMY i Contractionary monetary policy IMY

37 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Short-Run vs. Long-Run In the Short-Run, a decline in aggregate demand would cause national income to fall. Remember, each good and service that is purchased represents someone else’s income. So if purchases decline, incomes also decline. In 1930 real per-capita income fell to $8,210 and it is estimated the unemployment rate rises to 8.9%. The nation’s capacity – or its aggregate supply – hadn’t changed. Individual and firms were simply not purchasing the goods the nation was capable of producing. In the long-run, the failure to sell goods would force firms to cut prices. As prices fall, individuals and firms would purchase more goods and the economy would return to full employment. How long, though, is the long-run?

38 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics In 1931 the Great Depression gets worse  The unemployment rate in 1931 is estimated to be 15.7% and real per-capita income has fallen to $7,624.  Rather than simply lower prices, firms have reduced the size of their work force.  More importantly – and this is what turns a recession into the Great Depression – the widespread failure of banks has a significant impact on the ability of firms to produce and sell goods.

39 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Federal Reserve Policy Today Today we would expect the Federal Reserve to engage in expansionary policy when the economy entered a recession. This involves… 1. increasing the money supply 2. which lowers interest rates 3. which increases investment 4. which increases aggregate demand and income in the short-run. Note: In the long-run, increases in the money supply would just cause prices to rise. So you can’t make incomes go up forever by just increasing the money supply.

40 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Federal Reserve Policy in the Great Depression Expansionary monetary policy wasn’t pursued because the Federal Reserve believed it was important the nation stay on the Gold Standard (see next slide for how that policy worked out) The Federal Reserve also didn’t believe it should bail out failing banks. In the end, 9,000 banks failed or one-third of the nation’s banks. The failure of banks harmed both its depositors (or the nation’s consumers) and borrowers (or the nation’s firms). In other words, bank failures further depressed aggregate demand.

41 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Departing the Gold Standard source: Krugman ( )

42 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics The Great Depression gets more depressing In 1932, the unemployment rate is estimated to be 22.9%. Real per-capita income falls to $6,582. In 1933, the unemployment rate is estimated to be 20.9%. Per- capita income falls to 6,462. From 1929 to 1933, per-capita income fell from $9,080 to $6,462. In other words, per-capita income fell about 30%. IN NOMINAL TERMS… per-capita income fell from $ in 1929 to $ in Nominal per-capita income had not been this low since 1915.

43 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics To put the Great Depression in perspective… In the second quarter of 2008, according to the Bureau of Economic Analysis: 1. GDP was $14.4 trillion 2. Population – according to the U.S. Census – was about 306 million 3. So per-capita income was $47, By the second quarter of 2009, per-capita income declined by 4.5%. So per-capita income was about $45, Had the economy declined by 30%, per-capita income would be $33,031. Or about what it was in the late 1980s. 6. One should note that the BEA estimates that GDP started growing in the second half of And it has increased every quarter since. So the last recession is technically over.

44 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Difference between Then and Now During the Great Depression, monetary policy was not employed until And fiscal policy was relatively weak throughout the Hoover and Roosevelt administrations (and contractionary at various points). Today…. The Federal Reserve expanded the money supply and reduced interest rates to about zero. The Federal government passed a $700 billion stimulus package (90% of economists agree that the Federal government should increase government spending and/or cut taxes during a recession). Consequently, what could have been an economic disaster will probably be forgotten – by everyone but economists – in a few years.

45 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics Did the Stimulus Package Work? From Mark Zandi (chief economic advisor to the John McCain campaign) and Alan Blinder (professor of economics at Princeton) We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation. When we divide these effects into two components—one attributable to the fiscal stimulus and the other attributable to financial-market policies such as the TARP, the bank stress tests and the Fed’s quantitative easing—we estimate that the latter was substantially more powerful than the former. Nonetheless, the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration.

46 McGraw-Hill/Irwin The Fiscal Policy Dilemma 16 Colander, Economics A few questions… 46 When did the federal government start employing fiscal policy? What are the limitations of fiscal policy? Under what conditions should fiscal policy be employed?

47 Nixon and Keynesian Economics New York Times Article (January 6, 1971) Nixon Reportedly Says He Is Now a Keynesian WASHINGTON, Jan. 6, 1971 (Reuters) -- President Nixon has described himself as "now a Keynesian in economics," according to Howard K. Smith of the American Broadcasting Company, one of the four television commentators who interviewed the President on a television show Monday night.

48 Bartlett, Friedman, and Keynes Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.” Bruce BartlettThe Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take As it happens, (Milton) Friedman had said in 1965 that “we’re all Keynesians now” in the Dec. 31 issue of Time magazine. He later complained that his quote had been taken out of context. His full statement was, “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.” Friedman said the second half of his quote was as important as the first half.Dec. 31 issue of Time I think Milton Friedman was right that in a sense we are all Keynesians and not Keynesians at the same time. What I think he meant is that no one advocates Keynesian stimulus at all times, but that there are times, like now, when it is desperately needed. At other times we may need to be monetarists, institutionalists or whatever. We should avoid dogmatic attachment to any particular school of economic thought and use proper analysis to figure out the nature of our economic problem at that particular moment and the proper policy to deal with it. keynesianism/?_r=0 keynesianism/?_r=0

49 Mankiw, W. Bush, and Keynes Who is Gregory Mankiw, the 44-year-old Harvard professor nominated this week as U.S. President George W. Bush's new chairman of his Council of Economic Advisers?The key facts seem to be these. He is highly intelligent, wide-ranging in his economic expertise, and an excellent writer. He is a "New Keynesian" and named his dog Keynes. (This we see as very important.) His mentors have been bright and prominent economists, such as Larry Summers, former treasury secretary, and Alan Blinder, formerly of the Federal Reserve. From his early 20s, Mankiw has been close to the powerful. "Choose your mentors well," is advice he himself gives in an essay on his life. In his research, he has kind words for Bush's great friend, President Bill Clinton, while, on Federal Reserve Chairman Alan Greenspan, Mankiw's words are as opaque as those of the (perhaps) great helmsman himself.George W.Larry SummersBill ClintonAlan Greenspan Bush would appear to have turned to Mankiw for a number of reasons. One reason is that Mankiw's "new Keynesian" approach to economic policy-making may make him a good fit with Bush's current policies. New Keynesians believe in using fiscal policy flexibly to help smooth trends in growth. Thus, at a time of recession, new Keynesians would be comfortable with a widening government deficit if the deficit spending helped to alleviate the downturn in the economy. That has been Bush's policy /#ixzz2kfmZwTDy /#ixzz2kfmZwTDy


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