Janet Yellen should listen to Wu Tang Clan
Rules based monetary policy; Nominal GDP Level Targeting is the way to go
C.R.E.A.M. = Cash Rules Everything Around Me. It’s a rule. Plain and simple. Janet Yellen should take some advice from our old friends Raekwon, RZA, GZA, and the rest of Wu Tang Clan. Currently the Federal Reserve uses discretionary policy as apposed to a rules based approach to influence economic outcomes.
Rules can positively influence decision making in a market. In particular it helps investors understand the monetary policy decisions the Federal Reserve President makes. But when you use discretionary (how ever you feel) policy it undermines the Fed every step of the way, as David Beckworth points out here in Politico.
I’m not suggesting that our dear friend Yellen do any of these of course:
No question I would speed, for cracks and weed
The combination made my eyes bleedSticking up white boys in ball courts
My life got no better, same damn ‘Lo sweater
No one should ingest anything that makes their eyes bleed. And I doubt the basketball court is where Yellen could do the most damage. Also wearing purple sweater to every FOMC announcement isn’t helping, Janet.
But rather I suggest when:
Times is ruff and tuff like leather
Figure out I went the wrong route
So I got with a sick ass clique and went all out
Times are ruff and tuff like leather, as an economy we’d be lucky for 3 percent nominal growth. So like in the quote above, the Fed needs to admit its mistakes in policy — they are retroactive rather than proactive. I say this because markets are forward looking, meaning investors look to the future. What the Fed is currently doing is looking at data from the most recent past and trying to decide if they should tighten or loosen monetary policy. So what is the right path? As Wu Tang (I would like to think) suggests, Nominal GDP Level Targeting, a rule based approach would be best. So for your clique, I would go all out with Market Monetarists like Scott Sumner and David Beckworth.
As you can see above, just let people know where you’re headed (the red line) and that would be following NGDPLT (basically) and during a recession bring out them dolla dolla billa y’all. Keep it on path of 4.5 percent and recessions will be much shorter and milder. That’s because investors know what rules are and Fed will be following them. The public knows any unintentional deviation from 4.5 percent growth will be corrected.
Instead, all this discretion is making everyone less confident. One of the big indicators of economic health that Janet likes to point to in the media is the unemployment rate:
If you look at the graph you see every recession has a sharp increase in unemployment, so it makes sense one would focus on such an indicator. It’s really all a secret what other indicators the Fed uses while making economic decisions (aka discretionary policy), but I’ll try to give you a glimpse into what those secret justifications are.
For example, one of my professors in college told me Alan Greenspan used to pick random variables like trailer prices in Mississippi, a gallon of gas in Texas, and average rent in New York, to make his decisions. Or so the legend goes. I’m not really just calling out Yellen in this post, she’s just a figure head. I’m also looking at the people who sit on the Federal Open Market Committee (FOMC).
The FOMC meets eight times per year to set key interest rates, such as the discount rate. They also decide whether to increase or decrease the money supply, which the Fed does by buying and selling government securities. For example, to tighten the money supply, or decrease the amount of money available in the banking system, the Fed sells government securities. The meetings of the committee, which are secret, are the subject of much speculation.
But here’s where Wu Tang and Market Monetarism come together. Janet (and the FOMC), stop with the discretion and give in to some transparency. Have a rule in your life, even if it is:
Cash Rules Everything Round Me, C.R.E.A.M. get the money, dolla dolla bills y’all
I don’t think following the monetary base (Cash) is the best rule, but at least it would better than our current policies. I would suggest you let everyone know that cash rules everything around you while targeting a certain level of nominal growth in the economy. It’s really not that hard.
