Great post regarding perspective with monetary policy (applicable elsewhere in life) from Worthwhile Canadian Initiative.

Excerpt/Preview:

“Saving” is a “doing nothing” concept. When we save, we are doing nothing with our income. When desired saving increases, people want to do even more nothing. But there are 1,001 different ways of doing “nothing”. And it matters which one you do.

Has anyone else heard of BitCoin, and the incredible inflation it has seen?

This dude has put all his money into BitCoin – not smart, I would say.  Especially when news like a run on BitCoin hits. (If you have no clue on what BitCoin is, read.)

So while I laugh at the guy who invested all his money that is now gone, I reflect back on a conversation I had with a friend a few years ago.  Can we use this virtual currency to study monetary economics?  BitCoin has the potential to provide us with an interesting avenue to understand another type of currency.

But what I am imagining more is looking at virtual worlds and video games (disclaimer: I have no direct experience with video games) to build scenarios to “test” on live people interacting with the world/game.  Currently, there are trading simulators that follow the market where one can see how his/her virtual portfolio would fair in real life.  Add that aspect to a virtual economy and see how quantitative easing programs could affect it.

Just an idea.

[side step the fact that I haven't been blogging in a while]

Folks – for those of you that are unconvinced of Bernanke et al’s policies, efforts and commentary, I offer you Nobel Laureate Robert Lucas’ presentation made at UWashington a few weeks ago (I would have attended myself, but I was more engrossed in a Seattle Grunge-themed yoga class).

For the too long, didn’t read folks out there – Dr. Lucas compares the depression in the 1930s, while recognizing other recessions are not that comparable, to the recession we are currently experiencing.  While there are differences in the causes and prolongation of the two recessions, he notes that a big factor in both is the banking system, and the Fed’s monetary policies.  To note:

•In 1930, the Federal Reserve stood by and watched as spending and production declined

•In 2008, the Federal Reserve did exactly the opposite

•In August, 2008, there were $45 billion of reserves in the banking system

•By  the end of  the year, there were $821 b.

•The Fed acted boldly as lender of last resort, just as it should have done in 1930s, but failed to do

•Financial panic was over by end of 2008

•Too late to prevent deep spending declines in GDP in 2008-4 and •2009-1

•But there is a world of difference between two quarters of production declines and four years

He explains that the Fed did not do anything to help bank runs and the flow of currency in the 1930s, while the current Fed did the exact opposite.  The US has not technically been in recession since September 2009 (BEA) with [a seemingly shaky trend of] positive production, although it may feel like it.  Historically, job growth as always lagged after the end of recessions.  With Dr. Lucas’ comments, without the help of the Fed, we could very well still be experiencing decline in GDP/prolonged recession.

I’ve been cultivating an interest in monetary policy, and yes, it can be a bit bland.  Why not spice it up with behavioral economics?

A year or so ago I came across Inflation Targeting by Bernanke et al.  What I found interesting was the look at the overall market/public response to the German Bundesbank’s press releases after policy meetings.  If the Bank was not on target with inflation, Bernanke et al found that people respond better if the Bank had given a pinpointed estimate and was subsequently off target, rather than an inflationary range target.  The belief is if the Bank can’t hit its intended range, then it does not know what it’s doing.  But if it does not hit a specific number, then people are more forgiving.

It’s as if the Bank was playing darts with a large dart board versus a dime.  What, you can’t hit that target?  What a lousy arm.

The interesting thing is, the Bank could give an inflation target range of 2 – 3%, or a pinpoint 2.5%, and people would still be more forgiving of missing the pinpoint if numbers turned out to be 4%, even though the middle point of the range is equal to the pinpoint.

Hop across the pond back to the US, and people/markets have lost faith in the Federal Reserve as seen by the ongoing debates in DC and Wall Street.  How can we restore trust in our powerful reserve system?  Perhaps it’s similar to the Bundesbank’s understanding of how information is presented to the public.

I came across an interesting article yesterday from AdAge that documented a conversation with Dan Ariely, author of the popular behavioral economics book Predictably Irrational.  I’d like to see some combination of behavioral economics & marketing introduced to the FRB’s public releases.  One of Dr. Ariely’s comments regarding the loss of trust for a company & revenge:

Revenge is a useful thing because revenge allows for trust. If your computer crashes, you might get upset but you wouldn’t feel the same need for revenge as when a human being betrays your trust. The anger that can be caused by bad customer service is really kind of incredible. That’s the first thing that companies just need to understand. Things can quickly deteriorate to a level to which there’s no return. You can really calm people very easily if you do it at the right moment.

Replace “customer service” to “economic leadership” and “companies” with “the federal reserve” and I think there might be something there.

Bare with me, a series of questions: If the public/markets react poorly to the Fed’s leadership in trying to get us out of a recession, how is that going to be taken out on the economy itself?  If people distrust the Fed’s efforts, people must have a poor outlook, which must be seen still in restricting spending, use of credit, banks’ not lending, etc.  How does people’s mistrust affect the economy?  Does it interrupt monetary policy’s effectiveness?  Is there anything recursive going on to affect the progression of monetary policy?  Can we instill trust like that from the people of Germany (might I remind you the strength of the German’s economy…)?  How will faith affect the progression & effectiveness of monetary policy?

Are these questions viable…