The stance of monetary policy is confusing these days. The target Federal funds rate is near zero, but that's the nominal rate. With inflation low, the real rate cannot move as far into negative territory as it could if inflation were higher. It's not "zero bound," but it's much closer than usual.

I've always regarded monetary policy in terms of growth in the money supply rather than the level of interest rates. Many people insist on calling monetary expansion with low interest rates "quantitative easing," but to me it's just that money growth changes are a powerful tool. I don't know why a special term is needed.

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On Tues. I appeared on The Kudlow Report to discuss the prospect of long term inflation. I made the remark that monetary policy is not that easy, and the Fed's main concern should be preventing deflation. I also noted that a weak dollar in the short term could help with economic recovery.

On the May 20 Kudlow Report, I also discussed whether the SEC failed to reform mark to market. 

Congratulations

Candace Elizabeth McTeer

High School Graduation

And Admission to the Honors Program

George Mason University

"Way to Go Girl"

Advice Follows

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We've had no military casualties in my family. The closest we've come is a guy named Postel Nixon, whose house you could see or almost see from the window of Ranger Baptist Church in Ranger, Georgia. I never met Postel, and I'm not even sure I'm spelling his first name right. It is pronounced Poss'tell.

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In my opinion, the average watcher of financial cable TV and reader of the financial press can be forgiven some confusion. Experts are found at opposite extremes of many issues. For example,

*We need more spending, but budget deficits are bad.

*Debt is bad, but we are adding debt at a record pace.

*Consumers and investors need a strong dollar, but won't a strong dollar slow the recovery from recession?

The beginning of clarity on these and related issues is to get clear on the distinction between GDP and related measures of current output and income on the one hand and our standard of living on the other hand. To some extent the distinctions correspond to the difference between the Classical (pre-Keynesian) approaches to macroeconomics, which assumed full employment rate of GDP generation, and Keynesian economics, which is all about getting back to a full employment rate of GDP generation. During a period of deep recession, the Keynesian focus on spending levels, including using government spending to fill any gaps, is appropriate. In more normal times, the Classical focus is more appropriate.

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It may just be me, but aren't the credit rating agencies supposed to be rating credit?

Yesterday, we saw a sharp market reaction when one of the rating agencies that gave AAA ratings to mortgage-backed securities larded with subprime loans called into question the credit worthiness of Britain. As is the case with the United States and the Federal Reserve, Britain and its Bank of England have the ability to create new money if necessary to pay off its debt at maturity. There is no sovereign credit risk. There is no need for credit rating agencies to opine on the credit worthiness of sovereign debt.

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Yesterday's one-sided Senate vote to increase regulation of credit cards brought back some old mixed memories. My first testimony to a legislative body was to a Committee of the Maryland Legislature in the early 1980s warning them of the likely unintended consequences if they put a limit on credit card interest as they were proposing to do.

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The flap over whether President Obama should get an honorary degree when he gives a commencement address is unfortunate. It shouldn't have turned into such a big deal for so many people. Traditions differ. If they had asked my opinion, I would have said yes. After all, he is the President of the United States.

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I've had quite a few blog postings recently on various aspects of the financial crisis and the state of the economy. Scrolling through them to find something of interest is not the easiest thing to do. Since I'm out of pocket briefly, I thought it might be useful to present a list of recent postings for your convenience. The last one listed is February 2, 2009, but that end-point is arbitrary. There are plenty of relevant ones before that if you are interested.

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Increasingly, I'm feeling the need to state the obvious. Partly, that's because others aren't doing it because it is obvious, and, partly, because it isn't obvious to everyone. Enough people miss it to matter.

The obvious thing I have in mind right now is the similarity between the way the flu spreads and the way the financial crisis spread. They both reflect the interactions of a global community. Contact or proximity is the beginning of the spread of both, but the health of the public and their institutions also help determine the severity and duration of the impact. It remains to be seen whether the current flu reaches pandemic proportions, but the financial crisis already has, partly because of the spread of the subprime slime and partly because of the vulnerability of financial institutions made fragile by too much debt.

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Guitar-picking virtuoso, Glen Campbell, was once asked, derisively I assume, if he could read music. He said he could read music, but not so much that it got in the way of his picking.  Not to suggest a comparison, but I'm pretty sure that if I'd ever taken a course in writing poetry, I'd never write another poem; so I hold onto my shield of  ignorance to protect my fun. I think it's probably the same with formal rhetoric and blogging. If I knew all the rules and pitfalls of rhetoric, I'd probably just freeze up.

President Obama is one of the best speakers (and probably one of the best rhetoricians) I've ever heard. He can put words together like few others can. However, he pulls a few tricks on his listeners that I find insulting to my intelligence. I worry that others might not even notice, so here I go again, stating the obvious.

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"Accounting Arcana"

 "It's fascinating that the not-so-tiny matter of a
$30 billion loss comes down to accounting arcana,
but it does."

I copied that quote down last night when half asleep and this morning I can't recall where I got it. Now I can't find it. My best guess is the WSJ.com. My apologies to the author.

The article was about the unfortunate suicide of a Freddie Mac official, despite the fact that he had recently won a ruling from the SEC worth $30 billion. In my previous post, "Stressing Over Bank Stress Tests," I had tried to make a similar point: How accounting rules, which often seem arbitrary and not well suited to the situation at hand can make a huge difference and how bankers' challenging the results of the recent stress tests have about as good a chance of being "correct" as do the bank supervisors. I didn't feel like I had made my argument clear enough; so, last night I realized that what was missing was the term "accounting arcana."

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If it weren't tacky to say I told you so, I'd refer you to my previous posts and interviews pointing out the dangers and pitfalls of the bank stress tests. They weren't just a mistake; they were a mistake anyone without sleep deprivation should have seen coming a mile away. It's not the biggest mistake or the most important mistake that policymakers have made during this crisis, but it was the easiest to foresee and to avoid, except for the sleep factor. These boys need to get their rest. The economy and the banks will be there in the morning. In fact, a little less regulatory attention might just be what the doctor ordered.

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Texas singer-songwriter Townes van Zandt once told Emmy Lou Harris that there were only two kinds of music: the blues and zippity do da. To my knowledge he never posited a causal relationship running from too much of the latter to the former. But, as Billy Joe Shaver puts it so well, we're leaning toward the blues these days. Popular culture seems to buy the causal relationship since they apparently believe high pay and high living among some groups are responsible for it all and are determined to bring down the Temple. I'm not so sure.

I've always preferred to wallow in country music when I was blue…

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