This Is How A Fed Dove Crushes Any Hawkish Opposition To The Fed's True Religion
The relatively new Minneapolis Fed president Narayana Kocherlakota is not known for any insightful, original ideas. Before he took over the MinnFed, he was a research economist at the bank in the late 1990s, a consultant there from 1999 to 2009, taught at the University of Minnesota from 2005 to 2010 and was chairman of the U’s department of economics before being named president of the bank. What he is best known for is his epic flip-flopping: from one of the Fed's staunchest hawks early in his presidential career, to a dove so starved for the Fed's monetary liquidity, he often puts even Charles Evans to shame. He is among the first to suggest that the Fed should hold rates at zero until unemployment hits 5.5% (which it never will unless of course the plunge in the labor participation rate continues) something which both Goldman and Yellen have now adopted as gospel. Nobody knows what precipitated this shocking metamorphosis, although it is said Ben Bernanke can be quite persuasive during unrecorded phone calls. Which brings us to the topic of this post: what does a suspiciously reformed Fed dove do when faced with increasingly louder, conflicting voices that challenge the delusion that the only thing that will fix a failing QE is more QE? He fires them of course.
As the Star Tribune reports, two top economists at the Minneapolis Fed were "shown the door" when they disagreed with their tyrannical money printing advocate. Who were the two?
The departing economists are Patrick Kehoe and Ellen McGrattan, both highly regarded researchers with long tenures in Minneapolis. Kehoe, a Harvard Ph.D. who has taught at the University of Pennsylvania and the University of Chicago, joined the Fed as a monetary adviser in 1997. He was the bank’s highest-ranked research economist, according to data from the St. Louis Fed.
“He’s a high-profile person in the profession, a world-class economist,” said Stephen Williamson, a former Minneapolis Fed economist who now works at the St. Louis Fed and is a professor at Washington University in St. Louis. “He’s a big deal.”
Kehoe declined to comment. McGrattan said Kehoe was fired on Oct. 18. He already has a position at the U, which often shares economists with the Minneapolis Fed. “Patrick Kehoe did not choose to quit or leave the Fed,” McGrattan said.
McGrattan, a Stanford Ph.D. who taught at Duke University before joining the Minneapolis Fed in 1992, will take a position with the University of Minnesota in January and will go on unpaid leave at the bank. She has been an adjunct professor at the U since 1993 and said she was pushed aside at the Fed more implicitly than Kehoe.
As a reminder, "The Minneapolis Fed has a reputation as one of the premier economic research institutions in the country. A close partnership between the U and the bank over the years resulted in an innovative marriage of academic economic research and policymaking. It was a fruitful collaboration in which economists such as Prescott, Tom Sargent, Chris Sims and Neil Wallace helped put the Minneapolis Fed and University of Minnesota on the map. Former President Gary Stern and Art Rolnick, the former research director, continued the tradition. Sargent, Sims and Prescott eventually won Nobel Prizes in economics, and Sargent and Prescott still have ties to the U and the Minneapolis Fed."
Sargent, incidentally, is the same person who a few days ago was heard uttering the most apocryphal words a Fed cardinal could hear, namely that deflation is actually a good thing, and that Greece might benefit from returning to a gold standard. It is easy to see why Kocher does not like him.
But back to Kehoe and McGrattan who were mercilessly sacked by their dovish boss: why did he do that one may ask? Simple - they disagreed with his monetary religion.
There are subtle policy differences between Kocherlakota and the economists who are leaving. Kocherlakota has been at the center of a debate over the effectiveness of the Fed’s low-interest-rate policy. He has pushed for nearly two years for the Fed to hold down rates until unemployment drops to 5.5 percent.
He argues, in general, that what are known as “New Keynesian” economic models are helpful. This school of thought has helped create an unprecedented intervention in the financial markets by the country’s central bank — the $85 billion a month bond-buying program known as quantitative easing.
But Kehoe and McGrattan published a paper in 2008 arguing that monetary policy can do little to affect the unemployment rate, and Fed policymakers should instead focus primarily on controlling inflation.
“New Keynesian models are not yet useful for policy analysis,” they wrote.
Which is effectively the same as telling the Spanish Inquisition that god does not exist. Luckily, modern society is a little more developed (for now). Instead of Kehoe and McGrattan getting the iron maiden, they were merely fired.
Prescott laments that this sort of debate within the bank, long encouraged, no longer appears to be welcome. “A good administrator sets up a loyal opposition,” he said.
Don't ask. Don't question. Just accept. And with that it's case closed for how the Fed's pathological voodoo shamans deal with any dissent.
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