Tuesday, November 26, 2013

Shake-up at the Minneapolis Fed

If I am making too much of this story, chalk it up to wishful thinking.  I am quite aware of the link between academic economics and the economics divisions of the various world's central banks.  Regular readers around here know I have covered this link quite extensively.  The most telling link, of course, is that the "nobel" prize for economics is actually awarded by Sweden's Central Bank—which is why that award's official name is the The Sveriges (Sweden's) Riksbank (Central Bank) Prize in Economic Sciences in Memory of Alfred Nobel (who would be utterly horrified that his name has been attached to such a gang of scientific illiterates).

In 1981 when Paul Volcker jacked up the prime interest rate to 21%, the main message was that the world's central banks were decriminalizing usury.  The reasons usury has been the object of censure by virtually every culture in history are many and legitimate, but the main economic reason is that high interest rates act as a perpetual drag on the real economy.  So the Fed was acting against the historical, cultural, moral, AND economic sanctions against high interest rates.  And to get this crime against the economy in motion, the central bank—at the point of a capital strike—forced the repeal of thousand of anti-usury laws nationwide.  Some states were even forced to change their constitutions.

In order to justify this economic attack on the real economy, the Fed's economists had to come up with "justifications" that ranged from outright lying to institutional corruption to insanity.  Politicians being mostly historical and economic illiterates usually bought these insane lies—not that they had a lot of choice in the matter.  During this cultural upheaval, there were a few voices that tried to remind their fellow citizens that controls on the creditor classes were essential in the operation of the modern economy.  Those voices were very successfully marginalized and because they were now outsiders, many indeed turned to some crackpot theories in their critique of the Fed.

Many would probably admit there are moments when they would love to launch drone attacks against the word's central banks and send anyone whoever worked for them as economists to re-education camps where they could be taught a useful trade.  But in the cold light of day folks must admit that central banks perform a useful function and part of their operation is to measure the performance of the economy. So even if we were to destroy the central banks, something very similar would have to replace it.  And yes, they would need to employ economists.

Since we Lutherans are by cultural education, reformers, it should not surprise anyone that I believe that since we actually need central banks, we might as well fix what we have.  With this in mind, we see a public drama being played out at the Minneapolis branch of the Fed.  The head of the branch, a fine fellow named Narayana Kocherlakota, decided the some of the old guard who had spent their careers mouthing the neoliberal party line had to go to make way for new policy positions.

We don't know a lot about Kocherlakota except that both he and his wife are University of Chicago Ph.Ds and that he has a pretty solid record on the subject of neoliberal purity.  So there are several possibilities here:
  1. Kocherlakota is an evil prick who cannot get along with his colleagues (not likely), 
  2. He woke up one morning and realized that the laws of the land required that the Fed pursue full-employment policies and decided he didn't want to die as an economic criminal (possible), 
  3. After three decades of crushing austerity, the world's central banks have decided that they might need to remove their boot from the necks of the real economy and so want to change the direction of monetary policy. This means the defenders of the old order must be eased out and Kocherlakota was just following orders (I certainly hope so!)
I must apologize for the Minneapolis Tribune.  This is what happens when you try to cover a major economic story while adhering to the strictures of Minnesota Nice—"less collaboration" indeed.  Note also the chest-pounding.  Now even though the Minneapolis Fed is important to the real economy because of its role in midwest agriculture and the commodity trades, everyone I know is well aware that compared to New York, we ARE the backwater.  So we must claim something and here it is the quality of our research (Minnesota, the brainpower state.)

Shakeup at Minneapolis Fed ousts two top economists

ADAM BELZ , Star Tribune November 20, 2013
Some observers say the loss of highly regarded researchers signals a change to less collaboration and fewer policy debates.

A shake-up in the top ranks of the Federal Reserve Bank of Minneapolis is prompting sharp questions about whether the bank is straying from the collegial tradition that built its reputation for world-class economic research.

Two high-profile economists who differed philosophically with President Narayana Kocherlakota have been shown the door in recent weeks, while the research director was moved to a different position.

The changes have raised eyebrows in the small, interconnected world of academic economics, with some suggesting they could hamper the local Fed’s ability to retain top-flight talent.

“It sends a bad message,” said Ed Prescott, a Nobel Prize-winning economist at Arizona State University who spends part of each year at the Minneapolis Fed. “Something very good is breaking down rapidly. Will something new rise out of the ashes? I think that’s what Narayana hopes, but I’m not optimistic.”

A spokesman for the Federal Reserve Bank of Minneapolis, one of 12 regional Fed branches, said the bank has no comment.

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.

“I had an outside offer from the university, and I was not retained by the Fed,” McGrattan said. “They did not make a counteroffer. Our lingo is to say that you’re being fired, but you’re not really being fired, you’re just not being retained.”

McGrattan is the third-highest ranked research economist at the Minneapolis Fed, behind only Kehoe and V.V. Chari, according to the St. Louis Fed’s ratings. Prescott, who collaborates with McGrattan, said she is “developing into a star” and is a “great loss” for the bank.

Meanwhile, the bank’s research director, Senior Vice President Kei-Mu Yi, who was brought on by Kocherlakota in 2010, was replaced in October and given a new title — special policy adviser to the president.

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.

“That’s a very important change in direction,” said Williamson, who wrote a blog post earlier in the week on changes at the Minneapolis Fed under Kocherlakota. “If it’s true that the decision comes from the president, it would be nice to know what that direction is and what the rationale is for it.”

Kocherlakota took over as president in 2009, after spending several years in the same milieu as Kehoe and McGrattan. He was a research economist at the bank in the late 1990s, a consultant there from 1999 to 2009, taught at the U from 2005 to 2010 and was chairman of the U’s department of economics before being named president of the bank.

McGrattan said she does not know why Kocherlakota would fire Kehoe or let her leave — “It’s absolutely mysterious to us,” she said — but the circle of advisers to the president has shrunk since he arrived and she has been frozen out.

“The last time I talked to Narayana one on one was before he was the president,” she said.

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.

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.

Policy differences aside, McGrattan questions the Minneapolis Fed’s commitment to retaining talented research economists. She said she pushed in the past two years for the bank to keep talented, up-and-coming economists Virgiliu Midrigan, Paco Buera and Kjetil Storesletten, all of whom left.

“We can’t let guys walk out the door, otherwise it’s not going to be a top place,” she said. “It will be difficult for hiring in the future.” more
This little dustup as reported at Business Insider.  A change is monetary direction is a "scandal."  Good lord!

Is This The Biggest Scandal In The History Of The Minneapolis Federal Reserve?


Two top economists are out at the Federal Reserve Bank of Minneapolis after the pair "differed philosophically" from bank President Narayana Kocherlakota, the Star Tribune's Adam Belz reports.

Patrick Kehoe, a faculty member at the University of Minnesota, was the bank's top-ranked research economist. Ellen McGrattan, who joined the Minneapolis Fed in 1992 and was the bank's third-ranked economist, will go on unpaid leave and take a position at "the U" as well.

The departure of the two star economists has "raised eyebrows" in the academic community, according to the report.

The Minneapolis Fed has long been seen as a stalwart of research, joining with the nearby university to foster an academic brain trust. From the Star Tribune:
McGrattan said she does not know why Kocherlakota would fire Kehoe or let her leave — “It’s absolutely mysterious to us,” she said — but the circle of advisers to the president has shrunk since he arrived and she has been frozen out.

"The last time I talked to Narayana one on one was before he was the president [in 2009]" she said.

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.
Once considered a monetary policy "hawk," Kocherlakota is one of the more dovish members of the Fed, advocating monetary stimulus and using accommodative phrases about how the central bank should do "whatever it takes" to reduce unemployment and juice the economy. more

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