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Why are these President’s Laughing?
The Financial Sector and
the Economy
Functions of a Bank
• Financial intermediation - connecting savers and borrowers.
• Banks borrow from savers at a low rate (but high enough to attract
savings) and lend at a high rate (but low enough to attract
borrowers).
• Bankers profits are a function of its matching ability and its
willingness to bear the risk of illiquidity.
• Banks create money
• Banks convert an unacceptable medium of exchange (individual’s
promise to repay) into an acceptable medium of exchange (bank’s
promise to pay upon demand).
• The banks ability to create money means that the collective actions
of banks will influence interest rates, inflation rates, and national
output.
• The power of banks has led to the regulation of the banking system
by local and federal governments.
Colander, Economics
The Financial Sector and
the Economy
Creating Money
 Numerical example.
 Joe deposits $1500.
 Mo requests loan of $1000, which is deposited in Mo’s checking
account.
 Bank now has $1000 in loans, and $2500 in deposits.
 When a bank makes a loan, the money supply is increased. Why?
The debtor now has more money and no one else has any less.
Colander, Economics
Reserve Banking
The Financial Sector and
the Economy
 Bank reserves - assets held by a bank to fulfill its deposit




obligations, or, deposits that banks have received but have not
loaned out.
 Reserves are currency and deposits a bank keeps on hand or at the Fed or
central bank, to manage the normal cash inflows and outflows
100% reserve banking vs. fractional reserve banking
Fractional reserve banking - a banking system in which banks hold
only a fraction of deposits as reserves.
Bank reserves are only a fraction of total deposits.
Reserve ratio = bank reserves / total deposits
Colander, Economics
The Financial Sector and
the Economy
Excess Reserves and Profits
• The reserve ratio is the ratio of reserves to deposits a bank keeps
as a reserve against cash withdrawals
• Banks can keep more reserves: excess reserve ratio
• Reserve ratio = required reserve ratio + excess reserve ratio
• Profits are made from loaning out deposits. However a bank will
close its doors if it cannot meet the demands of its depositors. So
the bank must balance the demands for depositors with the drive
for profit.
Colander, Economics
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The Financial Sector and
the Economy
Calculating the Money Multiplier
 We will call the ratio 1/r the money multiplier
• The money multiplier is the measure of the
amount of money ultimately created per dollar
deposited in the banking system, when people
hold no currency
 It tells us how much money will ultimately be created by
the banking system from an initial inflow of money
 The higher the reserve ratio, the smaller the money
multiplier, and the less money will be created
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Colander, Economics
The Financial Sector and
the Economy
Determining How Many
Demand Deposits Will Be Created
 To find the total amount of deposits that will be created,
multiply the original deposit by 1/r, where r is the
reserve ratio
 If the original deposit is $100 and the reserve ratio is
10 percent (0.1), the amount of money ultimately
created is:
1/r = 1/0.1 = 10
$100 x 10 = 1,000
New money created = $1000 – $100 = $900
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Colander, Economics
The Financial Sector and
the Economy
Origin of Dollar?
9

The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)

There were numerous problems attached to using copper as the nation’s official currency standard,
as Sweden had done since 1624. For one thing, when copper is stored in bank vaults, it can’t be
used for all the other practical uses that it’s good for. And as later governments that tied the value of
their money to a precious metal have learned, having a copper-based currency created wild swings
in the value of money due to factors beyond any one country’s control. When the German economy
was devastated following the Thirty Years’ War, for example, it dramatically drove down the price of
copper and thus caused a collapse in the value of Sweden’s currency. Then there was a more
practical problem, one specific to a country that had recently begun to issue coinage as not so
pocket-sized metal plates: Copper is really heavy. A ten-daler plate , the most common unit of
currency, measured about twelve by twenty-four inches and weighed more than forty-three pounds.
It was enough to buy sixty-six pounds of butter or thirty-three days of work from an unskilled
laborer. The copper plates still turn up now and again in the waters around Stockholm, because
when one was dropped while being loaded or unloaded onto a ship, there was no retrieving it.
Daler plates were, presumably, hell on bank tellers’ backs.
Colander, Economics
Colander, Economics
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The Financial Sector and
the Economy
Origin of Lending?
 The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)
 Johan Palmstruch’s first innovation was to hold the giant plates in Stockholms Banco’s
vault, while offering a paper note as a receipt. This idea was compelling to King Karl X
Gustav. In the bank’s charter, he mentioned the “ good convenience ” Swedish subjects
would receive in the form of relief from “hauling and dragging and other trouble that the
copper coin entails in its handling.”
 The success of this innovation led to a great inflow of deposits into the bank—400,000
copper daler by 1660, just three years after its opening, the equivalent of $76 million in
today’s dollars . And even sooner, the leaders of the bank came up with another financial
innovation. As Palmstruch would later testify, Gustaf Bonde—the shareholder in the
bank who was also its chief government inspector—“came to the exchange bank towards
spring 1659 in the morning, stood there looking around, and exclaimed with these
words: ‘I see here in the exchange bank good stores of money and it seems to me to be
best now to make a beginning with the loan bank.’” That is: Hey, guys, we have all this
money just sitting around. Why don’t we lend it out and actually make a return on it!
10
Colander, Economics
Colander, Economics
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The Financial Sector and
the Economy
Equilibrium in the Money Market
Interest Rate
• The demand for money is
downward-sloping: as the interest
rate falls the cost of holding money
falls
S
i0
D
• When interest rates rise, bonds
and other financial assets become
more attractive, so you hold more
financial assets and less money
Q of Money
Colander, Economics
13-11
The Financial Sector and
the Economy
Market for Loanable Funds
Interest Rate
 The long-term interest rate is
determined in the market for
loanable funds
S = Savings
 At equilibrium, the quantity of
loanable funds supplied
(savings) is equal to the
quantity of loanable funds
demanded (investment)
4%
D = Investment
Q
Q of Loanable Funds
Colander, Economics
13-12
Monetary Policy
The 1907 Bank Panic

The 1907 panic resulted in mass bank
failure, a self-imposed bank holiday, failure
of several major New York banks, and an
unemployment rate of 20%.
Monetary Policy
from Ellis Tillman (2012): The Panic of 1907
[working paper from Cleveland Federal Reserve]
Table 1: Time line of Major Events during Panic of 1907

Wednesday, Oct 16 Failure of the Heinze attempt to corner stock in
United Copper sparks concerns. Bank runs begin on banks associated
with Heinze forces.

Friday, Oct 18 New York Clearing House agrees to support Mercantile
National Bank,the bank that Heinze controlled directly, upon
resignation of its Board (including Heinze). Run on Knickerbocker
Trust begins, apparently the result of rumored association of Charles
Barney, President of Knickerbocker Trust, with Charles Morse.

Saturday, Oct 19 Morse (Heinze's associate) banks are struck with runs,
and requests aid from the New York Clearing House Association.
Newspapers infer an equivocal response on the part of the New York
Clearing House.

Sunday, Oct 20 New York Clearing House agrees to support HeinzeMorse banks but requires that Heinze and Morse relinquish all banking
interests in New York City.
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Colander, Economics
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Monetary Policy
from Ellis Tillman (2012): The Panic of 1907
[working paper from Cleveland Federal Reserve]






Monday, Oct 21 Run on Knickerbocker Trust accelerates. Request by National Bank of
Commerce for aid from the New York Clearing House on behalf ofKnickerbocker Trust
was denied. J.P. Morgan denies aid to Knickerbocker Trust as well.
Tuesday, Oct 22 Run on Knickerbocker Trust forces its closure with cash withdrawals of
$8 million in one day. Run spreads to Trust Company of America, Lincoln Trust and other
trust companies in New York City.
Wednesday, Oct 23 J.P. Morgan agrees to aid Trust Company of America and coordinates
the provision of cash from New York Clearing House member banks to trust companies.
Thursday, Oct 24 U.S. Treasury deposits $25 million in New York Clearing House member
national banks. J.P. Morgan organizes provision of cash (money pools) to the New York
Stock Exchange to maintain the provision of call money loans on the stock market floor.
Saturday, Oct 26 New York Clearing House Committee meets and agrees to establish a
Clearing House Loan Committee to issue certificates. Also the Committee agreed to
impose restrictions payment of cash.
Monday, Nov 4 Trust companies provide $25 million to support other trust companies
that endured large-scale depositor withdrawals.
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Monetary Policy
J.P. Morgan and the Bank Panic of 1907
•
•
•
•
•
The reaction of J.P. Morgan in 1907
http://www.npr.org/templates/story/story.php?story
Id=14004846
 Pooled bank funds
 Rationed credit
Morgan’s ideas followed from the work of the Bank of
England, which Morgan was familiar with.
In essence, Morgan fulfilled the function of a Central
Bank, which did not exist at the time.
And this led to the Federal Reserve (established in
1913).
Monetary Policy
Central Banks Around the World

Most developed countries have a central bank whose functions are
broadly similar to those of the Federal Reserve. The oldest, Sweden’s
Riksbank, has existed since 1668 and the Bank of England since 1694.
Napoleon I established the Banque de France in 1800, and the Bank of
Canada began operations in 1935. The German Bundesbank was
reestablished after World War II and is loosely modeled on the Federal
Reserve. More recently, some functions of the Banque de France and
the Bundesbank have been assumed by the European Central Bank,
formed in 1998.
Monetary Policy
Power of Central Bankers


The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)
Whatever their perceptions or prejudices, central bankers all have an awesome
power: the ability to create and destroy money. Why is a piece of paper with
Andrew Jackson’s face on it worth twenty dollars? Why can that piece of paper be
exchanged for a hot meal or a couple of tickets to a movie? It’s only a slight
exaggeration to answer, “Because Ben Bernanke says so.” The bill may have the
U.S. treasury secretary’s signature on it, but at the top it reads, “Federal Reserve
Note.” Central bankers uphold one end of a grand bargain that has evolved over
the past 350 years. Democracies grant these secretive technocrats control over
their nations’ economies; in exchange, they ask only for a stable currency and
sustained prosperity (something that is easier said than achieved). Central
bankers determine whether people can get jobs, whether their savings are secure,
and, ultimately, whether their nation prospers or fails.
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Monetary Policy
Two Federal Reserve Links
The Federal Reserve
 Overview of Federal Reserve
(pdf)

Federal Reserve Districts
from David Colander (2010)
Minneapolis
Boston
New York
Chicago
San Francisco
*Alaska and Hawaii are
under the jurisdiction of the
Federal Reserve Bank of
San Francisco
12-20
Cleveland
.
Kansas City
Dallas
St. Louis
Atlanta
Philadelphia
Washington DC
Richmond
Monetary Policy
Duties of the Fed
from David Colander (2010)






Conducts monetary policy
Supervises and regulates financial institutions
Lender of last resort to financial institutions
Provides banking services to the U.S. government
Issues coin and currency
Provides financial services such as check clearing
to commercial banks, savings and loan
associations, savings banks, and credit unions.
12-21
Monetary Policy
Central Banks Create Money


The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)
Ever since the first central banker set up shop in seventeenth-century Sweden, offering paper notes
as a more convenient alternative to the forty-pound copper plates that had been the currency of what
was then a great empire, money has been an abstract idea as much as a physical object. The
alchemists of medieval times never did figure out a way to create gold from tin, but as it turned out, it
didn’t matter. A central bank, imbued with power from the state and a printing press, had the same
power. With that power, it creates the very underpinnings of modernity. As surely as electric utilities
and sewer systems make modern cities possible, the flow of money enabled by the central banks
makes a modern economy possible. By standing in the way of financial collapse, they’ve enabled the
gigantic, long-term investments that permit us to light our homes, fly in jumbo jets, and place a phone
call to nearly anyone on earth from nearly anywhere on earth. In modern times, when the amount of
money exchanged electronically dwarfs the volume of commerce that takes place with paper money,
even the physical work of printing paper dollars and euros is something of a sideline for the central
banks. The actual work of creating or destroying money in modern times is as banal as it is powerful:
A handful of midlevel workers sit at computers on the ninth floor of the New York Fed building in
lower Manhattan, or on Threadneedle Street in the City of London, or at the German Bundesbank in
Frankfurt, and buy or sell securities with a stroke of their keyboards. They are carrying out orders of
policy-setting committees led by their central bankers. When they buy bonds, it is with money that
previously did not exist; when they sell, those dollars or pounds or euros cease to exist.
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Inflation and Money Growth or
Why Central Bank Independence is Important

13-23
Monetary Policy
Money Neutrality
• Changes in the money supply impact
aggregate demand (not aggregate supply)
• Changes in the aggregate demand do not
impact real output in the long-run
• Therefore, money should be “neutral” (i.e.
impact nominal variables but not impact real
variables) in the long-run.
• How long is the long-run?
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Colander, Economics
24
Monetary Policy
Burns and Nixon
• The Alchemists: Three Central Bankers and a World on Fire (Neil
Irwin)
• The men who led the global economy in the crisis that began in
2007 had come of age in the 1970s, when central bankers were so
fearful of an economic downturn—and the political authorities—
that they allowed prices to escalate out of control. “I knew that I
would be accepted in the future only if I suppressed my will and
yielded completely—even though it was wrong at law and
morally—to his authority,” wrote Fed chief Arthur Burns in his diary
in 1971. “He” in this case was Richard Nixon, who insisted that
Burns keep interest rates low and the U.S. economy humming in the
run-up to the 1972 election. Prices rose so fast that steakhouses
had to use stickers to update their menus according to that week’s
cost for beef. Central bankers have been vigilant about inflation
ever since—for better and, especially in the 2000s, for worse, when
some saw inflationary ghosts where there were none.
McGraw-Hill/Irwin
Colander, Economics
25
Monetary Policy
Monetary Policy and the 1970s
• In the 1970s, oil prices increase
• This leads to an increase in the price level and a
reduction in national output (and increase in
unemployment)
• We could have lowered unemployment with
more aggregate demand (but that leads to even
higher prices)
• We could have lowered the price level with less
aggregate demand (but that leads to even higher
unemployment)
• Which did we choose?
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26
Monetary Policy
CASE STUDY:
Monetary Tightening & Interest Rates
from the textbook of Gregory Mankiw
• Late 1970s: inflation > 10%
• Oct 1979: Fed Chairman Paul Volcker
announces that monetary policy would
aim to reduce inflation
• Aug 1979-April 1980:
Fed reduces the money supply by 8.0%
• Jan 1983: inflation = 3.7%
CHAPTER 10
Aggregate
Monetary Policy
Monetary Tightening & Rates, cont.
from the textbook of Gregory Mankiw
The effects of a monetary tightening
on nominal interest rates
short run
long run
Quantity theory
model
Keynesian
prices
sticky
flexible
prediction
i > 0
i < 0
actual
outcome
8/1979: i = 10.4%
8/1979: i = 10.4%
4/1980: i = 15.8%
1/1983: i = 8.2%
(Classical)
Monetary Policy
Taylor Rule and the 2007-09 recession
29
 Taylor Rule:
Fed funds rate = 2% + Current inflation
+ 0.5 x (actual inflation less desired
inflation)
+ 0.5 x (percent deviation of aggregate
output from potential)
In 2008 we saw approximately the following
Unemployment Rate = 9%
Natural Rate of Unemployment = 5%
Inflation = 2%
Desired Inflation = 1%
Colander, Economics
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Monetary Policy
Liquidity Trap
30
 from Mark Thoma…
 In a liquidity trap, (a) short-term interest rates are
essentially zero and (b) banks have excess reserves.
Normally the Federal Reserve changes people's behavior
by trading short-term government bonds (which pay
interest) for bank reserves (which allow banks to expand
their deposits and loans). Fewer government bonds in
the economy means more appetite by banks to buy
corporate bonds and thus to finance corporate
investment. More bank reserves means banks have more
freedom to make direct loans as well.
 But in a liquidity trap bonds pay no interests, and banks
have more than enough reserves to cover their lending to
all the borrowers they think are credit worthy.
Colander, Economics
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Monetary Policy
Monetary Policy in a liquidity trap
31
 Once interest rates have been effectively pushed to
zero, monetary policy is not effective.
 If the economy is not at full-employment we can
wait
for the economy to return by
itself to full employment
employ fiscal policy
Colander, Economics
McGraw-Hill/Irwin
The Fiscal Policy Dilemma
16
Duration and Timing of Business Cycles Since 1854
Duration (in months)
Pre-WorldWar II
(1854 – 1945)
Post-WorldWar II
(1945 – 2012)
Number
22
11
Average duration
50
66
Length of longest cycle
99 (1870-79)
128 (1991-2001)
Length of shortest cycle
28 (1919-21)
28 (1980-82)
Ave. length of expansions
29
59
Length of shortest expansion
10 (1919-20)
12 (1980-81)
Length of longest expansion
80 (1938-45)
120 (1991-2001)
21
11
Length of shortest recession
7 (1918-19)
6 (1980)
Length of longest recession
65 (1873-79)
18 (2007-2009)
Business Cycles
Ave. length of recessions
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Colander, Economics
The Fiscal Policy Dilemma
Great Depression Unemployment Estimates
from Weir
McGraw-Hill/Irwin
Year
UE Rate
All workers
UE Rate
Non-farm workers
1929
2.9%
4.1%
1930
8.9%
12.4%
1931
15.7%
21.7%
1932
22.9%
31.7%
1933
20.9%
30.0%
1934
16.2%
23.6%
1935
14.4%
21.1%
1936
10.0%
14.9%
1937
9.2%
13.3%
1938
12.5%
18.3%
1939
11.3%
16.3%
1940
9.5%
13.5%
1941
6.0%
8.4%
1942
Colander, Economics
3.1%
4.3%
16
The Fiscal Policy Dilemma
16
Prior to the Great Depression
 According to EH.Net, in 1929 the U.S. economy produced and
consumed $1.1 trillion worth of goods and services (in 2011
dollars or in real terms).
 The U.S. population was almost 122 million
 So per-capita income – in real terms – was $9,080 (in other words,
if you divide how much was produced and consumed by
population, you get about $9,000 per person)
 At this point the economy was at full employment (unemployment
rate is estimated by Weir (1992) to be only 2.9%) so aggregate
demand equals aggregate supply.
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The Fiscal Policy Dilemma
16
The Great Depression Reviewed
 To curb speculation, the Federal Reserve began reducing the money
supply in the latter 1920s. This is a contractionary monetary policy
(see next slide).
 So we would have seen the following happen:
1. The Money Supply was reduced
2. which caused interest rates to rise
3. which caused investment (part of aggregate demand) to falls
4. which caused income to fall in the short-run
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Colander, Economics
Monetary Policy
from Colander (2010)
i
M
I
Y
I
Y
Expansionary
monetary policy
M
i
Contractionary
monetary policy
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12-36
The Fiscal Policy Dilemma
16
Short-Run vs. Long-Run
 In the Short-Run, a decline in aggregate demand would cause national income to fall.
 Remember, each good and service that is purchased represents someone else’s




income. So if purchases decline, incomes also decline.
In 1930 real per-capita income fell to $8,210 and it is estimated the unemployment rate
rises to 8.9%.
The nation’s capacity – or its aggregate supply – hadn’t changed. Individual and firms
were simply not purchasing the goods the nation was capable of producing.
In the long-run, the failure to sell goods would force firms to cut prices. As prices fall,
individuals and firms would purchase more goods and the economy would return to full
employment.
How long, though, is the long-run?
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Colander, Economics
The Fiscal Policy Dilemma
In 1931 the Great Depression gets
worse
16
 The unemployment rate in 1931 is estimated to be 15.7% and real
per-capita income has fallen to $7,624.
 Rather than simply lower prices, firms have reduced the size of
their work force.
 More importantly – and this is what turns a recession into the
Great Depression – the widespread failure of banks has a significant
impact on the ability of firms to produce and sell goods.
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Colander, Economics
The Fiscal Policy Dilemma
Federal Reserve Policy Today
 Today we would expect the Federal Reserve to engage in
expansionary policy when the economy entered a recession. This
involves…
1. increasing the money supply
2. which lowers interest rates
3. which increases investment
4. which increases aggregate demand and income in the short-run.
Note: In the long-run, increases in the money supply would just cause
prices to rise. So you can’t make incomes go up forever by just
increasing the money supply.
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16
The Fiscal Policy Dilemma
Federal Reserve Policy in the Great
Depression
 Expansionary monetary policy wasn’t pursued because the Federal
Reserve believed it was important the nation stay on the Gold
Standard (see next slide for how that policy worked out)
 The Federal Reserve also didn’t believe it should bail out failing
banks.
 In the end, 9,000 banks failed or one-third of the nation’s banks.
 The failure of banks harmed both its depositors (or the nation’s
consumers) and borrowers (or the nation’s firms). In other words,
bank failures further depressed aggregate demand.
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16
The Fiscal Policy Dilemma
Departing the Gold Standard
source: Krugman (10-9-09)
http://krugman.blogs.nytimes.com/2009/10/09/modified-goldbugism-at-the-wsj/
http://web.mit.edu/krugman/www/goldbug.html
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16
The Fiscal Policy Dilemma
The Great Depression gets more
depressing
16
 In 1932, the unemployment rate is estimated to be 22.9%. Real
per-capita income falls to $6,582.
 In 1933, the unemployment rate is estimated to be 20.9%. Percapita income falls to 6,462.
 From 1929 to 1933, per-capita income fell from $9,080 to $6,462.
In other words, per-capita income fell about 30%.
 IN NOMINAL TERMS… per-capita income fell from $850.03 in
1929 to $448.72 in 1933. Nominal per-capita income had not
been this low since 1915.
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Colander, Economics
The Fiscal Policy Dilemma
To put the Great Depression in
perspective…
 In the second quarter of 2008, according to the Bureau of Economic
Analysis:
1. GDP was $14.4 trillion
2. Population – according to the U.S. Census – was about 306 million
3. So per-capita income was $47,188
4. By the second quarter of 2009, per-capita income declined by 4.5%.
So per-capita income was about $45,062.
5. Had the economy declined by 30%, per-capita income would be
$33,031. Or about what it was in the late 1980s.
6. One should note that the BEA estimates that GDP started growing in
the second half of 2009. And it has increased every quarter since. So
the last recession is technically over.
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Colander, Economics
16
The Fiscal Policy Dilemma
16
Difference between Then and Now
 During the Great Depression, monetary policy was not employed
until 1933. And fiscal policy was relatively weak throughout the
Hoover and Roosevelt administrations (and contractionary at various
points).
 Today….
 The Federal Reserve expanded the money supply and reduced interest rates to about
zero.
 The Federal government passed a $700 billion stimulus package (90% of economists
agree that the Federal government should increase government spending and/or cut
taxes during a recession).
 http://gregmankiw.blogspot.com/2009/02/news-flash-economists-agree.html
 Consequently, what could have been an economic disaster will probably be forgotten
– by everyone but economists – in a few years.
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Colander, Economics
The Fiscal Policy Dilemma
16
Did the Stimulus Package Work?
 From Mark Zandi (chief economic advisor to the John McCain campaign) and
Alan Blinder (professor of economics at Princeton)

We find that its effects on real GDP, jobs, and inflation are huge, and probably
averted what could have been called Great Depression 2.0. For example, we
estimate that, without the government’s response, GDP in 2010 would be about
11.5% lower, payroll employment would be less by some 8½ million jobs, and the
nation would now be experiencing deflation.

When we divide these effects into two components—one attributable to the fiscal
stimulus and the other attributable to financial-market policies such as the TARP,
the bank stress tests and the Fed’s quantitative easing—we estimate that the latter
was substantially more powerful than the former. Nonetheless, the effects of the
fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%,
holding the unemployment rate about 1½ percentage points lower, and adding
almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are
broadly consistent with those made by the CBO and the Obama administration.
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Colander, Economics
The Fiscal Policy Dilemma
A few questions…
 When did the federal government start
employing fiscal policy?
 What are the limitations of fiscal policy?
 Under what conditions should fiscal policy be
employed?
46
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Colander, Economics
16
Nixon and Keynesian Economics
• New York Times Article (January 6, 1971)
• Nixon Reportedly Says He Is Now a Keynesian
• WASHINGTON, Jan. 6, 1971 (Reuters) -- President Nixon has
described himself as "now a Keynesian in economics," according to
Howard K. Smith of the American Broadcasting Company, one of the
four television commentators who interviewed the President on a
television show Monday night.
Bartlett, Friedman, and Keynes
• Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush
administrations and served on the staffs of Representatives Jack Kemp and Ron
Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We
Need It and What It Will Take.”
• As it happens, (Milton) Friedman had said in 1965 that “we’re all Keynesians
now” in the Dec. 31 issue of Time magazine. He later complained that his quote
had been taken out of context. His full statement was, “In one sense, we are all
Keynesians now; in another, nobody is any longer a Keynesian.” Friedman said
the second half of his quote was as important as the first half.
• I think Milton Friedman was right that in a sense we are all Keynesians and not
Keynesians at the same time. What I think he meant is that no one advocates
Keynesian stimulus at all times, but that there are times, like now, when it is
desperately needed. At other times we may need to be monetarists,
institutionalists or whatever. We should avoid dogmatic attachment to any
particular school of economic thought and use proper analysis to figure out the
nature of our economic problem at that particular moment and the proper
policy to deal with it.
• http://economix.blogs.nytimes.com/2013/05/14/keynes-andkeynesianism/?_r=0
Mankiw, W. Bush, and Keynes
• Who is Gregory Mankiw, the 44-year-old Harvard professor nominated this week as U.S. President George W. Bush's new
chairman of his Council of Economic Advisers?The key facts seem to be these. He is highly intelligent, wide-ranging in his
economic expertise, and an excellent writer. He is a "New Keynesian" and named his dog Keynes. (This we see as very
important.) His mentors have been bright and prominent economists, such as Larry Summers, former treasury secretary,
and Alan Blinder, formerly of the Federal Reserve. From his early 20s, Mankiw has been close to the powerful. "Choose
your mentors well," is advice he himself gives in an essay on his life. In his research, he has kind words for Bush's great
friend, President Bill Clinton, while, on Federal Reserve Chairman Alan Greenspan, Mankiw's words are as opaque as
those of the (perhaps) great helmsman himself.
• Bush would appear to have turned to Mankiw for a number of reasons. One reason is that Mankiw's "new Keynesian"
approach to economic policy-making may make him a good fit with Bush's current policies. New Keynesians believe in
using fiscal policy flexibly to help smooth trends in growth. Thus, at a time of recession, new Keynesians would be
comfortable with a widening government deficit if the deficit spending helped to alleviate the downturn in the economy.
That has been Bush's policy.
http://www.upi.com/Business_News/2003/02/28/Commentary-Bushs-new-Keynesian-Mankiw/UPI34101046472891/#ixzz2kfmZwTDy