"a published formula"

From The New York Times:

House Republicans Resume Efforts to Reduce Fed’s Power
By BINYAMIN APPELBAUM, JULY 10, 2014

WASHINGTON — House Republicans frustrated by the Federal Reserve’s expansive economic stimulus campaign and its growing role as a financial regulator are renewing their efforts to constrain the central bank.

The Fed would be required to set monetary policy based on a published formula under legislation introduced this week by leading Republicans on the Financial Services Committee. Other bills would eliminate the Fed’s responsibility to maximize employment, or eliminate the Fed entirely.

The bills face uncertain prospects in the House, and have no future in the Senate while it remains under Democratic control. But they highlight ideas that Republicans are likely to revisit if they win a majority in both houses of Congress in the midterm elections.

“We have seen a radical departure from the historic norms of monetary policy conduct,” Representative Jeb Hensarling of Texas, who is chairman of the Financial Services Committee, said at a hearing on Thursday. “Monetary policy is at its best in maintaining stable, healthy economic growth when it follows a clear, predictable rule or path.”

It's easy to draw a triangle with all sides equal:

And it is easy to draw a triangle with one square corner:

But it is impossible to draw one triangle that has all sides equal and one square corner:

We want to take the top corner of the all-sides-equal triangle (circled) and slide it over to the left (upper red arrow) to make one square corner. When we do that, the one side of the triangle slowly rotates to the left (lower red arrow) and the other side of the triangle stretches out and gets longer (dashed line). But as soon as that side starts to stretch out, the triangle is no longer all-sides-equal, and we have failed at our task!

This sort of thing is obvious to someone like me, who makes AutoCAD drawings eight hours a day. In AutoCAD you can literally grab that corner of the triangle and move it, and you can see what happens when you do.

So if the boss comes to us and says I want an equilateral right triangle, well, it just can't be done.

The boss probably wouldn't come to us with that request. But he does come to us with equally impossible requests. Usually he'll tell us the features he wants in the drawing. And when we draw it, sometimes there is a combination of features that simply cannot be done. I think it's because he's looking at the big picture and not the little details. That's okay. That's my job, the little details.

But if I tell the boss it can't be done -- and if I'm right, of course -- then it can't be done, whether he understands the reason or not. If he gets red in the face and tells me Just slide that top corner over to the left until the bottom corner is square I can do it -- because he's no longer telling me to keep all sides equal. His required combination of features has changed. But he's red in the face, and he doesn't want to hear my story.


To me, the economy is like the triangles. There are some things that just cannot be done. There are other things that can be done. But the boss -- Congress -- is red in the face and doesn't want to hear it. Just make interest rates obey the Taylor Rule he says. Just slide that top point over to the left. Don't worry about keeping all sides equal.


"Monetary policy is at its best in maintaining stable, healthy economic growth," according to Representative Hensarling, "when it follows a clear, predictable rule or path."

Well yeah, that could work. But it won't work if it's the wrong rule or the wrong path. Suppose the rule is we always want debt to grow a little faster than the quantity of money. Think that rule would work? It would work for a while, I guess, like in the 1960s; then it would start to fail, like in the 1970s. Finally we'd give up on the ideas that worked in the 1960s -- most of them, but not the idea that we always want debt to grow a little faster than the quantity of money, because we always want that. And the changes would change things -- we discover thirty years later -- when deleveraging becomes suddenly fashionable.

What's that you said? They wouldn't do that? You mean, they would never say we always want debt to grow a little faster than the quantity of money? Is that what you think? I think you're wrong:

Graph #1: Debt (blue) and Money (green) compared to GDP (red)

They always want debt to grow a little faster than money.

Oh -- see the green line? On the right there. The last half inch of it, or less, where it's no longer flat and so close to zero that it is almost invisible: See it? There around 2009, where it starts to go up. You've seen that before. Everybody showed it to you. By itself, it looks like this:

Graph #2: Base Money (green), the same as on Graph #1

Everybody showed you this graph and expected you to be shocked and dismayed.

It is troubling, I admit. But the increase that looks so troubling on Graph #2 is really next to nothing compared to the growth of debt, as you can see on Graph #1.

It was the growth of debt for half a century and more that was the real problem -- the growth of debt at a more rapid pace than the growth of money, for half a century and more. The shocking and dismaying increase in money we see on Graph #2 was the response to the long period of excessive debt growth: the response to the problem created by the growth of debt.

The increase in money visible on Graph #2 was the response. If you don't believe me, go ask Ben Bernanke.


It is Graph #2 that bothers Representative Hensarling of Texas. He wants the Federal Reserve to follow "a clear, predictable rule or path" and to keep monetary policy on the straight-and-narrow. Hensarling doesn't want the Fed making the quantity-of-money side of the triangle suddenly long. He wants to keep it good and short. He's not happy with the increase in the green line visible on Graph #2.

That's fine. But by itself, his plan won't work. To make it work you have to make sure that the quantity-of-debt side of the triangle also stays good and short. Really, this is just a broadening of the "clear, predictable rule or path" that Hensarling wants.

So there it is, in writing, the Arthurian formula.