Scott Sumner: What Can Asset Prices Tell Us About The Great Recession?

The Federal Reserve’s dual mandate is to promote price stability and full employment. The Fed describes this on its website:

The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate. The dual mandate is the long-run goal for monetary policy, and the Congress also established the Federal Reserve as an independent agency to help ensure that this monetary policy goal can be achieved. The independence of the Federal Reserve in conducting monetary policy is critical to guaranteeing that monetary policy decisions are free from political influence and focused exclusively on achieving the Federal Reserve’s dual mandate. For example, a problem experienced in many countries without an independent central bank is that elected officials have put pressure on monetary policymakers to follow policies that boost the economy in the short run even if doing so would result in high levels of inflation later on. The Federal Reserve’s dual mandate and the provisions for the independence of the Federal Reserve are two key factors that help guard against such outcomes in the United States.

As the US is well short of full employment and the economy is at a low ebb, there has been considerable discussion about what the Fed should do, especially given the lack of fiscal support for the economy. I have a view here, but I am not expressing it in this post. I may at some future date. Rather, I want to highlight a view that I think is gaining currency. Bill Gross says that the Fed is going to target nominal GDP. This idea is something that Scott Sumner and David Beckworth have been promoting for some time. Other economists like Brad DeLong are getting onboard now.

I suggest you watch the video of Scott Sumner below to understand some of the thinking behind this policy prescription because it is something we could well see the Fed taking on.

  1. David Lazarus says

    I would suggest that they follow Net Real GDP. That will eliminate inflation especially the QE sourced inflation.

  2. Ray Khell says

    you can’t repeal the business cycle.
    with your scheme we are headed for hyper-inflation.

    1. David Lazarus says

      I agree about the business cycle, but I doubt that we will have hyper inflation unless they start the printing presses. All that this will do in the end is hold up over valued asset prices. That means substantial asset deflation. That will wipe out the banks and that is why the Fed (owned by the big banks) is reflating the asset bubbles.

  3. Jim says


    Someday soon I hope you can fully explain what was talked about in the video and what its implications are if this policy is followed by the Fed. This video didn’t make much sense to me, perhaps because he didn’t elaborate on “how” they were going to reach a certain nominal GDP target.

    To me, at first blush, this seems like nothing more than money printing and having the Federal Reserve go out on a “shopping spree.” But I’m probably missing something. :)

    1. Edward Harrison says

      Jim, I promised not to comment and just let you all absorb it for yourselves. But I think you are right about the need to clarify a transmission mechanism. How does the target for nominal GDP get met and what are the implications of using that mechanism to get there. I do have a view but, again, I want to give this video an unbiased viewing because I think this policy is going to be very topical in the coming months.

      At the risk of biasing you, here is a link to the last post on this topic:

      1. Jim says

        Thanks for that link – that helped clarify a few things although the transmission mechanism is still an unknown.

        I understand you not wanting to bias anyone. But sometime in the future, hopefully you can write up your own thoughts in a separate post about this topic – especially if this becomes “unofficial fed policy.”

        Your forecasts and analysis has been eerily accurate since I started reading your blog, so your ideas on what nominal GDP targeting might mean to the economy are definitely worth listening to.

        After reading (actually, re-reading it) that post, I can’t help come to the conclusion that nominal GDP targeting is just another toss under the bus of fixed income/low/middle income people – as well as people who save – in a desperate bid to prop up asset prices and to prevent debts from becoming larger in real terms. The fed might get their inflation as happened with QE2, but if incomes flatline or decline, the entire exercise will likely to accomplish little.

        Also, one question that popped to mind after reading that other post. Why is the Federal Reserve so fixated on propping up asset prices? Does the Fed really believe that propping up asset prices, by all means fair and foul, that they can somehow reduce unemployment and thus get the economy out of stall speed? Granted, I tend to approach things simplistically so am likely missing something, but if incomes fail to rise any rise in asset prices will be, over time, transitory.

      2. Jim says

        Ugh…sorry for commenting all over this post, especially since you didn’t want to bias anyone. But one rather unsettling thought just came to mind regarding this. So here’s another question for you if you don’t mind.

        If I’m understanding nominal GDP targeting correctly, it means the Federal Reserve says “we need to have x% of non-inflation adjusted growth next year/quarter/whatever.”

        So, assuming that is the proper context to understand nominal GDP targeting, is the following example correct? If the economy is contracting at a 1% rate (say, in a mild recession), and the Federal Reserve says the US economy should have a nominal GDP growth of 1%, does that then mean that the Federal Reserve will print enough money to be able to buy enough assets of various kinds to bump up GDP growth by 2%? If that’s how it would work – what on earth would the fed buy, and what the heck would they do with it all???? Taken to the extreme, the federal reserve under this policy could end up owning a very large chunk of the economy over time!

      3. john newman says

        In your earlier link Beckworth says, “Not only have corporations, but households too have built up relatively large share of liquid, money-like assets since the crisis.”

        Liquid, money-like assets. Hmmm. In what form do “households” have this kind of thing? How is “household” defined here? Everyone I know is using the “money” (only “money-like asset” commonly used by households as I understand them) they get to pay debts. This is not leaving them with other “money-like” assets to deploy toward demand expression or investment because the debts they are paying off are non-productive consumer credit our underwater real estate and the pay down does will not free up cash flows for the foreseeable future.

        What I’ve seen of consumer deleveraging has mostly taken the form of bankruptcy or default. I don’t see how this will stimulate or how Fed asset purchases are transmitted into consumer purchasing power. I look forward to your future post.

  4. Rafael says

    If this policy were to take hold, how would they decide which assets to buy and at what price? Would this not disproportional benefit those holding the assets the monetary authority intends to buy? Also, would this not incentive private sector actors to borrow at negative rates with the hopes that the fed could eventually buy up that asset? With that said, why would banks create credit contracts understanding that they would be returned less valuable dollars in real terms? Is he not confusing tight money for credit contract default and credit contraction?

    Would this policy be applicable during expansions by suppressing NGDP as real GDP increased thus always keeping NGDP at the same level?

  5. Rafael says

    Also at what point does this become quasi fiscal policy?

  6. SH says

    Given the realities of our system, this is a reasonable argument yet it offers no prescription for what the nominal GDP target should be. Is it never contract of constant 5%, 10%, or doubling every year?

    My first comment though is that I think he assumes that no one knew monetary policy was tight. We spend 16 months (or whatever it was, I remember it) with an inverted yield and when short term rates are artificially raised above long term rates lending margins are gone. That’s contractionary right? That’s the whole point of a one trick pony isn’t it? Raise until it kills $140 oil. It worked.

    Second, given that contractionary monetary policy and inverted yield curves are such good indicators, is there ever going to be a time when tightening monetary policy will not cause a slow down or recession? The logical conclusion from this argument is never tighten monetary policy. I wouldn’t if I were in charge because I can see what it does and I don’t want that on my watch. I understand that current policy actions have not had a detrimental effect, even if not a positive effect, but I plan on living through more than one or two more business cycles, so even if it’s not for ten years, someone will have to go tight again, and sh*t, thanks for that in the future because as soon as they pull back, things break.

    Please, let’s get some trade cycle theorists somewhere in a position of influence. I only want an organically grown economy that has some resiliency built into it and is not hyper sensitive to monetary policy. I’m not convinced we get there right now.

  7. Dave Holden says

    I’m obviously missing something because apart from making me want to run out of the room screaming in what version of the current US would this policy have political legs.

  8. Mary Stromquist says

    Please help me out here as I struggle to grasp this form of macro thinking. My initial cue to our devolvement occurred in ’04 when I started looking for a retirement property in a market I’d previously known well. In late ’04, median income for a family of four in Jackson County Oregon was in the ballpark of $46,000, and median sales price of a home was $250,000+. Ain’t no way that family can pay for that home. That comparison was valid in numerous markets.

    My journey thru the extinction of Glass-Steagall, the burgeoning derivatives market, what was even then identifiable fraud endemic in the R.E. market, ever-decreasing real wages, the views of myriad economists/commentators, ad infinitum, and I can see no other result but the one we are experiencing, particularly given Fed policy and TBTF.

    I know my ignorance is on display here, so please help me understand how targeting NGDP will enable mortgage holders to pay 5X earnings (or more)?

  9. Simon says

    So let me get this right …….just because prices go up, this is not indicative of a bubble (and that princes may fall)…. Ok, so what is indicative of a bubble. If a bubble is a misallocation of resource then allowing it to burst , and the allowing of consequences seems sensible.

    All in all it seemed to me like a big rationalisation which says ‘our understanding and models are all good explanations, it is just that we didn’t do enough of what didn’t work’.

    No doubt Madoff’s Ponzi would add to GDP, so on this line of thinking, we should have supported that to maintain his contribution to GDP.

    In a debt based system any solution must find a way to add to the debt, any kind of deleveraging will result in contraction. Growth in debt simply cannot be greater than growth in GDP in any sustainable system.

    The answers are always more stimulus, more debt, this or that level of inflation, this or that rate of interest. There is little about what defines productive vs unproductive growth, the rampant corruption, preferential deals for insiders (made legal through regulatory capture)….. Nothing of this ……. Just some pointless academic windbag justifying the hours he probably spent on his PhD (the PhD bit is a guess I admit)


  10. Two Ed's better than one says


    I so much enjoy reading your articles. I may have this all wrong but if the Fed runs policy targeting nominal GDP then they become a defacto “replacement” for fiscal policy which is grid locked. Wouldn’t this be an expansion of Fed Powers and sort of an “end run” around Congress even though you could make the argument that Congress is dysfunctional in their role? If the Fed would target nominal GDP then how do they know when the mix of the porridge is a balance of real growth and some inflation? It would seem to me that if they target nominal GDP then they should be looking at nominal CPI as a better inflation gauge if they really want to help the bottom 99%. I say the CPI because I assume that this new approach is ultimately supposed to “help” grow real jobs for the disenfranchised and unemployed. As far as the “transmission” levers are concerned: If that means the Fed now “authorizes” itself to buy new assets (MBS/Equities) it is unclear how that translates to real growth in aggregate demand for Goods and Services.
    Lastly, how does the Fed now balance their Nominal GDP targeting against any longer term fallout that may have for TBTF banks and their “lender of last resort” (both liquidity and solvency) role? For example, it the Fed needed to invert the yield curve based on signals of too robust growth in Nominal GDP (NGDP futures index) wouldn’t that make the Feds balance sheet explode with more poor collateral pledged by banks hemorrhaging earnings. Don’t you really need to have the necessary credit write-downs in the banking sector and some return of moral “hazard” before we can expect that any new approach won’t be gamed?


  11. Tom Hickey says

    Purchase of T-securities simply changes the composition of government liabilities. No change in net financial assets. It is a monetary operation to control interest rates. Purchase of private sector assets adds net financial assets to non-government. If the Fed purchases more T-securities, it will increase the monetary base but will not have much more effect than past QE’s have in addressing lack of effective demand.

    If the Fed buys private sector assets instead of T-securities, it will inject net financial assets into non-government. This is fiscal, not monetary. This has the potential to increase effective demand. The flow of funds is crucial, and this will depend on what the Fed purchases in the private sector.

    This a way of conducting fiscal policy without increasing the deficit. It is a fiscal operation rather than a monetary one and constitutes end-run around Congress. If it happens, I wonder how it is going to go over Capitol Hill, where the Fed is already under fire. Or maybe they won’t notice the difference.

  12. Patrick says


    I already read your post:, so I was already biased. I think this video is one of the reasons many people no longer put much value in economists. I won’t even mention some, of what I consider, to be ridiculous comments from Sumner regarding the housing bubble, but wasn’t this solution applied with quantitative easing? How is Sumner’s plan not a QE3 on steroids? I read Delong’s post on this issue as well and have no idea how punishing savers and creating inflation is going to work for an economy buried with debt and suffering from wage deflation.

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