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Before 2009 there seemed to be some movement towards lowering the 2% inflation target, when it next came up for renewal. I think we can now rule that out as being a bad idea.

My views have been shifting on price level path vs inflation targeting. I used to prefer inflation targeting. Now I'm leaning towards PLP targeting. If credible (and I think it could be made credible, given time) it would give us an extra bit of leeway if we ever encountered similar circumstances again.

The Canadian financial system survived. But maybe that was skill, or maybe luck. I would prefer a system I felt were more robust to bad judgment and bad luck. The ABCP crisis was contained, more or less. But it wasn't good, and might have been worse. But yes, I don't see how a transactions tax can be the correct instrument to fix a liquidity crisis, for example. I would prefer something more structural, along the lines of "living wills" that specify in advance exactly what will happen if a financial institution defaults, and makes those things happen immediately, without judges and lawyers.

I don't understand the objection to a Tobin tax. I take your objection (reduced liquidity) as the goal of the tax. It is supposed to be sand in the gears. The marginal cost of productive activity lost vs eliminating a bunch of speculative froth is supposed to be favourable. The Tobin tax isn't supposed to get us out of trouble -- it is supposed to discourage the exuberance that gets us into trouble. Do I misunderstand this? Or is there some quant work that shows a net loss?

Shakespeare specified the only solution to removing judges and lawyers from that situation. It's a little drastic.

You could certainly cut their scope for mischief down.

As much as I am disgusted with Martin and Chretien for how and how much they brought the deficit down I have to appreciate Martin's implementation of a sound principles based regulatory system.

The ABCP mess was about customers getting shafted by dodgy selling practises at a level of purchase where it's not completely unreasonable to expect financial competence. It didn't really affect the the soundness of the banks, at least not the major ones.

We did get bailed out by the more unconventional policies pursued in the United States and elsewhere. If not for that we could have found ourselves in real ZLB problems and having to resort to similar measures.

Going forward I would like to see price level targeting, and at a higher rate of 3% to 4%.

Per Dave Altig: "Among the lessons taken from the financial crisis, I include this: The 'zero bound problem' was not all that big of a problem at all."

In the US, anyhow, the reason it was not a huge problem was that there was a lot of help from fiscal policy. Which brings up a couple of issues:

1. Lucky that the US had an election just as all Hell was breaking loose, giving one party (and the more pro-stimulus party at that) just enough control of the government to push through a substantial stimulus bill. With a (more typical) gridlocked US government, 2009 (and 2010) might have looked very different, and the zero bound might have been a tremendous problem for the US. Canada would undoubtedly have been affected too.

2. Why does everyone write as if the fat lady were already singing? I've heard operas with similar plots before (Verdi's "Il gran depressione", Puccini's "Il decennio perso del Giappone"), and they aren't generally quite so short. The US fiscal stimulus is a temporary measure and will begin winding down just as the boost from the inventory cycle is dying out and the preliminary steps of the Fed's exit strategy are having their impact. All this with the US unemployment rate still projected to be above 9%. For the US, anyhow, it's way too early to draw the conclusion that the zero bound was not a big problem. And I would want to be cautious about drawing that conclusion for Canada.

I would also point out that Canada got serial stimuli from the US: first the dollar rally and then, just as that was reversing itself, the spillover effect of the US fiscal stimulus. The zero lower bound would have been more of a problem for Canada without those stimuli. (How much more, I'm not sure, but I think it's enough to be an issue.)

What about the CMHC "bailout" of the mortgage market? Without the resulting increase in home sales and prices, we would still be in recession.

Would the BoC's actions look sterile without this outside stimulus?

I suspect that Canada has fared better mostly because we didn't have a big RE bubble, and our banking system didn't die and come back as a zombie.

Anyone aware of a country that had a big real estate bubble pop, but whose banks didn't blow-up? How did they fare? Unfortunately, Spain fits this description, but they got clobbered by the Euro so we can't compare.

The ABCP fiasco stands out as the biggest failure of Canadian policymakers during the crisis. The "General Market Disruption" clause was a purely Canadian creation that managed the remarkable achievement of being so sketchy as to get a thumbs down from the big US ratings firms, even though they had no problems rating lots of subprime mortgage junk as AAA. We still have to get to the bottom of what went wrong there and whether or not it was just a "one-off" failure.

By contrast, the IMPP (or what asp calls the CMHC "bailout") was an extremely smart move, and my candidate for the most successful and important distinctly Canadian policy.

I liked the Economist's suggestion to require financial institutions have arrangements to raise substantial amounts of capital prepared well in advance of any crisis. This way, existing shareholders won't get nearly as hosed as many did in the US simply because capital markets froze. Government bailouts won't be necessary in most cases, it would likely end up being bondholders. Enough to bring them up to 20% tier 1 capital should the need arise. The cost of doing this in highly leveraged firms would seem to discourage such leverage.

It seems to me that for automatic stabilizers, we need some mechanism to ensure we run surpluses during booms. It is very difficult, politically, to run large surpluses without raising expectations for pro-cyclical spending or tax cuts. I don't know if we need to set up some kind of smoothing fund including overpayments to EI, etc.). My other wish would be that provinces save resource royalties rather than spending them immediately. This would do a lot to smooth out the white hot booms and crushing busts that provinces like Alberta (and increasingly Saskatchewan, Newfoundland, etc.) face as we go through commodity cycles. This is a major omission in our automatic stabilizer program.

Chile ran huge surpluses during the copper boom (which was politically unpopular), but it meant they could do a big fiscal stimulus when the world collapsed and copper prices went through the floor.

Ah, if only we could be as fiscally prudent as Chile... ;)

Chile's cabinet.

"My preference would be to refuse to play this game, and to focus on strengthening the social safety net for those who need it most"

this hardly makes sense if the choice that cuts deepest
is can i keep this job or will i get fired

now an employer attempting to extract maximum output
knows where he stands on this

but for the jobling elements
maybe effective demand
that pre empts job less automatically
exceeds the cuddliness of a soft safety harness

but obviously you'll never cure yourself of deficit fetish eh ???

balancing the maple leaf books
fun stuff for numbers wonks.... if you got tenure

merit class winners oughta feel like it was a lottery win despite the false label

but they really don't

and social justice as a system of "fair" rewards and punishments
brings out the emminent victorian in all of you

price level targets are indeed an improvement

but in the spirit of we Fishermen
automatic debt adjustment would work better still

of course the free range corporate system
might sublate itself
just as it might
if we had hyper employment macro targets
and a universal mark up cap and trade system

i suspect such "gosplan II" RX's
might cause a rugged bold liberal marketeer of a canadian econ con
to lose some " initiative " though eh ??

like "capital" taxes

which reminds me of an old contre temps i witnessed between
mundell and vickrey
both leafs
both old blue tenure-ites
opposite as noon and midnight

I agree with you Stephen; there is no convincing evidence that there is a problem with the present 2%ish targets. As I wrote on Dave Altig's blog, I am quite cynical about such calls. I do not think that the key point here is a 2% or 4% target, but rather the excuse for going easier now. This will endear Blanchard et al to the establishment, whether intentionally (eg if Blanchard has ambitions to be president of the ECB) or not. For the same reason, I expected Bernanke to become Fed chairman after his November 2002 speech. Since I believe that the financial crisis was largely caused by such expediency - eg the monetary policy responses to LTCM, Y2K, 9/11 etc - I think that it would be a big mistake to go in the direction advocated by Blanchard et al.

If the US had a credible, formal inflation-targeting policy in place before the turn of the century, would there have been a financial crisis of 2008? Under a formal (and credible) policy, would the US federal reserve bank have lowered and kept overnight rates at 1% for so long?

It is amusing to contemplate how economists are socialized to believe in clear signals of relative value and the kind of useful, accurate information transmitted by properly functioning markets, yet here we have a leading macroeconomist arguing that central banks should muddy the waters, and deliberately confuse some agents.

Why? Does he fear an Argentinian style crisis where internal relative price adjustments proved to be inadequate? Will higher inflation rates allow relative price adjustments that wouldn't occur otherwise? Who does Blanchard want to reward? Future bond holders and unsophisticated retirees? Who does Blanchard want to punish?

We could use a theory of economic bull-shit. It might be pedantic and condescending but such a theory of the social benefits of confusing price signals would help enormously.

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