Ouch! Professor John Taylor, creator of the Taylor Rule has written a Wall Street Journal op-ed calling out Bernanke's speech from a few days ago claiming the Fed's low interest rates did not affect the housing bubble (For details on the speech see: implausible deniability)
A major call out is the Fed spinning the formula:
In one alternative, which addresses what he describes as his "most significant concern regarding the use of the standard Taylor rule," he put the Fed's forecasts of future inflation into the Taylor rule rather than actual measured inflation. Because the Fed's inflation forecasts were lower than current inflation during this period, this alternative obviously gives a lower target interest rate and seems to justify the Fed's decisions at the time.
After spinning the Taylor Rule by putting in fictional data we have this additional call out:
Mr. Bernanke cites no empirical evidence that his alternative to the Taylor rule improves central-bank performance.
Gets worse, it seems after Bernanke spun the formula he claimed it shows way off results, which of course an improperly used theory will, trying to imply the Taylor rule is some sort of crud that isn't valid.
Here's a call out that implies Bernanke is at minimum cherry picking and at maximum lying about the affect of cheap money on housing bubbles:
Mr. Bernanke also said that international evidence does not show a statistically significant relationship between policy deviations from the Taylor rule and housing booms. But his speech does not mention that research at the Organization for Economic Cooperation and Development in March 2008 did find a statistically significant relationship.
Then the op-ed continues on to imply good ole' Ben might be justifying all of the above to actually create another bubble (my conclusion, not Professor Taylor) by trying to play Hocus Pocus with theory and formulas to discredit and minimize their use when setting monetary policy.
For background of the Taylor rule, read this article. The formula makes the unfortunate use of as a variable for Federal Funds target rate. Truly not good since is a recognized universal constant. Beyond my pickiness, one can see clearly Taylor's call out is more justified after reading the formula. Shame on me! I should call myself out in not digging into the mathematical details to realize earlier the major agenda and flaws from Bernanke's speech.
Big h/t to The Mess That Greenspan Made.
Agree, but underlying weaknesses with Taylor
I agree with the gist of what Prof. Taylor says, although I also agree with the underlying weakness pointed in in the Wikipedia article.
The largest underlying weakness is understanding the underlying reason for the change in the economic description from Gross National Product (GNP), to Gross Domestic Product (GDP).
When over half (really the majority) of trade transacted by American-based multinationals was occurring offshore, it was decided that the GNP numbers couldn't accurately measure it (especially as so much of it is either corporate intra-trade -- moving those pencils back and forth, on paper, to increase their prices and decrease taxation -- and/or transfer pricing; same principle at work -- both for "profit laundering" purposes).
That terminology change indicates the other underlying weakness.
speaking of that
our various gov. stats will not, refuse to demand data on offshore outsourced jobs, production offshore as well as workers based on citizenship status (to capture guest workers).....so this is an exceptional point that even with GDP we have a percentage of data that really isn't domestic.
If you see any research into this topic (I've covered a few papers on this on EP) it's really worth writing up a post on it...
for garbage in equals garbage out, skewed raw data upon which so many other calculations are based....
The Impossible Number
Over the last fifteen years I, along with others, have tried in vain to get some sort of viable numbers on this, but they are purposively not recording any.
Back in the earlier part of this new century, the GAO (or was it the CRS?) made a half-hearted attempt to gather some stats, but was hamstrung by having no legal power in the matter.
The asked the Fortune 500 for a voluntary response in the matter, and so very few actually responded (it was in the single percentage digits) and their insipid response couldn't even be verified!
One can occasionally gather referential data; tracking company layoffs, then attempting to track the corporate movement of those jobs to other sites, such as offshore, by examining their local newspapers. But it is highly spotty and unreliable at best. (Not to mention expensive and time-consuming.)