PING: Abe (Or should the Fed Use Dice)

[Barkeep49]

From this article (http://blogs.reuters.com/felix-salmon/2009/05/21/can-we-inject-uncertainty-into-monetary-policy/) discussing the Federal Reserve Board and suggesting that perhaps some uncertainty would be a good thing. Made me think of Abe and his love of dice.

What would happen if, for instance, rates were set using a random-number generator? Every FOMC meeting, some kind of virtual die would be rolled, moving rates up or down even if that was the opposite of “correct” monetary policy. The resulting uncertainty would force people to take a more defensive stance at all times, just in case rates went sharply upwards — even if the probability of such a rate hike was quite low.

Maybe monetary policy is a bit like optimal poker strategy: a certain percentage likelihood that you’ll do this, a certain percentage likelihood that you’ll do that. The Fed governors can then release a decision saying, essentially, “we plugged in a 10% chance of a 50bp cut, a 50% chance of a 25bp cut, a 25% chance of keeping rates steady, and a 15% chance of a 25bp raise, and rolled the electronic dice; guess what, we we ended up with the 25bp raise”.

OK, so that’s probably a silly idea. But some element of uncertainty is I think useful in monetary policy.

[Abe Sargent]

Heh

[gstelmack]

We already have a financial system with built-in risks, but the government wants to bail everyone out. Whether it's the derivative betting that drove AIG into the ground, or the screwy mortgages that sent everyone into a tailspin when the payments ballooned, we've shown as a country that we're not willing to tell folks to go screw themselves when they bet poorly in our economy.

[Passacaglia]

I'll re-ping Abe here -- driving on I-94 yesterday, I saw a van that totally could have been you. It had WVU and EMU stickers on the back windshield. Pretty weird.

[Abe Sargent]

That is...a weird combination. Where on I94 was it?

[Passacaglia]

That is...a weird combination. Where on I94 was it?

I actually passed them twice -- once in Mid-Michigan somewhere, then again in Indiana. There was a sticker that said something about St. Louis, but I didn't remember you having any connection there.

[sterlingice]

Or, if someone wants to repost the South Park clip of the beheading of the chicken to determine what to do about a particular bailout- that would work, too ;)

SI