This time is the same: like the housing bubble, the Fed is ignoring the shale bubble in plain sight

We are now far advanced into the third central bank generated bub-ble of the last two decades, but our monetary politburo has taken no notice whatsoever of its self-evident leading wave. Namely, the massive malinvestments and debt mania in the shale patch. Call them monetary bourbons. It is no exaggeration to say that inhabitants of the Eccles Building deserve every single word of Talleyrand’s famous epithet: «They learned nothing and forgot nothing». To wit, during the last cycle they claimed to be fostering the Great Moderation and permanent full employment prosperity. It didn’t work. When the housing and credit bubble blew-up, it washed out all the phony gains from the Greenspan/Bernanke printing spree. By the time the liquidation was finished in early 2010, there were 2 million fewer payroll jobs than there had been at the turn of the century. Never mind. The Fed simply doubled-down. Instead of expand-ing its balance sheet by 50%, as happened during the eight years between 2000 and 2008, it went into monetary warp drive, balloon-ing its made-from-thin-air liabilities by 5X in only six years.

New Keynesians and Inflation

This chapter reviews the basic tenets of the New Keynesians (NK); i.e. the school of thought that sought to preserve the insights of Keynes on the desirability of activist stabilization policy, but taking on board the methodological and other advances of the New Classicals. As markets do not clear due to price stickiness, the latter is thoroughly reviewed: causes, including ‘menu costs’, empirical evidence, and implications for price level dynamics are outlined. Other models of wage rigidity as well as new directions of NK theory are also reviewed. Furthermore, the chapter reviews inflation: its costs, causes, and recent ‘great moderation’. It concludes with a critical analysis of the NK model of inflation, and with a review of how this model of inflation can be incorporated into a baseline ‘three-equation New Keynesian model’.