Bernanke Used to Know What to Do
Even though Ben Bernanke is a conservative Republican Bush appointee, and even though the Fed mishandled a lot of things before the Bear Stears meltdown and Lehman Brothers bankruptcy, a lot of people I know were reasonably glad he was Fed chair as the country headed into major economic crisis. Why? Well largely because his pre-government academic work really seemed to indicate that he appreciated the need for drastic anti-crisis measures. Scott Sumner, for example, links to this 2003 paper in which Bernanke has very reasonable ideas for what a country in our kind of situation ought to do:
A concern that one might have about price-level targeting, as opposed to more conventional inflation targeting, is that it requires a short-term inflation rate that is higher than the long-term inflation objective. Is there not some danger of inflation overshooting, so that a deflation problem is replaced with an inflation problem? No doubt this concern has some basis, and ultimately one has to make a judgment. However, on the other side of the scale, I would put the following points: first, the benefits to the real economy of a more rapid restoration of the pre-deflation price level and second, the fact that the publicly announced price-level targets would help the Bank of Japan manage public expectations and to draw the distinction between a one-time price-level correction and the BOJ’s longer-run inflation objective. If this distinction can be made, the effect of the reflation program on inflation expectations and long-term nominal interest rates should be smaller than if all reflation is interpreted as a permanent increase in inflation.
And yet here in the contemporary United States when Bernanke has the chance to put these ideas in practice, he’s not doing it. But we’ve been having below-target inflation for a while now. And we’ve got 10 percent unemployment. And our forecasts tell us that elevate unemployment will continue for a loooong time. The appropriate solution, as Bernanke laid out here, is for the central bank to continue monetary expansion until the price level “catches up” with where we’d be on a reasonable growth trend. That means a limited period of time in which inflation exceeds the standard target by a limited amount. But instead of doing this, the Fed remains obsessed with trying to eliminate all risk of inflation rising above the long-run target for even a moment. But why?
45 Responses to “Bernanke Used to Know What to Do”
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December 7th, 2009 at 10:04 am
Because Inflation scares rich people and economists don’t care how many real Americans are unemployed?
Really, everything about their so-called “science” indicates that these people will drop what they “know” the second it comes in conflict with what their wealthy financiers think.
December 7th, 2009 at 10:11 am
The major difference is the amount of US deficits. The Fed and the Treasury must engage in a balancing act, promoting economic growth (including US exports) while at the same time calming credit markets. Too rapid monetary expansion, as with too “weak” a dollar, could result in (require) a spike in interest rates, which would really bust the budget (as if it isn’t already busted).
December 7th, 2009 at 10:14 am
Matt,
You might want to use quotes, or indentation for Bernanke’s text.
December 7th, 2009 at 10:18 am
You might want to use quotes, or indentation for Bernanke’s text.
You’d think that would go without saying.
December 7th, 2009 at 10:19 am
Scott Sumner, for example, links to this 2003 paper in which Bernanke has very reasonable ideas for what a country in our kind of situation ought to do
Bernanke’s suggestion was quite reasonable – for Japan. But “a country in our kind of situation” is not a country like Japan.
Japan has been undergoing deflation. The US is not undergoing deflation. In fact, since the end of the collapse of gas prices in Q4 2008, the US is undergoing inflation that is somewhat in excess of the normal 2% target. Over the past 10 months (i.e., since Jan 2009), we have had inflation at an annualized rate of 2.8%. Over the past 3 months, we have had inflation at an annualized rate of 3.6%.
In short, the situation that Bernanke was discussing is nothing like the situation today in the US.
December 7th, 2009 at 10:28 am
But why?
Regulatory capture.
December 7th, 2009 at 10:33 am
I second 2 and 5. I would also add that the deficits are different to the extent the U.S. debt is much more an external debt, and so the concern about how much the dollar is worth in other currencies or against real world goods is more pronounced than if you are just trying to keep domestic bond investors calm with a moderate inflation target.
Also, give what is going on more of a chance. Kind of now-nowism going on. They really threw everything at it for a while, but I think it is prudent to see what kind of stabilized trajectory emerges from the past actions before embarking on anything dramatic again.
December 7th, 2009 at 10:39 am
Inflation hurts creditors, and helps debtors.
Which of those classes has political power in America ?
This has been another …
December 7th, 2009 at 10:42 am
Other than an expansion of the Federal government, Matty’s all purpose solution to ANY problem, can he name the businesses which will create the jobs he claims the Fed is preventing from doing so?
No he can’t.
And apparently Obama can’t either judging by his piss poor made-for-the-idiocracy jobs “summit”.
To quote Obama’s friend and adviser, the Rev Wright, the chickens are coming home to roost with trillion$$$ for his Wall Street masters but penury for the peons.
But I understand Matty, anything to shift blame from Obama and the fellow corrupt bastards he appointed.
December 7th, 2009 at 10:45 am
Gad. Intelligence is not the same as competence.
BigY is in that sad position of having had someone describe economics to him, and now thinking he understands business.
It’s rather like a virgin having had sex described to them, thinking they are now qualified to give advice.
December 7th, 2009 at 10:46 am
Because Dems are in power and high unemployment will hurt them. Would have been crazy to suggest something like that until Greenspan endorsed the Bush tax cuts and the Fed’s credibility on these matters was lost forever.
December 7th, 2009 at 10:50 am
Inflation hurts creditors, and helps debtors.
Which of those classes has political power in America ?
Actually, though I sympathize with the point you’re making, I think part of the political economy of the last two years reflects that this is not a simple question. Back in 1930 it was straightforwardly true that policy-makers did what bankers wanted and bankers were creditors who wanted deflation.
It’s still true that policy-makers do what bankers want, but bankers are not as purely creditors now as they were then. Notably, the supernova of leverage on the books of large financial institutions after the revocation of Glass-Steagall, such that they became glorified hedge funds, meant that they could come to love inflation too. That’s why we had a specifically large-financial-institution targeted loose monetary policy, whereby the Fed would buy up any crap dumped by their friends no questions asked.
So bankers got to dump their debts, and now they’re fine. (At least, the richest New York ones are. The Feds have been harder on the bankers they don’t regularly run into at cocktail parties.) And it’s eat-your-vegetables for the rest of us, i.e. time for an “exit strategy.”
December 7th, 2009 at 11:06 am
Is there only one known photograph of that guy?
December 7th, 2009 at 11:27 am
Matt, do you know what the term “lip service” means?
December 7th, 2009 at 11:32 am
You guys are just brilliant with all your pathetic and creepy ad hominem attacks.
But what exactly is the alleged mechanism of money dilution on a micro/human level that you claim leads to wealth creation? Keynes admits that it’s a surreptitious mechanism to trick workers into accepting lower wages. Dean Baker wants a “weaker dollar” to increase exports, in effect forcing lower prices upon U.S. manufacturers without them realizing it.
Please explain how this wonderful process allegedly increases employment and well-being.
(Of course, it doesn’t and you can’t.)
December 7th, 2009 at 11:52 am
Imagine my surprise that Bob Roddis showed up to talk about “monetary dilution.”
December 7th, 2009 at 11:53 am
Maybe Bernanke is just expecting the velocity of money to pick up soon. The monetary base went way up, but the broader measures of money supply haven’t because of the lower velocity of money. Once v returns to a value closer in line with historical averages, the price level may really take off.
Or, one could think about what Bernanke’s options really are. The interest rate is already near zero, can’t do much there. Bernanke did indeed put many of his innovative ideas to the test regarding the use of the asset side of the Fed’s balance sheet, but the effects were smaller than what I’d imagine Bernanke expected. For those that want Bernkanke to not worry about inflation so much, what policy course do you want him to pursue? FF rate is zero, the discount window has been opened to a larger group, and he’s drastically expanded the asset side of the balance sheet. I don’t want to see the inflation hawks push to have monetary policy tightened in any way, but what remaining actions could effectively loosen it even more? I do wish he’d show less concern with inflation and much more concern with unemployment, but I’m not exactly sure I have an opinion on what he should actually do.
December 7th, 2009 at 11:56 am
Imagine Paulie Carbone showing up for another creepy ad hominem attack but no response to the serious question.
December 7th, 2009 at 12:04 pm
Imagine Paulie Carbone showing up for another creepy ad hominem attack but no response to the serious question.
But it’s not serious. It’s the same crap over and over again. You’re just proselytizing for a cult. Nobody’s interested in this Austrian crap. What is your compulsion to keep posting it?
December 7th, 2009 at 12:05 pm
Money is a sovereign commodity. Only the government can create new money, not any Tom, Dick or Harry. That task is delegated to a central bank (which, despite its perverse ownership structure, is what the Fed is). The purpose of a central bank is to provide the right amount of money consistent with the growth of the nation. That is a limited task and something the Fed can do.
How the economy grows and how shares of wealth are distributed are entirely distinct issues. And they are beyond the Fed’s capabilities. To think that the volume of money in an economy will determine these larger issues is just plain nuts.
But the plutocracy has a lot of brains at its disposal. If its objective is to accumulate ever greater shares of the nation’s wealth, and there are some elements of representative government, how to accomplish that with least interference?
Why not pretend that some mysterious force in the universe, “the free market”, determines our fate. And the Fed is the only white knight that can joust with it on our behalf.
This has the entirely pleasing aspect that our attention is diverted from discussion of what most Americans would desire from an economy and the best ways to achieve those ends. It also obfuscates the notion that the WH and congress are the entities that should be addressing these issues.
Actually pretty clever.
December 7th, 2009 at 12:10 pm
It’s also impossible to answer your questions, Bob, because you reject the entire terminology and methodology of mainstream economics. For example, Nylund is talking about the velocity of money. You can’t even express that idea in your system. If money is circulating more slowly, you need more of it to sustain the same level of demand. If demand is too low the economy can reach equilibrium below full employment.
December 7th, 2009 at 12:23 pm
Whose business is it that a particular level of “demand” is “sustained”, whatever it is you mean by “demand”? Don’t you really mean by a lack of “demand” that people are too poor to buy stuff? Or choose not to? As in “demand for Vanilla Ice CDs”.
Apparently, artificial temporary fiat money induced “demand” creates its own supply. Or something.
I’ll take any answer. I just want to try and understand what those answers are.
December 7th, 2009 at 12:28 pm
Me:
Bob:
This is exactly my point. I make a point about aggregate demand, which is a basic concept in macroeconomics. You respond by denying the entire concept.
Yes, the lack of “demand” is currently limiting economic production and wealth creation. Factories are not producing as many goods as they could because there is not enough demand. The fact that we have double-digit unemployment indicates that there is excess productive capacity in the economy.
December 7th, 2009 at 12:28 pm
“Even though Ben Bernanke is a conservative Republican Bush appointee..”
Even though Ben Bernanke is Obama’s Fed choice….
Fixed.
December 7th, 2009 at 1:21 pm
I just want to try and understand what those answers are
No you don’t. If you wanted to try you wouldn’t show such contempt for those who understand that you are a one trick pony, a gold nut whose “solution” is to not only eliminate “fiat” money but also fractional banking. Your ideas would be the equivalent of bloodletting, if bloodletting had been discovered to be a really fucking stupid idea before the Romans ruled the “known” world.
Bob, not only are you a nutcase, but apparently you still haven’t figured out that no rational person would ever support the destruction of our entire financial structure just to get back to sweet, sweet, goooooold. A solution you have even admitted requires still more restrictions on human nature before it could work.
December 7th, 2009 at 1:23 pm
Inflation of asset prices, financial and commodity, makes the top 20% giggle in delight. Increased wages for citizens makes them angry. To wit for 15 years Greenspan went before congress and declared with delight that wages were rising slowly, as stocks and other assets went through fantastic bubbles, and declared to the rapt attention and knowing approval of the peoples representatives that if wages were to even hint at peeking above the minuscule uptrend he would slam the door on monetary policy. A very odd sort of democracy that. One can certainly argue that rising wages were bad but you can’t explain people voting for it. Voting for representatives who groveled before the man promising to keep wages low.
He did allow that there was beauty and perfection in the inflation of everymans main asset, homes. Too bad about that one.
December 7th, 2009 at 2:21 pm
Paulie,
The idea that easy money will lead to greater wealth has a pretty good recent counter example with the housing market. Low interest rates along with the “quantitative easing” of relaxed underwriting standards did indeed spur aggregate demand for houses and seemed to generate a great deal of wealth. The question though is whether that was real wealth and whether netted out against the unrecoverable debt and the impact of the current readjustment of values and contraction, it was all worth it.
That is a real risk and a real issue, no matter how annoying or monotone the person who raises it.
December 7th, 2009 at 2:38 pm
I am disturbed by the premise of this post, that the Fed is against inflation. As I understand it, most major (if bearish) economists, and the zerohedge crew, for example, think that while the Fed’s stated policy is anti-inflation, in fact it is understood that the only way that the USA can repay $60 trillion in debt is to inflate it away, since repayment at current values is impossible.
What’s disturbing is that this possibility has been completely written off by the progressive blogosphere, which feels the need to defend the Fed and Treasury as extensions of Obama. There is a real possibility that #26’s comment will come to pass — asset price inflation with no wage increase and rising unemployment — and destroy what is left of the middle class.
December 7th, 2009 at 3:07 pm
Orwellian doesn’t begin to cover the pro forma anti inflation talk. The word inflation becoming encoded to mean almost nothing, except wages in a rising trend. Stock, homes or anything else you can shake a stick at doubling were not considered inflation. Even oil to the moon was not really considered inflation in the CPI calculation, or not enough to worry about.
There is one word where there is no ambiguity about its meaning or the policy of the Fed and everyone else being against, deflation. Deflation is death to the system. The asymmetry in the rhetoric, or lack of words about fighting or fearing deflation, is a complicated subject. People know it in their bones but rarely think about the fact that deflation is a systematic disaster. 3% inflation is actually seen as just about right. 3% deflation, perhaps what we had in GDP is a stupendous systematic disaster.
Now I am going to pull out some words not meant in the pejorative sense as when used by Austrian’s, gold bugs and the like. In a fractional reserve, fiat monetary system, deflation cannot be allowed. For it instantly brings about a self reinforcing cycle of debt default and contraction. Now a fractional reserve banking system with fiat money is not a perfect system. No system is perfect. It could be and can be run in a better and more just and fair manner, hopefully.
December 7th, 2009 at 3:21 pm
Doug, the problem isn’t that Bob is opposed to easy money. That is a rational argument that can be debated. But Bob isn’t interested in rational arguments. He is claiming, without any basis in real world applications, that we should return to a day when everything was based on gold and that we should further eliminate the entire banking industry (and indeed the whole notion of credit). See if you can figure out what the hell Bob’s world would look like once he has eliminated fractional banking. See if you can find a path from here to there.
What Bob is asking for would require the restructuring of the entire world’s economy. It is not merely a concern about easy money, it is a concern about so-called “fiat” money and anything that dilutes the worth of some intrinsically worthless bit of rock (okay, it has applications, but there is no reason to make it the basis of your economy except that Bob likes the color).
December 7th, 2009 at 3:24 pm
Some monetary history from somebody who knows about it and knows how to write. Jim Grant.
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html
December 7th, 2009 at 3:48 pm
Not as Stupid as Will Allen:
I believe in competitive money and banking. You could have your very own fractional reserve bank. When it implodes, don’t come looking for help from me.
Further, it should be perfectly legal for you to attempt the use of your personal favorite monetary device, 55 gallon drums of belly button lint.
Further, I think we have actually made substantial progress today:
In a fractional reserve, fiat monetary system, deflation cannot be allowed.
December 7th, 2009 at 4:38 pm
National Review’s warmongering Neo-Cons take a smack at Ron Paul here.
You Keynesians are in bed with some truly disreputable characters.
I guess when the chips are down, everyone knows whether they are an establishment whore or not.
December 7th, 2009 at 5:19 pm
Bob, the problem with your insane theories is, well first that they are insane, and secondly that they require that everyone else follow along with your insane theories – otherwise your theories don’t fail, they are failed. This is the very definition of falsifiable and is…wait for it…insane.
Your follow-up post is as loathsome as it gets.
Here’s a clue you demented fuckwit, just because A & B both recognize that C is a crazy person doesn’t mean that A & B are “in bed.” It may be that B, a bunch of sociopathic monsters who are generally wrong about everything, are right that C is crazy as a bedbug. It says nothing about A at all.
That you are reduced to such disgusting smears (hell, it isn’t even as serious as guilt by association since you haven’t shown any actual association) demonstrates that you aren’t in any way serious but are merely a foul troll insisting that, really, bloodletting is cure for all ills.
December 7th, 2009 at 5:55 pm
I get quite a lot of resistance to the idea that the Fed is the funding source for our endless wars starting with the unnecessary entry into WWI.
Little Matty notes that the feminists want more war in Afghanistan to help free the women. That sure sounds like National Review, David Frum and Bill Kristol to me.
December 7th, 2009 at 6:16 pm
wow, you are right, he is kind of insane. Still, not every nut hoarded by a blind, insane squirrel is a rock or piece of turd. Some are dinged up poop covered nuts.
December 7th, 2009 at 9:16 pm
This paper – at the NY Fed web-site – defends and elaborates price level targeting, as described by Bernanke in that speech:
http://www.newyorkfed.org/research/staff_reports/sr404.html
“Conventional and Unconventional Monetary Policy”
It is by Mike Woodford – a friend and former co-author of Bernanke. Woodford is recognized as a great expert on monetary policy.
On pages 31 and following he describes a price level target as “much much” (his words) better than an inflation rate target.
Think about that. It is described as much much better – by a friend and recognized expert – and yet Bernanke does not do it -and congress does not ask him why.
What is going on here is really crazy.
December 7th, 2009 at 9:27 pm
Look at these charts. They are enough to break your heart.
http://www.businessinsider.com/the-real-state-of-the-us-labor-market-2009-12#to-start-the-us-population-is-only-going-up-its-quite-steady-1
And Bernanke tells us inflation is a big big worry – so the unemployed can just go rot.
Why does the Obama administration not call him on this? Why does congress not just take the fed back?
The Democrats used to be the party of the debtors and the Republicans the party of the plutocrats. Now apparently its the plutocrats – the crazed deflationists – who run both parties.
December 8th, 2009 at 11:33 am
The idea that easy money will lead to greater wealth has a pretty good recent counter example with the housing market. Low interest rates along with the “quantitative easing” of relaxed underwriting standards did indeed spur aggregate demand for houses and seemed to generate a great deal of wealth.
Doug, you seem sane and raise a reasonable point. No one maintains that an easy money policy is always good, or that you always want to stimulate aggregate demand. Rather, these things are only called for in particular situations, namely recessions. In a recession, such as the one we find ourselves in now, the economy is producing far less than it is capable of producing. You can see that in the fact that we have 10% unemployment–instead of producing goods and services 10% of the workforce is sitting on its ass (through no fault of its own.) This is a severe form of waste. The reason people are not working and the economy is not operating at full capacity is because of a lack of demand. Hence the need to stimulate demand through an expansionary monetary policy. In this situation, increasing demand will lead to increased production. As I said before, however, this is not always true. If the economy is operating at full capacity, i.e. there is full employment, then increasing demand will only lead to more dollars chasing the same quantity of goods, which will simply bid up prices, i.e. trigger inflation. Thus, easy money is a bad policy in that situation, but that’s not the situation we’re currently in.
December 8th, 2009 at 11:47 am
[...] Matt Yglesias says it’s puzzling that Ben Bernanke isn’t adopting a more expansionary monetary policy in order to jumpstart the job market. Brad DeLong says, “I am puzzled too.” A bunch of other liberally inclined economists have said similar things recently. [...]
December 8th, 2009 at 11:59 am
Matthew, please site your proof of this. Monthly CPI has been about 3% annualized for 3 months or so now. 2009 will probably show ~2.5% inflation. We’re not in some sort of deflationary period right now.
December 8th, 2009 at 1:19 pm
Excuse me, “cite”, not “site”. I’m homonyminally challenged.
December 8th, 2009 at 1:46 pm
Too rapid monetary expansion, as with too “weak” a dollar,
They are the exact same thing.
Matthew, please site your proof of this. Monthly CPI has been about 3% annualized for 3 months or so now. 2009 will probably show ~2.5% inflation. We’re not in some sort of deflationary period right now.
Ideally the inflation should be somewhere between 1.5% to 2@. The fact that the U.S. has overshot that by probably a full percentage point for last thirty years make emergency inflation targeting really ineffective, because the Fed can’t actually do anything meaningful without going about 3.5%, to something like 4.5% or 5.5%, and at that point inflation becomes somewhat unsettling.
Some people were predicting 7% inflation eventually; I am not sure that is the case, but if so it would be awfully for the Fed to take the full reins of the economy without some sort of drastic action.
December 8th, 2009 at 3:34 pm
Who could ever have imagined that a conservative economist would support conservative positions? Shocking.
December 9th, 2009 at 9:27 pm
Bernanke is a mainstream New Keynesian macroeconomist, so while the term “conservative” may be accurate in an overall sense, his views on monetary policy are similar to those of many liberal economists. In my view he privately supports a slightly more expansionary policy, but still not expansionary enough. His 1% inflation suggestion was above the BOJ’s 0% target. In America a 3% inflation rate would be equivalent. The Fed pays more attention to the core CPI than the headline CPI. The core rate is well below 2%, and is likely to fall much further below 2%. If we committed to a 2% trajectory for the core CPI starting when Lehman failed, then the Fed would have to adopt a far more expansionary policy. If only it would.