Matt Yglesias

Some Public Opinion With Your Tea?

Tea Parties aside, Barack Obama’s handling of the economy remains extremely popular:

Gallup also reports the following finding that reenforces my general sense that you shouldn’t take public opinion survey data about second-tier personalities and issues at face value:

The partisan ratings of Bernanke have shifted from last year, when he was serving under a Republican president. At that time, the Fed chairman received a 61% confidence rating from Republicans, 43% from independents, and just a 40% rating from Democrats. Apparently, Americans associate the Fed chairman with the particular president he happens to be serving under.

Ben Bernanke was, of course, not only appointed to his Fed job by George W. Bush but he was on the Bush Council of Economic Advisers. But people just have very little awareness of most of what’s happening in the political world, and tend to form their opinions using relatively crude heuristics. People do have strong opinions about Barack Obama, and they see Bernanke appearing next to Obama administration officials and their views shift accordingly.

Famous Last Words

A good example of the stuff I was talking about in my Animal Spirits review is this 2006 speech by Ben Bernanke on the subject of risk management in the financial sector. Bernanke began with the observation that “banks have invested in risk management for the good economic reason that their shareholders and creditors demand it.” And then he concluded:

The ongoing work on this framework has already led large, complex banking organizations to improve their systems for identifying, measuring, and managing their risks. Indeed, banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks. The banking agencies will continue to promote supervisory approaches that complement and support banks’ own efforts to enhance their risk-management capabilities.

What’s striking about this isn’t just it’s total wrongness in hindsight. It’s the nature of the logic Bernanke employs. Basically, Bernanke just assumes that everything is working well. If bank managers are doing a bunch of stuff in the field of risk-management, it must be the case that risk-management is improving. After all, it’s in the interests of creditors and shareholders for risk to be managed well, so that must be what’s happening. There’s no need to assess, in detail, whether or not things are actually improving. And there’s no consideration of the possibility that shareholders don’t really care, and bondholders are assuming (rightly, as it turns out) that loans to major financial institutions come with an implicit federal guarantee so managers are just mucking around to boost short-term profits and aren’t really inquiring too closely into the details.

In retrospect, though, that’s exactly what was happening. But a combination of financial industry political clout and strong neo-classical ideology made it impossible for the key policy player to see it. And not only did he not see it, he specifically gave his seal of approval to the casino.

House Republicans Endorse Higher Unemployment Rates, European-Style Central Banking

Most commentary on the House GOP “budget” released today has focused on its not-very-budget-like lack of actual budget estimates. How much money would they have the government spend? And on what? And how much revenue would the government take in after their tax changes? Such questions are not addressed. However, another point of interest in the “plan” is that it stakes out some fairly radical positions on monetary policy near the end. They condemn the Fed’s current quantitative easing strategy and, somewhat confusingly, specifically urge the Fed to stop doing this on the grounds that listening to the Republicans is necessary to preserve the Fed’s independence. They “support a requirement that the Fed establish some numerical definition for price stability and maintain that policy.” And most strikingly of all for a party that mostly defines itself in opposition to the dread specter of Europe these days, they want the Fed to abandon its current generalized prosperity mandate in favor of a European Central Bank-style pure inflation target:

In addition, Republicans support amending the Humphrey-Hawkins Full Employment Act, which currently diverts the Fed’s attention from long-term price stability to short-term economic growth. In an effort to fuel the economy, this additional mandate has encouraged the Fed to keep rates artificially low, contributing to the present crisis and a loss in public confidence of the institution.

If you want to make a serious inquiry into the roots of persistently high unemployment in many European states relative to the United States, one great place to start would be in the policy difference that the GOP wants to eliminate here. The European Central Bank has no mandate to concern itself with keeping unemployment low. Consequently, unemployment is generally not low.

Meanwhile, to put these concerns in context it’s worth observing that we haven’t actually had a Democratic Fed chair in over 20 years and that the last one we did have is known as the man who finally whipped the inflation of the 1970s. But Alan Greenspan and Ben Bernanke are hardly left-wingers. They’re both people with views of monetary policy grounded firmly in mainstream economic thinking, with political views grounded firmly on the right. Before Bernanke was put in charge of the Fed by George W. Bush, he was chairing Bush’s Council of Economic Advisers. I think it’s nice that the GOP has decided, in at least one respect, that the “more Bushism” approach isn’t the way to go, but it’s a bit odd that they’ve decided that we need to go in a much more conservative direction.

Ben Bernanke Calls for Compensation Reform

Federal Reserve Chair Ben Bernanke says something’s amiss with Wall Street’s pay structure:

“Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization,” Mr. Bernanke said during a speech in Phoenix to the Independent Community Bankers of America. “Management compensation policies should be aligned with the long-term prudential interests of the institution.”

There are two kinds of issues here. One is what should the government do (or have done) with “normal” financial institutions. In this case, I don’t think it would be appropriate for government to step in and try to tell firms how to pay their traders. But Ben Bernanke and other regulators, charged as they are with prudential oversight of the financial system, could certainly make known to the public their view that certain firms have a compensation structure that does not seem consistent with the long-term prudential interests of the institution.

At the moment, however, there’s the more direct issue of what to do with government-controlled or government-dependent enterprises. Here the case for forthright action is pretty clear. It’s our money, so we should insist that it be given to managers who are compensated in a way that’s aligned with long-term prudential interests. That would mean relatively low salaries and long-term equity in the firm so that you can strike it rich if and only if your work actually pays off well over time.

It’s important to think about this somewhat systematically. Right now there’s populist outrage about bonuses, but we don’t want to just shift to a system of low bonuses and giant fixed salaries. We need comprehensive reform, a la Brad DeLong’s suggestion.

Quantitave Easing

I was fretting the other day that the American system of government might have too many veto points to grapple with the economic crisis in a decision way. Something that I should have thought of is that we have, quite smartly, set up a quasi-independent Federal Reserve system that’s able to take action without going through the veto point process. Instead, the script is flipped—congress can dictate to the Fed, but in order to do so it needs to pass through a large number of veto points so in practice the Fed can take decisive action in a crisis. Hence, things like today’s dramatic announcement of “quantitative easing”.

This is something most people don’t understand very well, but when you hear people talk about how the Fed “set” short-term interest rates at such-and-such a level, the people are being a bit inaccurate. What the Fed does is make decisions about how to target interest rates. Then it engages in a bunch of actual financial transactions—buying or selling of short-term bonds—to make the market prices move in line with the target. Ordinarily, you would fight a recession by lowering interest rates. Unfortunately, we’ve already lowered rates as far as they can go and yet there’s still a recession. Under such circumstances we turn to “quantitative easing” or “unconventional monetary policy” in which, basically, the Fed buys other stuff. In this case, long-term bonds, Fannie & Freddie securities, and some mortgage-backed securities. The goal here is to make interest rates on mortgages extremely low. That way homeowners will be able to refinance their loans at low rates and save on their monthly payments. That, in turn, will free up money that can be used to buy stuff, encouraging a return of production and retail jobs and a revival of business investment.

At any rate, that’s the theory. We’ve never before been in a situation where this is actually tried on a substantial scale.

Bernanke: Anti-Stimulus Govs are Hurting the Economy

Let’s take a moment to recall that Ben Bernanke was appointed to his current position by George W. Bush. He’s not, in other words, a left-wing ideologue hell-bent on Europeanizing the United States. Or whatever. And listen to him about the impact of the stimulus-rejecting governors:

BERNANKE: If unemployment benefits are not distributed to the unemployed, then they won’t spend them and it won’t have that particular element of stimulus.

SEN. JACK REED (D-RI): So if this was done on a wide basis, it would be counterproductive, not productive?

BERNANKE: It would reduce the stimulus effect of the package, yes.

This grandstanding is bad for America. Bad only in a small way, it’s true, because thankfully the amount of money being postured over is pretty small. But still bad. Meanwhile, Chuck Schumer’s office has a statement out that’s all over the intertubes indicating that the stimulus is not an à la carte menu, and governors need to either accept or reject the whole thing.