Chapter 19: Bernanke’s contradiction in terms?

TravisV, in a comment on The Money Illusion asked if someone might be willing to do a blog post on Chapter 19 in Bernanke’s book, quoted as such:

Dear Commenters,

Could someone please write a blog post about these contradictory passages in Bernanke’s new book (Chapter 19):

“Our goal was to bring down longer-term interest rates, such as the rates on thirty-year mortgages and corporate bonds. If we could do that, we might stimulate spending—on housing and business capital investment, for example…..Similarly, when we bought longer-term Treasury securities, such as a note maturing in ten years, the yields on those securities tended to decline.”


“A new era of monetary policy activism had arrived, and our announcement had powerful effects. Between the day before the meeting and the end of the year, the Dow would rise more than 3,000 points—more than 40 percent—to 10,428. Longer-term interest rates fell on our announcement, with the yield on ten-year Treasury securities dropping from about 3 percent to about 2.5 percent in one day, a very large move. Over the summer, longer-term yields would reverse and rise to above 4 percent. We would see that increase as a sign of success. Higher yields suggested that investors were expecting both more growth and higher inflation, consistent with our goal of economic revival. Indeed, after four quarters of contraction, revised data would show that the economy would grow at a 1.3 percent rate in the third quarter and a 3.9 percent rate in the fourth.”


FOOTNOTE: “I tried, without success, to get the media and markets to use the term “credit easing,” a phrase suggested by Dave Skidmore, rather than “quantitative easing.” Quantitative easing was the term applied to (unsuccessful) Japanese programs earlier in the decade, which differed from our securities purchases in many respects. In particular, the Japanese QE programs were aimed at increasing the money supply, while the Fed focused on purchasing longer-term Treasury and mortgage-backed securities as a means of reducing longer-term interest rates.”

I don’t have Bernanke’s book on the principle that, to be blunt and down to brass tacks, unless he is willing to admit the role of monetary policy in the financial crisis of 2008 and the Great Recession and contribute to a properly educated public on monetary matters, whatever might be in the book isn’t the sort of education in weasel verbiage I desire pay for; I can get plenty of that for free.

Digression aside, what I wanted to point out was that it’s hard to know the context from just three quoted paragraphs, and in weighing in, I want to be sure to be fair. Among the many at the Fed who don’t really know what they’re doing, or those who may have misplaced interest, I have a sense that Bernanke never really belonged because he is one of the very bright ones and his intentions have always been well meaning. What he has to say does have some value. I am just stubbornly against paying him for it for the same reason I refuse to pay for a WSJ subscription, and I have to rely on secondhand accounts.

Continuing on, the first thing that comes to mind is that monetary policy is not interest rate policy. It’s my impression that in prior decades when the Wicksellian interest rate was positive, nominal interest rates were pegged by manipulating the base. And this is different from the short term effect on nominal rates from changes in the base when the Wicksellian interest rate is very low or negative. At least this is how I understand it.

Of course, after cutting my macro baby teeth on Friedman, Sumner, Christensen, and Nunes, I prefer not to think of monetary policy in terms of interest rates and I have a heavy monetarist accent when trying to speak that language. But what I think Bernanke is saying, though disguised as intentional, is that the rise in long rates noted in the second paragraph was surprising (at least I can translate weasel – I hear plenty of that language at work every day *grin* ). He was trying to reduce long rates with QE and got the opposite, which Sumner predicted.

And this is an interesting note for those who think ending QE and lopping the base will result in a rise in long rates. It won’t. Bernanke said so, only not in those words.


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