It was early September of 2012 when Market Monetarists, after having tenaciously argued their case for several years that NGDP level targeting provides for more economic stability than a monetary regime based on a discretionary version of the Taylor rule, saw a glimmer of encouragement that monetary policymakers had begun to see that monetary policy had been anything but optimal since prior to the crash of 2008. The FOMC had decided that a third round of QE was required, and implemented it in a way that would be more productive than the previous rounds based on time and amount. Adherents, including me, to this new economic school of thought that is based on Monetarist theory developed and championed by the late Milton Friedman, were encouraged that these developments might lead to the beginning of end of the Great Recession.
As time has marched on, those feelings of encouragement are beginning to fade on my part. I’ve seen discussions regarding the wrongness of unemployment targeting in addition to the ones regarding interest rate and inflation targeting at the zero bound that would make any rational person wonder why these things are attempted at all. I have heard the public discussion of what to expect regarding monetary policy from various FOMC-related officials, and Bernanke’s speech to the Economic Club of New York; and I no longer see any justification for expecting too much from these people (I’ve commented on Kocherlakota and Lockhart specifically – and I have no intention of sparing Bernanke when he refuses to abandon ideas that fail).
There is simply zero rationale for the sorry state of monetary affairs to continue if the FOMC voted for the course of action it did in September. If they agree that monetary policy has been tight since 2008 and contributed significantly to the delayed recovery, it is beyond reason to keep waiting it out to see if something improves as if monetary policy is entirely detached from reality. If the Market Monetarist diagnosis of the problem is correct, there is nothing about the current state that can be tweaked around the edges to be made to work better; and we will never get away from the ZLB in such a state that monetary policy does not push in that direction. There is a certain amount of skating on thin ice involved in attempting to exist at the ZLB without a plan B and I question the rationale that caution in one direction, avoiding mildly higher inflation expectations, implies that policymakers are being responsible. Instead, I believe they are playing with deflationary fire and getting burned with it would be far worse than an inflation rate of even 5%.
Bernanke’s speech to the Economic Club of New York was downright depressing as there was nothing in it that provided even a hint of culpability. Even worse, the only nugget tossed out is that he views the inflation target to be a long run target while burying it in strange theories about influencing market interest rates to improve economic conditions. I find it very curious indeed that he would still be saying much of the same erroneous things he’s been saying for the last several years, like discussing the limits of monetary policy, when he must be aware those limits are all psychological and not technical. Otherwise, there is no intellectual justification for QE3 at all – he only ever intended to pay lip service to all the people whose lives have been destroyed either by deflation or by the lack of opportunity created when the Fed decided to not take long run price stability so seriously and just let the markets adjust. That was simply unlawful and immoral, but they did it anyway, and continue to do it.
This kind of hemming and hawing, and obsession with inflation when that is nowhere near being the most pressing problem has got to stop. No one deserves to be put through another year of this monetary psychosis that has no basis in traditionally accepted monetary theory. Bernanke has been at the helm of this disaster too long and needs to go. If he doesn’t go willingly, President Obama should impress upon him that it is best for everyone involved that he decide to vacate his post earlier than planned and replace him with a candidate that has strong leadership skills and isn’t afraid of a little inflation if it might be a consequence of getting us all back to work.