Scott Sumner posted snippets of a write up by Bloomberg about Michael Woodford in their report on the top 50 most influential people in finance. I agree with the thrust of Woodford’s arguments presented in the report, that the only way out of the central bank induced communications morass is to switch to NGDPLT, promising to return to the pre-Great Recession trend. But I have a bit of a quibble when it changes focus to talk about Woodford’s stance on tapering QE in which he seems to be in agreement. Sumner seems to think tapering is irrelevant, and perhaps in a theoretical sense it is; but it seems to me like a de facto contradiction in terms given that NGDP is currently very far behind trend and getting farther behind with every passing quarter. In other words, my intuition tends toward the notion that the pathway out of the morass and to a place where NGDP is returned to trend from an operational standpoint is basically the same given the situation.
I am not disagreeing with the basic tenant of Market Monetarism that managing expectations is the name of the game and the amount of QE is likely immaterial in that regard. But an essential ingredient to expectations management is credibility; something that the Bernanke Fed lacks and appears to be intent on making its credibility deficit ever larger. It hasn’t hit its inflation target, never mind the Bernanke/Evans Rule, and those involved don’t seem concerned about it unless there is upward pressure on the 2% ceiling. Even when there is virtually no risk to the upside, we hear about concerns over QE that originate in the imagination rather than those that can be supported by facts – all of it different variations of spin on the theme: we can‘t trust people with money; so it’s better that they not have any.
I have been mistaken to think of those on the Bernanke Fed as amoral or even immoral in motivation. The problem with the apparent sentiment, however, is that the sights and sounds of prosperity are an unavoidable consequence thereof no matter how distasteful to refined academics. Prosperity is and means much more than what is front and center to a central banker, though; and I suspect that perhaps there might be an issue of being unable to see the forest through the trees while average Joe ends up tossed out with the bathwater. But I digress.
My point is that I do not see the Bernanke Fed being able to make a credible commitment about NGDP or any other kind of target that would allow a recovery to take place and put the Great Recession in the review mirror without doing something concrete to back it up, at least not with the current roster. With Obama making the appointments and influencing who is placed in the other posts he doesn’t directly appoint, the situation isn’t going to get any better. It is quite possible that compared to Obama’s preferred candidates, Bernanke is quite dovish.
Of course, I could be wrong – and I sure hope that I am otherwise only the big guy upstairs can make things right.