A nickel has been put into my incredulous slot this evening with the talk floating around about Bernanke and his daring feats of bravery… And it’s a good thing that I have plenty of sturdy soapboxes laying around because I’d like to start with an example of somewhat recent history involving Bernanke that has been pointed out on The Money Illusion.
And in the end I’m going to defend Bernanke, or at least 80% defend him from the charge that he caved in to the FedBorg…
Bernanke came to the Fed with lots of ideas about how policy could be improved. He also had lots of ideas about the appropriate policy process—which he thought should be more collegial, less dictatorial than under Volcker and Greenspan—more like a college committee.
The FOMC, in my opinion, is an artifact of the industrial age, where human frailties were the only reliance, designed to meet political expediencies of the 1930’s, and cannot accommodate the needs of an information age economy the size of the U.S. The FOMC needs to be modernized, not inefficiencies enhanced by applying a collegiate atmosphere on top of the archaic. In Lean Six Sigma speak, this is simply optimizing waste, and it didn’t produce good results for Bernanke, nor does it work well today.
But maybe it’s just me who can’t understand the public benefit to the picture below. I mean, I can’t for the life of me figure out why we need a few hundreds of billions of dollars lopped off national wealth – now – and that’s just for one day. At least in 2008 there was a somewhat understandable excuse – the erroneous inflation forecast. But there is currently no Beige Book telling them headline inflation will be 5% next year. The only evidence anyone can point to is that wages are starting to rise, ever so slightly, and even that is somewhat shaky evidence from one employment report.
These humans continue to believe they are smarter than markets, and probably even smarter than any computer. It’s interesting though to imagine what might have been over the last decade if Greenspan had modernized monetary policy, leaving behind a supercomputer programmed with his logic to make the policy adjustments.
Bernanke quickly found out that the Fed is a very powerful institution, with a life of its own. And it’s embedded in a difficult and highly complex policy environment in Washington.
This doesn’t square well with point number one. College committees aren’t all-powerful political institutions with the same sets of consequences for failure, and applying that same kind of approach turned it into a power vacuum FFA. Nobody was in charge. And when nobody is in charge, everyone does their thing, and nobody is responsible or accountable – not even Bernanke. His book says it all (or really I mean he takes no responsibility for the choices).
Bernanke felt that policy was most effective if credible, and that meant you needed to avoid lots of close 6 to 5 votes. You wanted enough support so that the markets would believe the Fed would carry through with its policies.
Sure. Credibility is important, except when the only thing that is credibly counted on is a tight bias. And I think that collegiate atmosphere played a huge role in the loose cannons sending the wrong message. If one cannot be an effective cat-herder with an undeniably sound argument, then it’s probably a better idea to resign. The problem is, however, Bernanke didn’t recognize a problem with tight money until well too late. Perhaps that is the idea that needs the defending, at least from the point of view of a victim in the ant farm.
In this difficult environment, Bernanke decided to pick his battles, and focus on implementing as many reforms as he could, given the political constraints.
I am not sure what this is referring to in specificity, but I doubt it has anything to do with the Chairman of the House Financial Services Committee, Barney Frank’s objection to explicit inflation targeting. Perhaps Mr. Frank was just one of those (elected) political constraints to be overcome. Bernanke’s troubles began when he had trouble respecting the word “No.”
In addition to implementing his academic research on the importance of saving the banking system, he also implemented some of his monetary research. Most notably, he did QE and then he got the Fed to adopt an explicit 2% inflation target (a bit higher than some wanted.) He got the Fed to try to reduce long term bond yields, by buying long-term bonds. Then he got the Fed to commit to low rates for a long period. And then low rates until the economy improved, and then QE that was open-ended, until the economy improved. That’s a lot, and I wouldn’t blame Bernanke for being exasperated by critics like Ball, Krugman and yours truly.
See my comment to number account number three. Additionally, wouldn’t it have been better to not have to save the banks after mowing them down with a disinflation or implementing QE to try to rebuild all that was lost (which probably isn’t even true – it was to offset austerity and tax increases to keep conditions from getting worse)? It can’t be both ways without taking responsibility for it all – especially after the conversation contained in the Sept. 2008 FOMC meeting minutes.
Over the years since the crisis, I’ve gone back through CSPAN’s video library of pre-2008 Bernanke, and it’s like watching an inflation-targeting tragedy that I already know the ending to. I keep wishing I could tell him to take the damn blue pill instead, but his egotism knew no bounds, even today with the title of the book which raises my ire of him by several notches. There is nobody who can convince me that the Great Recession was the result of Bernanke not having played a role in creating it. As Chairman and after having led the charge to the explicit IT path, it was his responsibility to fix it. If he couldn’t fix it, then his reform ideas failed miserably and in a spectacular way that left scars on everyone.
I look at what is happening there today, and the political problems at the Fed are much worse. Where are even the small things like a revised reaction function? Where is the commitment to the target? The place is a complete disaster with loose cannons everywhere and zero accountability. They still don’t know what they did and appear to be of the impression that doing more tight money is the cure-all we really need. I surely do not believe that Bernanke’s book helps them to understand what they are doing in anyway at all. It really is very sad that we’ll go on with this IT mess until… who knows when they will stop blaming the victims for debt deflation.