I’ve been on a vacation from work since last Tuesday and I am not scheduled to return until Thursday. Including the Thanksgiving holiday, it is the longest stretch of being away from work since I started this job back in 2012. Given that we had no company for the holiday and are not traveling this year, I’ve plenty of downtime to ponder, particularly with this post about Bernanke’s proposal for temporary price level targeting at the ZLB on my mind.
With time to think I may have added the following points along the theme of burning down the house:
Some say that the September 2008 FOMC meeting was the last chance, make or break moment to signal lower rates are coming due to the unemployment, inflation and TIPS figures signaling a deeper recession ahead. In in themselves, these figures should have been clue enough that more needed to be done by policy, and caught up in the inflation forecasts, the FOMC did nothing – easy to write it off as a reasonable mistake.
But there’s more to this FOMC mistake than just missing the blazingly obvious clues in traditional indicators. Fannie Mae and Freddie Mac were inarguably the largest mortgage dealers in the country, dealing with government guaranteed loans, and they had been placed in conservatorship the previous month. Even if, as some have suggested, Bernanke was focused on the credit channel, I suppose that the bankruptcy of Fannie and Freddie would have meant capital destruction in no small degree when the government defaulted on its guarantee obligations, which it did, and the subsequent crash in the MBS market and the failures of Lehman and AIG that resulted from runs on their MBS insurance products only added to it.
So if inflation and unemployment figures are signaling trouble, and we have something like Fannie and Freddie going down with the government defaulting on its guarantee obligations, it seems rather incredible to me that the FOMC did NOTHING at this September 2008 meeting. Just Fannie and Freddie going down like redheaded stepchildren in a vacuum would have been catastrophic enough to require FOMC action, but this was on the heels of an ongoing recession and they did NOTHING including not stopping the absurd financial institution lending sterilization program that caused the Fed to sell assets at the same time everyone else was – all combined very contractionary and very ugly.
It’s a real headscratcher. Not wanting to miss a great ranting opportunity, it seems particularly glib of Bernanke to suggest PLT at the ZLB without commenting on the elephant in the room of how we ended up there or on the costs and benefits of such a disinflation.