Ramesh Ponnuru has a very good article pushing back against Robert Samuelson’s criticism of Fed bashers. While Mr. Samuelson is certainly right that much of the criticism is a bit nutty, sometimes I think there is a tendency for what Paul Krugman calls “Very Serious People” to be overly protective of institutions such as the Fed. I am perfectly willing to accept the claim that the Fed is an institution full of very talented people. I believe that its leadership is well intentioned. I believe Fed policy partly explains why the US has done better than the eurozone in the past 4 years. I believe that, on average, Fed policy has improved over time.
But . . . no institution should be immune from criticism, as there is always room for improvement. Today I’d like to talk about the biggest Fed basher of them all: Ben Bernanke. Here’s Bernanke blaming the Fed for the Great Inflation:
Monetary policymakers bemoaned the high rate of inflation in the 1970s but did not fully appreciate their own role in its creation.
And here’s Bernanke attributing the performance of the Fed during the Great Moderation to improved Fed policy:
With this bit of theory as background, I will focus on two key points. First, without claiming that monetary policy during the 1950s or in the period since 1984 has been ideal by any means, I will try to support my view that the policies of the late 1960s and 1970s were particularly inefficient, for reasons that I think we now understand. Thus, as in the first scenario just discussed (represented in Figure 1 as a movement from point A to point B), improvements in the execution of monetary policy can plausibly account for a significant part of the Great Moderation. Second, more subtly, I will argue that some of the benefits of improved monetary policy may easily be confused with changes in the underlying environment (that is, improvements in policy may be incorrectly identified as shifts in the Taylor curve), increasing the risk that standard statistical methods of analyzing this question could understate the contribution of monetary policy to the Great Moderation.
And here’s Bernanke blaming the Fed for the Great Depression:
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
That’s a pretty serious charge, given that the economic collapse of 1929-33 turned the Nazis from a small fringe party to the dominant political force in Germany. And Bernanke is not just a Fed basher; he lashes out at any other central bank that doesn’t do what he thinks they should be doing:
Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.
So the Fed is to blame for the Great Depression, deserves praise for producing low inflation during the 1950s and early 1960s, deserves praise for producing a stable macroeconomy during the Great Moderation (1984-2007), and is to blame for the Great Inflation of 1966-81. In this set of PowerPoint slides Bernanke blames the Fed for the severe 1981-82 recession. Are we to assume that beginning in 2008 the Fed suddenly stopped being responsible for macroeconomic outcomes? After being to blame or deserving credit for virtually every single major macroeconomic twist and turn since it was created in 1913?
Not according to William Dudley, current New York Fed President and close Bernanke ally. He argues the Fed continued to make mistakes after 2008:
I would give each of these four explanations some weight for why the recovery has been consistently weaker than expected. But I would add a fifth, monetary policy, while highly accommodative by historic standards, may still not have been sufficiently accommodative given the economic circumstances. . . .
My conclusion is that the easing of financial conditions resulting from non-traditional policy actions has had a material effect on both nominal and real growth and has demonstrably reduced the risk of particularly adverse outcomes. Nevertheless, I also conclude that, with the benefit of hindsight, monetary policy needed to be still more aggressive. Consequently, it was appropriate to recalibrate our policy stance, which is what happened at the last FOMC meeting.
As I argued in a recent speech, simple policy rules, including the most popular versions of the Taylor Rule, understate the degree of monetary support that may be required to achieve a given set of economic objectives in a post-financial crisis world. That is because such rules typically do not adjust for factors such as a time-varying neutral real interest rate, elevated risk spreads, or impaired transmission channels that can undercut the power of monetary policy. [emphasis added]
So from the vantage point of October 2012, William Dudley suggests that monetary policy over the previous 4 years was insufficiently expansionary. He’s “bashing” the Ben Bernanke Fed, and he’s almost a clone of Bernanke in his policy views!
I wonder if Dudley is also admitting that, in retrospect, a certain group of monetary cranks that were bashing the Fed in 2008 and 2009 for inadequate nominal growth might have been right.
I don’t know if “Fed basher” is the right term to apply to Ben Bernanke. All I can say is that if Bernanke is a Fed basher, then I’m proud to be one too.