The analysis starts with a puzzle about Ben Bernanke. From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions–primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates).
A number of economists have noted the difference between recent Fed policies and Bernanke’s earlier views– usually critically. In discussing one of Bernanke’s early writings on the zero bound, Christina Romer says “My reaction to it was, ‘I wish Ben would read this again’” (quoted in Klein ).
Paul Krugman (2011b) asks “why Ben Bernanke 2011 isn’t taking the advice of Ben Bernanke 2000.” In criticizing Fed policy, Joseph Gagnon echoes Bernanke’s criticism of the Bank of Japan: “It’s really ironic. It’s a self-induced paralysis” (quoted in Miller, 2011).
Sections IV-VI review the broader evolution of Bernanke’s views. I find that they changed abruptly in June 2003, while Bernanke was a Fed Governor. On June 24, the FOMC heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasized are close to those that the Fed has actually implemented since 2008; Reinhart either ignored or briefly dismissed the more aggressive policies that Bernanke had previously advocated.
In the discussion that followed the briefing, Bernanke joined other FOMC members in agreeing with most of Reinhart’s analysis.
Shortly after the meeting, Bernanke began writing papers that took positions very close to Reinhart’s–some with Reinhart as a coauthor. Clearly, the analysis of the Fed staff in 2003 was critical in changing Bernanke’s views about the zero bound.
At first glance, Bernanke’s sharp change in views is surprising. In 2003, he was a renowned macroeconomist who had studied the zero-bound problem extensively and expressed strong views about it. Yet he quickly accepted a different set of views when Reinhart presented them.
Why did the positions of the Fed staff influence Bernanke so strongly?
This question is difficult to answer, as we can’t observe Bernanke’s thought processes. Yet we can develop hypotheses based on research by social psychologists, who study group decisionmaking.
Based on this research, Section VII suggests two factors that may help explain Bernanke’s behavior. The first possible factor is “groupthink” at the FOMC, a tendency of Committee members to accept a perceived majority view rather than raise alternatives that might be unpopular.
The second is Ben Bernanke’s personality, which is typically described as “quiet,” “modest,” and “shy”– traits that might make him unlikely to question others’ views.
That made me wonder about the mysterious Vincent Reinhart, and decided to investigate his views. Here’s some comments from early 2008, when he was at the AEI:
I believe that Ben Bernanke began his chairmanship influenced by his own experience on the Board as a governor, by academic research that tended to show groups perform better than individuals, and by the foreign precedent of argumentative yet still successful monetary policy committees. And he embarked on a fundamentally selfless act by attempting to make the Federal Open Market Committee more central to policy making. Eschewing the power and trappings of authority is not an everyday occurrence in Washington, DC.
Thus Reinhart gives the changes a more positive spin, but basically agrees with Ball. So what does Reinhart think of policy? I was all set to view him as a “bad guy,” but his views are actually pretty sensible. However I take strong exception with this comment:
Looking at the bigger picture, America has embarked on one of the great experiments in the history of monetary economics. We are testing the notion that the size of a central bank’s balance sheet matters more to the economy than the overnight interest rate that balance sheet produces in money markets. The hope is that this experiment will stabilize asset prices, reduce credit spreads, and boost the economy.
This “notion” is clearly the monetarist view that “money matters,” even apart from changes in interest rates. And it’s clearly true. But this theory applies to “high-powered money” which is non-interest bearing base money. Once the Fed started paying interest on reserves, the base no longer represented high-powered money. Today the currency stock is the stock of high-powered money. Thus there is no test of monetarism. That’s not to say that monetarism would pass a fair test, as even the demand for non-interest bearing money can be highly unstable near the zero bound, but the point is that the Fed never tried the monetarist experiment of boosting the supply of high-powered money at the zero bound. I’m worried by the fact that Fed officials think that they did this test.
But Rienhart also has many sensible things to say, such as this:
The Fed is guilty as charged in setting policy to achieve the goals mandated in the law. Fed policy makers cannot be held responsible for the fuel to speculative fires provided by foreign saving and the thin compensation for risk that satisfied global investors. Nor can the chain of subsequent mistakes that drove a downturn into a debacle be laid at the feet of the Federal Open Market Committee of 2002 to 2005. If the results seem less than desirable in retrospect, change the law those policy makers were following, but do not blame them for following prevailing law.
And there’s this prophetic statement from 2009, right after Bernanke was re-appointed:
First, the White House will likely learn that a Fed chaired by Ben Bernanke will follow a policy uncomfortably tight as the 2012 election looms into sight. Bernanke has espoused a commitment to low inflation over his entire career. He also is a democratic and consultative chairman, so the voices of monetary conservatives among Fed officials will be heard loudly and frequently.
And this statement from 2009:
As a result of legislative convenience, bureaucratic imperative and historical happenstance, a variety of responsibilities have accreted to the Fed over the years. . . .
Apparently, the argument runs, there are hidden synergies that make expertise in examining banks and writing consumer protection regulations useful in setting monetary policy. In fact, collecting diverse responsibilities in one institution fundamentally violates the principle of comparative advantage, akin to asking a plumber to check the wiring in your basement.
There is an easily verifiable test. The arm of the Fed that sets monetary policy, the Federal Open Market Committee (FOMC), has scrupulously kept transcripts of its meetings over the decades. (I should know, as I was the FOMC secretary for a time.) After a lag of five years, this record is released to the public. If the FOMC made materially better decisions because of the Fed’s role in supervision, there should be instances of informed discussion of the linkages. Anyone making the case for beneficial spillovers should be asked to produce numerous relevant excerpts from that historical resource. I don’t think they will be able to do so.
On monetary policy he has many statements that are mildly dovish, mostly supportive of Bernanke’s policy preferences. This doesn’t prove anything, but it’s consistent with Ball’s claim that Bernanke is a Reinhartian central banker. I certainly did not find calls for level targeting, NGDP targeting, or raising the inflation target to 4%. For now, Ball’s paper is the best explanation of the evolution of Bernanke’s policy views.
In my next post I’ll argue that in an ironic twist, Reinhart has now become a Bernankian.