Vincent Reinhart

I was going to entitle this post “Who is Vincent Reinhart?” but then I remembered poor Vincent Foster.  Here’s a quote from a Lawrence Ball paper (taken from a post by Marcus Nunes):

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 [2011]).

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.


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23 Responses to “Vincent Reinhart”

  1. Gravatar of Max Max
    14. February 2012 at 08:37

    “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.”

    If it helps, the Bank of Japan did this “test” from 2001-2006. It created lots of base money with no interest. Since 2008 they offer a whopping 0.1%. Why do you think this matters? Real difference or just more monetary placebo (ignorant people will be fooled somehow)?

  2. Gravatar of Benjamin Cole Benjamin Cole
    14. February 2012 at 09:12

    Interesting post. Reinhart writes with Teutonic resolve and intellect.

    But as they say in sports, “It is better to be lucky than good.”

    And in macroeconomics, “It is better to be right than smart.”

    The Fed should have printed money to the moon from 2008 on. Reinhart was wrong.

  3. Gravatar of Steve Steve
    14. February 2012 at 09:34

    “Who is Vincent Reinhart?”

    Husband of Carmen Reinhart, who co-wrote “This Time is Different.” with Kenneth Rogoff.

    I wonder if the Reinharts ever argue about economics.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    14. February 2012 at 10:03

    I hope Bernanke isn’t re-appointed, or declines if offered. Then he can get to writing his book and we can (hopefully) find out what really was in his mind.

  5. Gravatar of Daniel Daniel
    14. February 2012 at 11:02

    This post reads like a mythology.

  6. Gravatar of Mark A. Sadowski Mark A. Sadowski
    14. February 2012 at 13:45

    This was truly fascinating. Moreover it is consistent with what I’ve read concerning Bernanke’s conduct of departmental meetings at Princeton. He has been quoted as saying that his main responsibility was to decide whether to get donuts or bagels.

  7. Gravatar of ssumner ssumner
    14. February 2012 at 14:24

    Max, Interestingly, the BOJ thinks it passed the test. NGDP growth sped up after 2003 and they were so satisfied with the results that they sharply tightened policy in 2006. In 2006 they raised rates and reduced the monetary base by 20%.

    In my view the problem in Japan is that the BOJ has set its target too low. But no one could assert they’ve failed to hit their targets.

    Ben, That’s right.

    Steve, Yes, I assumed that.

    Patrick, Yes, but can we trust memoirs?

    Daniel, Good observation.

    Mark, The Ball paper is actually pretty impressive.

  8. Gravatar of Cthorm Cthorm
    14. February 2012 at 14:30

    So if I’m reading Reinhart right, one of the problems is mission creep at the Fed. So the Fed should not be in charge of things like this. I find this believable.

  9. Gravatar of Mike Sax Mike Sax
    14. February 2012 at 14:33

    Apologies for being off topic here but in celebration of Valentine’s Day we are having a retrospetive of the first 8 months-give or take a few weeks-over at Diary of a Republican Hater.

    I have the stats to prove that some of my best readers have been Money Illusion readers. Hey listen you may think Im real liberal but the fact is you are really a much more respectful readership than say the liberal FDL who had no tolerance for what they saw-believe it-as my conservatism

    Please anyone interested take a look

    http://diaryofarepublicanhater.blogspot.com/2012/02/happy-valentines-day-to-all-diary-of.html

    Scott I even say something nice about you. If you can take yourself away from your very busy schedule I would be honored. Hey all work and no play, you know? Your choice of course.

  10. Gravatar of Major_Freedom Major_Freedom
    15. February 2012 at 06:39

    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.

    That isn’t “sensible” at all. That is just a cowardly passing of the buck. It would be like a thief blaming the law for his stealing if the state told him he could steal. “Don’t blame me for those people getting hurt by what I did, I was just doing what the law says.”

    Reinhart is parroting Bernanke’s excuse for the housing bubble on a “foreign savings glut.” This explanation fails because:

    A. those “savings” originated at the Federal Reserve System;

    B. since there was no fall in the demand for and hence prices of foreign consumer prices that would have accompanied a rise in foreign savings that Bernanke and Reinhart are blaming, it follows that these “savings” MUST have been financed by a rise in the quantity of money and volume of spending, not abstaining from consumption; and

    C. foreigners and domestic investors cannot be blamed for having to operate in a market with overnight interest rate that dipped below 2% pre-2005, which of course signalled the creation of massive quantity of new reserves, which was the fuel for the banking system to create massive quantities of new credit, that poured into the housing market.

  11. Gravatar of 123 123
    16. February 2012 at 00:35

    Ball is mostly wrong. The first thing Bernanke did was credit easing, which is the much more powerful version of discount window lending. Although Ball’s explanation of the absence of level targeting might be right.

  12. Gravatar of ssumner ssumner
    16. February 2012 at 06:56

    Cthorm, I agree.

    Mike Sax, Thanks for the comments.

    Major Freeman, The Fed doesn’t create saving.

    123, I disagree, credit easing is not very powerful.

  13. Gravatar of 123 123
    16. February 2012 at 07:05

    Scott,
    Level targeting and futures targeting are more powerful than credit easing. But this has nothing to do with Ball, who forgot that QE1 was a less powerful replacement for credit easing, and who said that Bernanke dismissed discount window operation. In fact, credit easing is a discount window lending on steroids.

  14. Gravatar of Major_Freedom Major_Freedom
    16. February 2012 at 10:45

    ssumner:

    “Major Freeman, The Fed doesn’t create saving.”

    That’s why I put “savings” in quotes.

    The Federal Reserve System creates the money that goes to net investment, which is a false form of saving.

    The money foreigners “saved” to invest in the US housing market, is money that was created by the Fed.

  15. Gravatar of ssumner ssumner
    17. February 2012 at 06:34

    123, I won’t argue that point, except to note that the effect of QE very much depends on how it shapes expectations.

    Major freeman, No, money doesn’t go to investment, only saving finances investment.

  16. Gravatar of 123 123
    17. February 2012 at 09:50

    Scott, the main effect of QE1 was based on expectations. QE1 reassured the markets that monetary base will not contract after the expiry of credit easing.

  17. Gravatar of ssumner ssumner
    18. February 2012 at 07:56

    123, I agree, although I think the effect was rather small.

  18. Gravatar of Becky Hargrove Becky Hargrove
    18. February 2012 at 07:58

    Echoes of this post today from Bryan Caplan:
    http://econlog.econlib./org/archives/2012/02/the_mystery_of_2.html
    The myth is out there now so this won’t sound like rabble rousing: I thought of the company that buys an invention just to squelch it on the marketplace.

  19. Gravatar of Becky Hargrove Becky Hargrove
    18. February 2012 at 08:46

    Sorry, I checked that link twice and couldn’t figure out why it didn’t take.

  20. Gravatar of Major_Freedom Major_Freedom
    19. February 2012 at 00:23

    “Major freeman, No, money doesn’t go to investment, only saving finances investment.”

    No, in a division of labor, monetary economy, money spent on goods for the purposes of making subsequent sales (e.g. the purchase of a machine that produces widgets, a factory, raw materials), this is money that goes to investment, rather to the purchase of consumer goods. This investment is equal to saving.

  21. Gravatar of Major_Freedom Major_Freedom
    19. February 2012 at 00:25

    Therefore, when the Federal System inflates the currency, specifically into the loan market, what happens is that more money goes to investment than is backed by real savings.

  22. Gravatar of ssumner ssumner
    19. February 2012 at 06:52

    Major, That’s not correct. Investment is financed out of “real savings.”

    Becky, Thanks for trying, I’ll take a look at his blog.

  23. Gravatar of Major_Freedom Major_Freedom
    1. March 2012 at 22:48

    ssumner:

    Major, That’s not correct. Investment is financed out of “real savings.”

    No, that’s false. Real savings is abstaining from consuming out of gross income.

    The Federal Reserve System doesn’t earn the money it creates out of nothing, and so the investment that results is NOT financed out of real savings. That’s exactly why the business cycle is generated. It is because the economy is not making available enough real resources to make the investments sustainable. Resources are tied into consumer goods because people aren’t really saving more, and yet the Fed System is bringing about more investment that there are real savings.

    It would be like the Federal Reserve System bringing about more investment in office buildings, even though consumers, by their voluntary consumption/investment allocations, haven’t released enough brick material (capital) into the office construction industry, and are instead tying up the brick material in things like their driveways and walkways.

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