“Again”

The Bernanke press conference was not very interesting, presumably because he’s getting better at doing these sorts of things, so his true feelings leak through less often.  Binyamin Appelbaum and Greg Ip asked the best questions.  Applebaum couldn’t figure out why the Fed wasn’t doing more, given their dismal forecast.  Bernanke responded:

1.  “Again,” we are taking steps like extending Operation Twist.  (He must have said “again” 100 times.)

2.  We’re prepared to do more if employment doesn’t improve.

3.  There are costs and risks with unconventional stimulus.

Bernanke’s a smart guy, and probably doesn’t want to spout nonsense in the way politician might when caught in a trap.  So my theory is that he doesn’t really believe the risks and costs argument, but what else can he say?  It’s at least slightly plausible.

Later Greg Ip asked a similar question, and this time he spelled out the three costs and risks:

1.  . . . the exit would be more extended . . .

2.   . . . could affect market functioning . . .

3.   . . . could impact financial stability . . .

And that was it, no explanation for these bland platitudes.  I have no idea why an extended exit would be a risk, and I don’t think Bernanke does either.  He didn’t provide any realistic examples of what could go wrong.  Indeed all the financial stability risks come from too little monetary stimulus, which could worsen the debt crisis by plunging the economy back into recession.

But again, Bernanke had to say this, given that the announced Fed policy is not expected to be enough to hit their own targets.  We should not be surprised that he gave the only answer he could.  The only real mystery here is whether or not he privately wants to do more.  The way he kept almost pleading with the smarter reporters “again, we’re prepared to do more . . .” when they put him on the spot tells me that he privately wants to do a little bit more.  A Richard Fisher would have been more defiant—explaining why doing more wouldn’t help.  Ben Bernanke never once said that doing more wouldn’t help.

But ultimately all that matters are actions, not his private beliefs, and Bernanke will be judged on that basis.

PS.  All quotes are made up from memory.  I believe the Appelbaum question came soon after 15:00 on the video, and Ip’s came around 38:00.

PPS.  Commenter 123 pointed out that Bernanke seemed intrigued by the new BoE policy, and I thought so to.  His true feelings came through and his face lit up a bit (well, from 2 watts to 3 watts).  This makes me even more convinced he doesn’t believe this “risks and costs” nonsense; the British plan would presumably be more risky for the government than QE.


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49 Responses to ““Again””

  1. Gravatar of Mike Sax Mike Sax
    20. June 2012 at 19:20

    Bernanke actually said he will do QE3-or some other major easing- if needed:

    “The Federal Reserve, seeing a further slowdown in the US economy, hinted strongly Wednesday that it is prepared to launch a third round of quantitative easing, or QE3.”

    “The Fed also lowered its growth projections for 2012 through 2014 and lowered its expectations for new hiring. And both the Fed statement and Chairman Ben Bernanke held out the prospect of more easing, if the economy needs it. ”

    “Yes, additional asset purchases are among the things we would consider if we need to take additional measures to strengthen the economy,” Bernanke said during his quarterly press briefing.

    “However, Bernanke warned there is a cost associated with easing programs and they can’t be taken lightly.”

    “We”re prepared to do more. We have to get additional information on the state of the economy, what’s happening in Europe.”

    http://diaryofarepublicanhater.blogspot.com/2012/06/fed-meets-but-doesnt-exceed-market.html

  2. Gravatar of dtoh dtoh
    20. June 2012 at 19:23

    Scott,
    So what’s you’re theory as to why the Fed is not doing more?

    Is it simply that they blindly follow the consensus view of the majority of economists?

  3. Gravatar of Morgan Warstler Morgan Warstler
    20. June 2012 at 19:38

    Scott, you are wrong.

    Fisher says VERY SPECIFICALLY that the Fed can do more, he is clear as a bell about it.

    He also says he’s not in the business of keeping the govt. from facing up to its failings.

    This is where the idea that QE is not a panacea comes from.

    And Scott, I think in the end this is why you come down where you come down on this…

    Because you personally are simply not a full blooded member of the private sector, and in order to get the moral order of the world in place, you have to start not just with private > public, but actually Private OWNS the Public.

    If you don’t understand, “I like to be able to fire the people who work for me” deeply, not just in the abstract, but in your marrow, as in you can’t STAND IT, it drives you NUTS.

    In the private sector you can fire anyone, any store, any brand, any Realtor, any masseuse anybody.

    If you can’t starve them out, aid their competitor, force them to dance to your tune, that’s ok, because they are not getting your money.

    This is WHY a govt. must be forced to suffer for its mistakes, because the problem is NEVER truly Monetary, the problem is that govt. can’t be fired.

    And when YOU Scott Sumner fail to grasp how important it is to the private sector that that the public sector be fired aggressively and routinely, then it is easy for you to think problems are Monetary problems.

    We don’t want to reduce debt through printing, we wantt o see some firings. We don’t want to save the banks through TARP and IOR etc. we ant to see some firings.

    And what we want is the most important thing, if some people have to be unemployed to get the earth turning the right way – thats the fault of the public sector for not taking their medicine.

  4. Gravatar of Andrew Andrew
    20. June 2012 at 19:50

    So what do you think the risks and costs are? Surely anything so beneficial to the economy must involve a trade off between costs and benefits?

  5. Gravatar of Full Employment Hawk Full Employment Hawk
    20. June 2012 at 19:55

    Morgan:

    You clearly have an excellent grasp of what the objective of the conservative members of the FOMC is. It is to use contractionary monetary policy to impose right wing economic policies on the government. This obviously includes defeating Obama.

    But I am not sure that this is Bernanke’s objective. I have vacillated in my position about what he is up to.
    Defeating Obama is one plausible explanation, but it is not the only one.

  6. Gravatar of Full Employment Hawk Full Employment Hawk
    20. June 2012 at 20:01

    I have been vacillating about why Bernanke has become the Hamlet of the Fed and refuses to end the depression we are in by blatently refusing to comply with the Fed’s mandate to achieve maximum employment. I have now pinned the explanation down to 3 possiblilities.

    1. Making Obama fail. Bernanke is a Republican and keeping the unemployment high will increase Romney’s chances of defeating Obama.

    2. Class bias. Bernanke is conducting monetary policy for the benefit of the moneyed elite (the plutocracy). During the financial crisis, when it looked like the rich were in danger of losing a large part of their wealth, Bernanke acted boldly and creatively to end the crisis. Once the crisis was over and the moneyed elite was no longer in danger of losing their wealth, he reverted to conducting country club Republican monetary policy. The moneyed elites are currently not in danger of losing their wealth and are not suffering from unemployment. For them it’s morning in America. Working people are still suffering badly from high unemployment, but they are not part of Bernanke’s class and their problems do not matter to him. But an increase in inflation would hurt the moneyed elite. So keeping inflation down is seen as the priority of monetary policy. The Fed’s tools for giving the economy a monetary stimulus are being held in reserve in order to be available if something happens that puts the wealth of the moneyed elite in peril again.

    3. Bernanke really believes that the economy is close to a liquidity trap, so that the tools the Fed has available have very little effect on improving the economy.

    Or it can be a weighted average of the 3.

  7. Gravatar of Full Employment Hawk Full Employment Hawk
    20. June 2012 at 20:06

    “but actually Private OWNS the Public.”

    That is, of course, FASCISM, and not democracy. Scott, unlike Morgan believes in democracy.

  8. Gravatar of Liberal Roman Liberal Roman
    20. June 2012 at 20:38

    Isn’t it hilarious that these Fed meetings were supposed to make Fed policy more transparent and clear.

    Instead we are evaluating Bernanke’s facial reactions in response to questions. I can see it now. Deep in the Goldman Sachs’ basement, Lloyd Blankfein has body language experts meticulously reviewing video tape of Bernanke’s reactions to questions.

  9. Gravatar of Bonnie Bonnie
    20. June 2012 at 20:58

    Morgan likes economic civil warfare where the people he wants fired never actually get fired, just a lot of innocent private people minding their own business lose their businesses that they packed all their blood sweat and tears into for decades. That’s real productive.

  10. Gravatar of dwb dwb
    20. June 2012 at 21:17

    didnt todays action disprove Warstleran Fed theory?

    i am strangely more bullish than all of you. Merkel seems to have blinked. the market is still up over the last 6 months. housing is coming back to life. IT is booming.

    i never thought things were as dire as last sept when double dip was the watchword. i think bernanke slipped one by the hawks and even opened the door to more. this time at least they are stepping on the gas while things are decent. still no visibility into Europe, of course, but as long as we have our own currency we have hope, right?

  11. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. June 2012 at 22:11

    Full Employment Hawk,
    You wrote:
    “Or it can be a weighted average of the 3.”

    It’s none of those. It’s something far more simple. He’s a devoted practioner of Inflation Targeting (IT). IT is a single mandate and unlike NGDPLT IT is a rate target. He’s happy where we are and will do more only if inflation falls much below his target.

    He is targeting the forecast (or forecasting the target):
    http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120620.pdf

    I was however puzzled by this:

    “The continuation of the maturity extension program will proceed at the current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.”

    http://www.newyorkfed.org/markets/opolicy/operating_policy_120620.html

    Since: 1) the current rate of MEP is $50 billion a month and $267 billion implies they will run out before the end of the year, and, 2) according to Yellen’s presentation on the 6th they will have less than $200 by the end of this month.

    http://www.federalreserve.gov/newsevents/speech/yellen20120606-slide13.gif

    Prior to this it seemed to me that MEP had little more than three months left to it. Where will that extra $100 billion or so of short term short term securities come from?

  12. Gravatar of Full Employment Hawk Full Employment Hawk
    20. June 2012 at 22:14

    “didnt todays action disprove Warstleran Fed theory?”

    Not at all. Morgan is right on about the intentions of the more conservative members of the FOMC.

    From the Los Angeles Times:

    “Fed policymakers noted that employment growth has slowed in recent months … The Fed revised its economic forecast downward. It said growth in total economic output this year would be 1.9% to 2.4%, much lower than the 2.4% to 2.9% range projected in April.”

    The Fed is forecasting that it will continue to defy its congressional mandate to achieve maximum employment.

    Whether is is intentional or the byproduct of an excessive obsession with keeping the inflation BELOW the 2% target, the Fed is engaging in economic sabotage of President Obama.

  13. Gravatar of Full Employment Hawk Full Employment Hawk
    20. June 2012 at 22:21

    “this time at least they are stepping on the gas while things are decent”

    Almost 4 years after the beginning of the worst economic shock since the Great Depression, we are trapped in a depression with the unemployment rate stalled above 8%. How is this decent? It is bloody awful. And this token effort is at most giving the pedal a very light tap.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    20. June 2012 at 23:09

    Scott,
    Ttally off topic but I noticed this while cruising Eurostat today.

    The EU members that have had the greatest decline in their labor forces are Bulgaria, Ireland and Latvia (5-6% from 2008-2011). All three are either on the euro or are pegged to the euro.

    The three EU members with the greatest increases in their labor forces are Luxembourg, Malta and Poland at roughly 11%, 8% and 6% from 2007-11. Luxembourg is the EU’s DC and naturally has geatly inflated during the crisis. As for what is going on in Malta I have no clue other than I hear the climate is really nice.

    Poland has a flexible exchange rate, had no recession and is a born NGDP level targeter. Whereas Poland’s labor force shrank by about 3% from 2001-2007 as people searched for work in the West, the labor force has increased by about 1 million since then with some people entering the workforce, some people returning from abroad, and foreigners coming in mainly from Ireland, Spain and the Netherlands. This represents about 22% of the EU’s 4.5 million in labor force growth since 2007.

    As Horace Greely once sort of said, go East young man!

  15. Gravatar of Major_Freedom Major_Freedom
    20. June 2012 at 23:21

    Indeed all the financial stability risks come from too little monetary stimulus

    Financial stability risks arise from monetary inflation, since it distorts economic calculation.

    Problems in the banking sector were already appearing 2006-2008 before the 2008 NGDP decline, due to years of inflation prior.

  16. Gravatar of Britmouse Britmouse
    21. June 2012 at 00:43

    I am extremely impressed with the US press corps, whacking Bernanke over the head time and time again. A total contrast with the BoE press conferences where King has supreme confidence and journalists don’t really dare to ask him about UK monetary policy for fear of getting a lecture. No wonder Bernanke looks so depressed.

  17. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 01:40

    “If you don’t understand, “I like to be able to fire the people who work for me” deeply, not just in the abstract, but in your marrow, as in you can’t STAND IT, it drives you NUTS”

    Morgan my friend judging by the latest poll numbers not many people do-Romney has real bad favorability and likability numbers.

    http://diaryofarepublicanhater.blogspot.com/2012/06/new-poll-suggests-gop-tricks-arent.html

    If you want a good predictor it’s likabiity-when has likable candidate won? Never in my lifetime

    Reagan was more likable than Carter but Clinton was more likable than Bush I and way more likable than Dole. HOwever Gore and Kerry lost in libability. Obama wins on the other hand.

    Yes those who hate him really hate him but they’re the minority as were the Clinton haters.

  18. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 01:44

    I mean “when has the unlikable candidate won? Never in my lifetime”

  19. Gravatar of 123 123
    21. June 2012 at 01:47

    @Britmouse

    No, journalists are not afraid in the BoE conferences. It is just their questions are not as good. Remember when journalist from FT asked what is the bank’s estimate of the fiscal multiplier, and Bean was quite surprised how such meaningless question might be asked…

  20. Gravatar of Mike Sax Mike Sax
    21. June 2012 at 01:50

    Even worse 55% of likely voters-according to the new Bloomberg poll-think Romney’s out of touch. In American politics that’s just the kiss of death and a perception very hard to change

  21. Gravatar of dtoh dtoh
    21. June 2012 at 03:20

    FEH
    Bernanke is conducting monetary policy for the benefit of the moneyed elite (the plutocracy).

    How do you figure that? The moneyed elite want real NGDP growth (=higher returns on fixed income and equity). It’s not like people hold all their wealth in long bonds and can’t anticipate inflation.

  22. Gravatar of StatsGuy StatsGuy
    21. June 2012 at 04:18

    What Bernanke wants is not relevant – what he can justify politically is relevant. Politically, he can’t justify a stronger move without being accused of influencing the election. Note, oil (WTI) was at 84 yesterday, today under 81. They need to get at least to last year’s lows, 76ish, to have some runway, and that looks like August now.

    If I were to take a guess what a smart Bernanke will do – they will wait until there is a super clear argument for intervention, and announce a long-duration (possibly open ended) intervention. NGDP targeting perhaps, or as goldman sachs suggested, a flow based approach rather than a fixed quantity cap. Twist2 is minimal, and they know it. Given a zero or near zero return on short debt, btw, I’m still confused why it’s much different than QE if you believe in an interest rate model (or expectations via rate signalling model) of monetary policy?

  23. Gravatar of Negation of Ideology Negation of Ideology
    21. June 2012 at 04:38

    Scott,

    Steve Chapman has a column that mentions you:

    http://townhall.com/columnists/stevechapman/2012/06/21/strangled_by_tight_money/page/full/

    He wants a “Money Is Too Damn Tight Party”. Would you consider being the nominee?

  24. Gravatar of JimP JimP
    21. June 2012 at 05:52

    Stats –

    That does sound right – lets hope that is what he does.

    I still do not quite get this. It has always been clear, I think, that only the head of government, the elected head, the President, can directly call for higher inflation. Roosevelt did so and we know what happened. I simply do not understand why Obama does not do so.

    After all – what does he have to lose. On present trends he is toast (hopefully).

  25. Gravatar of 123 123
    21. June 2012 at 07:08

    Scott: “PPS.  Commenter 123 pointed out that Bernanke seemed intrigued by the new BoE policy, and I thought so to.  His true feelings came through and his face lit up a bit (well, from 2 watts to 3 watts).  This makes me even more convinced he doesn’t believe this “risks and costs” nonsense; the British plan would presumably be more risky for the government than QE.”

    I came to the opposite conclusion. The main risk central bankers fear is the risk of losses from their asset holdings. So basically Bernanke has justified his relative tightness compared to BoE by referring to the fiscal subsidy BoE will get.

  26. Gravatar of Mike Rulle Mike Rulle
    21. June 2012 at 07:08

    1) What is with the Morgan’s on this blog? How do we get from operation twist to Romney’s supposed desire to fire people? (question, is Twist duration neutral or cash neutral? If the former, it reduces money supply now. If the latter, it can increase money supply later without further action, like a forward QE. Dont know answer)

    2) Perhaps I have finally drank Scott’s cool aid………but, if Bernanke himself has downgraded his forecasts AND believes there is more the Fed can do, why would he not do that now? I can only assume he is a “consensus” guy who does the “optimal”—i.e., optimizing for greatest agreement at the Fed.

    3) I believe politics does drive strange behavior. But I am unwilling to buy into the absurd notion that the right on the Fed would either willfully sabotage the Economy and have the ability to control an Obama re-appointee. While I can believe in “the grassy knoll” gunmen as easily as the next guy, the Fed conspiracy theory favoring Romney thru economic destruction is at least one Knoll too far.

    4) I assumed like the market, he would do a Twist—-that is, nothing. But if I were him, and believed what he says he believes, then I would have wanted to be heroic and ease more now. At the end of the day, he is a cautious guy—-although I cannot figure out why.

  27. Gravatar of Cthorm Cthorm
    21. June 2012 at 07:20

    Scott –

    Per my email, I need a drink. There are probably many, many more Richard Fishers in the Fed system than there are Ben Bernankes or Charles Evans. We may be in for a rude awakening. I’m not so sure the Sumner Critique will hold up if there is so much complacency and so little commitment to actually hitting targets.

  28. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 07:36

    “Politically, he can’t justify a stronger move without being accused of influencing the election.”

    He is under a Congressional mandate to achieve maximum employment. His blatent defiance of this mandate opens him up to being accused (justifiably) of engaging in economic sabotage of Obama in to bring about his defeat.

  29. Gravatar of Saturos Saturos
    21. June 2012 at 07:40

    Scott, this is what happens when you start making compromises. We’ve stopped insisting that an NGDPLT is the only way to go, instead allowing for more “pragmatic” ways out, and the press has taken that to Bernanke. But now he gets to say that stimulus works through printing more money, which makes the exit more difficult as we have to withdraw more money as the economy recovers. Instead the beauty of NGDPLT is that we don’t have to promise more money printing per se, or allow any overheating – we simply insist that next year’s NGDP rise to the appropriate level by whatever means necessary. Since we could definitely do this by permanently increasing the money supply till the year we escape the liquidity trap, followed by backwards induction – the market knows it’s going to happen anyway, giving them the incentive to “do the heavy lifting” for us. Demand for money returns to normal levels, and we evacuate money immediately as NGDP rises to trend next year. No overheating, no making a bigger mess for ourselves to clean up. It’s what Nick Rowe says about inducing the market to “jump” to the correct equilibrium – the Fed doesn’t have to force it on path, it is merely the great persuader. Miles is still looking through the wrong end of the telescope.

    I think you’re still giving Miles too much credit, Scott, he’s very much an interest rate thinker and not a monetary base thinker. Worse, he isn’t thinking about how the French could enlarge the sun. Getting stuck in “finance” or portfolio equilibrium conditions when all we’re talking about is changing the “measure” is truly absurd. That is how Roosevelt got out of the trap. In terms of increasing the quantity of the base, yes the ZLB is supposed to make demand for money rise to match – but remember that the way the Fed permanently increases the base is by holding Treasuries to maturity and then essentially handing money over to the Fed. So that is more of a helicopter drop than a substitution – people spend more when they are (nominally) wealthier. Wallace neutrality doesn’t make permanent currency injections ineffective. But that is still the wrong way of thinking. Instead of dragging up the NGDP path by increasing the permanent money supply, we propose lowering the demand for money between now and the (currently) expected end of the recession. By promising that NGDP will jump to its correct path, NGDP does jump to its correct path. No irresponsibility is required – rather the private economy simply stops hoarding money once it realizes that the Fed is going to be cooperative again, to “stop being a bad parent” (to use David Beckworth’s excellent analogy).

    I realised this comment works well for both the last two posts, so I’m double posting it.

  30. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 07:42

    “There are probably many, many more Richard Fishers in the Fed system than there are Ben Bernankes or Charles Evans.”

    And Morgan is right on about what their objectives are.

    This is why Federal Reserve bank presidents, as long as bankers have 2/3 of the votes in electing them, should not be allowed to have votes on the FOMC. Actually a strong case can be made that giving them votes on monetary policy is unconstitutional since the Constitution gives Cogress the power to coin money and regulate the value thereof.

    There are several ways of correcting this problem. One option is to only let the Class C directors choose these presidents.

  31. Gravatar of ssumner ssumner
    21. June 2012 at 07:51

    dtoh, You said;

    “Is it simply that they blindly follow the consensus view of the majority of economists?”

    I’d put it slightly differently. Other than Bernanke, they are a bunch of average economists. Why should the views of average economists inside the Fed be different from the views of average economists outside the Fed?

    Morgan, Wrong, He said the Fed can do more, but he also said that the Fed can do no more to HELP the economy. Bernanke believes that more stimulus would help (but also be risky)–that’s the difference. Bernanke never talks about pushing on a string.

    You said;

    “And when YOU Scott Sumner fail to grasp how important it is to the private sector that that the public sector be fired aggressively and routinely,”

    I understood this when you were still in elementary school.

    Andrew, That’s what’s so weird—there are no risks. A few days ago I did a post pointing out that all the risks are in doing too little.

    FEH, All three of those are wrong. He’s just not a strong leader, or perhaps he’s a bit more conservative than I assumed.

    Liberal Roman, Excellent observation.

    dwb, As you may recall, I was never really sold on the double dip. The slow current growth is about what I expected, i.e. what the markets were expecting late last year.

    Mark, I can’t answer the short term debt issue, as I don’t keep up with that. I agree that Bernanke’s inflation target bias is an issue.

    I agree about Poland.

    Britmouse. That surprises me, as the debate in your Parliament is much better than ours–I would have assumed monetary policy was the same.

    123, He should have said “zero, if we are doing our job.” I’d pay $1000 to hear a central banker say that just one time.

    Statsguy, That’s certainly possible.

    Negation, Thanks, and no, I would not be asked and wouldn’t be interested if I was.

    123, God help us if they are so stupid that they think about risk in those terms. It would be like the 1930s Fed worrying about running out of gold. Actually, it would be much worse.

    Mike Rulle, I pretty much agree with all those points.

    Cthorm, The Sumner critique might be wrong, but it would still hold up if they were targeting only inflation. Policy wouldn’t just need to be wrong, it would have to be wrong in a very peculiar way.

  32. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 07:56

    “But I am unwilling to buy into the absurd notion that the right on the Fed would either willfully sabotage the Economy and have the ability to control an Obama re-appointee.”

    For the right defeating Obama is the overriding objective, as Boehmer clearly stated. Yes, they are deliberately doing everything they can to try to keep the unemployment rate as high as possible before the election. Their actions of the right on the FOMC are perfectly consistent with this.

    As far as Bernake is concerned, the right is not controlling him. Bernanke is making monetary policy like a country club Republican. Price stability is what matters and if that means having massive unemployment for years, so be it. Reappointing Republican Bernanke was Obama’s most serious policy blunder and if he loses the election this was the most important reason for it.

  33. Gravatar of ssumner ssumner
    21. June 2012 at 07:59

    Saturos, Obviously you and I are very closely in synch with our view on all this. Regarding Miles Kimball, I’m not going to be too critical at this point, because I’m just about the only economist (along with a handful of others) who look through the telescope the way you and I do. I’m more interested in how Kimball reacts to my arguments–that’s how I’ll evaluate him. The fact that he favors more QE means that we are close on the important issue, which is the current need for more monetary stimulus.

    BTW, In an older post I asked if you were at the University of Washington–ignore that, I recall you are in Perth.

  34. Gravatar of Cthorm Cthorm
    21. June 2012 at 08:06

    Scott – It seems really clear to me that the Sumner Critique is entirely true -IF- inflation is really being targeted in a rule-based way. It’s probably mostly true if the ‘target’ is a broad range, like driving a boat rather than a car. If the central bank is entirely coasting and unwilling to intervene at all, then the critique doesn’t really apply at all.

  35. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 08:08

    “Other than Bernanke, they are a bunch of average economists.”

    The proof of the pudding is in the eating. If Bernanke is an above average economist, why is his monetary policy so bad?

    And what about Janet Yellen?

  36. Gravatar of david stinson david stinson
    21. June 2012 at 08:41

    The “we can do more” and “of course, if things deteriorate, we stand ready to do more easing” lines seem unconvincing, at least to me.

    They are unconvincing because Bernanke of all people must understand that continuing the relatively ineffectual OT2 is what will necessarily lead to the deterioration, particularly given low growth expectations, below-target inflation and high demand for US$/t-bills resulting from the euro nonsense. So Bernanke saying “we will do more if things deteriorate” is like saying “we’re not going to do our job now but we stand ready to reverse our bad policy if it has its eminently predictable bad effects”. Why not just change course now?

    It cannot be that the only ones who understand this point are econbloggers and their commenters. And if you (Scott) believe that is in fact the case, then I simply do not understand how you can continue to support central banking. It would seem that you must immediately change sides and become a free banking advocate.

    Similarly, I don’t buy the political angle – either that Bernanke doesn’t want to be accused of influencing the course of the election or that he is otherwise constrained.

    First of all, neither of these is an argument available to those who believe that the Fed is an independent organization of brilliant technocrats guided only by the light.

    Second, it doesn’t make sense even on the political calculation. If Bernanke screws up and the economy is struggling badly, do you think this will raise his stock with Romney, should Romney win? Similarly, if, under those circumstances, Obama manages to get re-elected, is Obama’s view not likely to be that Bernanke almost cost him the election?

    Third, more substantively, is running an overly tight policy not more likely to leave Bernanke open to accusations of influencing political outcomes than running a neutral monetary policy?

    Fourth, I would imagine Bernanke would be far more concerned with his legacy both within the profession and in the history books, especially since he has a nice position to go back to at Princeton. If he saves the day, there will be so much adulation and market worship directed his way that any political stuff will fade into insignificance.

    Finally, advocates of central banking can’t argue that, sure, Bernanke is smart and understands, but he is constrained by the internal politics of the Fed. This is equivalent to arguing that those brilliant selfless technocrats who are indeed guided only by the light do not carry the day because they are weak or outnumbered by their dimwitted, small-minded and self-interested colleagues. Again, an argument for free banking.

    So, why’s he doing it?

  37. Gravatar of Andre Andre
    21. June 2012 at 10:24

    http://misleadingguidetocurrentaffairs.blogspot.com/2012/06/in-which-ben-bernanke-turns-me-into.html

    We need to tolerate more inflation if we’re to see any robust recovery. So why is the Fed keeping a 2% inflation ceiling?

  38. Gravatar of 123 123
    21. June 2012 at 10:42

    Scott:”God help us if they are so stupid that they think about risk in those terms. It would be like the 1930s Fed worrying about running out of gold. Actually, it would be much worse.”
    Yes, that is the most important risk for them. Asset side losses might prevent controlling inflation in the future plus they would be politically costly. I agree that asset side losses are a important problem, but I draw the trade-off at completely different line; and level targeting helps greatly too. Here is how Delong is modelling it:

    http://delong.typepad.com/sdj/2012/06/the-spread-between-the-30-year-treasury-bond-rate-and-the-30-year-tips-rate-is-now-222year.html

  39. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 10:50

    “So why is the Fed keeping a 2% inflation ceiling?”

    YOU SHALL NOT PRESS DOWN UPON THE BROW OF LABOR THIS CROWN OF THORNS!

    YOU SHALL NOT CRUCIFY MANKIND UPON A 2% INFLATION TARGET!

    William Jennings Bryan updated for the 21st century.

  40. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 11:02

    123:

    It is dangerous, and wrong, to infer real interest rates from TIPS yields. The bond market is more complex.

    There is a built in call option price that investors factor in when buying TIPS, since they could otherwise just buy regular bonds, plus call options for inflation expectations.

    One can’t look at TIPS bonds and regular bonds and infer a real rate of interest from them.

    It is also possible for TIPS bond yields to change without any change in inflation expectations.

  41. Gravatar of Full Employment Hawk Full Employment Hawk
    21. June 2012 at 11:05

    “This is equivalent to arguing that those brilliant selfless technocrats who are indeed guided only by the light do not carry the day because they are weak or outnumbered by their dimwitted, small-minded and self-interested colleagues.”

    The most serious problem is the presence of the 5 presidents of the individual Federal Reserve Banks on the FOMC. 2/3 of the boards of directors of these banks, who choose them, are chosen by bankers. The most serious problem members of the FOMC, like Fisher, Plosser, and Lacker come from this source (although only Lacker currently has a vote on the FOMC). Ending the ability of people chosen largely by bankers to have a vote on monetary policy would improve the response of the Fed to the needs of ordinary working people significantly.

  42. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 11:24

    If you look at the 5, 10, 20, and 30 year TIPS yields, you’ll see this:

    http://research.stlouisfed.org/fredgraph.png?g=8aq

    Contrary to what people like Sumner are claiming, these low rates DO NOT necessarily mean that investors expect inflation the next 5, 10, 20 and 30 years to be as low as these yields seemingly suggest.

    These people simply do not grasp the fact that TIPS bonds have call option prices embedded in them.

    For example, consider the 5 year TIPS yield. It is currently at -1%. Does this mean that investors think inflation will be negative 5 years out? NO.

    If an investor believes inflation is going to heat up 5 years down the road, then they might be willing to pay a call option price associated with a fixed income bond, which has the result of TIPS yields turning negative.

    A super low yield on TIPS bonds, rather than being a means to yammer for more inflation, can actually signal investors expect VERY HIGH inflation down the road. For if inflation does heat up down the road, then the interest payments will INCREASE at that time, which nets the 5 year bond investor a positive nominal return.

    I do not want to see inflation doves on this blog or any other blog pointing to the TIPS market, and saying “SEE?!?! Worries over inflation are misguided!”

  43. Gravatar of Doug M Doug M
    21. June 2012 at 11:30

    Could someone please explain to me what Operation Twist is actually supposed to do?

    The Fed is buying longer-term treasury bonds, and it is selling shorter-dated bonds. There is no expansion to the Fed’s ballance sheet, and no increase in the money supply.

    Then what is the purpose. Theoretically, a flatter curve will create an incentive for people to borrow money? Am I going to buy a house today because I can borrow at 3.625 vs. the 3.75 I gould get last week? A $7/month for every $100,000 borrowed…Not if I don’t think the house will hold its value!

    The Fed shouldn’t trying to lower rates to stimulate demand to borrow. They should be looking to steepen the curve to give more incentive for banks to lend. The Fed has it completely backwards!

  44. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 11:33

    Then there is the fact that TIPS bonds also have an embedded put option price associated with them.

    Unlike other inflation hedges like gold and commodity futures, you are guaranteed the principle with TIPS bonds. So an investor in a TIPS bond can also price in a put option based on the guaranteed principle repayment. That has the effect of boosting the value of a TIPS bond even more, and thus reducing the yield even more.

  45. Gravatar of Wimivo Wimivo
    21. June 2012 at 11:38

    http://www.pbs.org/newshour/businessdesk/2012/06/paul-krugman-on-ben-bernankes.html

    Bernanke’s old collaborator, Mark Gertler:

    “I disagree with Krugman about monetary policy — I think he vastly overstates what the Fed can do now. While I agree with him on just about everything else, what just happened today is a good example of why things are so difficult for the Fed. The Fed announced a purchase of nearly $250 billion long maturity government bonds, and, basically, long rates did not move. With rates so low, it is difficult to push them down any further. So now it’s up to fiscal policy (unfortunately!).”

    Gross. At least they follow it up with Wayne Angell:

    “The 25-basis point payment for sterile deposits at the Federal Reserve with zero risk has incapacitated monetary policy.”

  46. Gravatar of Doug M Doug M
    21. June 2012 at 12:03

    Major Freedom…

    A negative real yeild on TIPS does not suggest a negative outlook for inflation. Quite the opposite. The arbitrage free prices suggest that infaltion expections are rising if real yields fall more than nomimal yields. The 5 year break- even inflation rate is 1.7%

  47. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 13:21

    Doug M:

    A negative real yeild on TIPS does not suggest a negative outlook for inflation.

    I know. That’s exactly what I just got through explaining.

    I think you misunderstood what I said.

  48. Gravatar of Major_Freedom Major_Freedom
    21. June 2012 at 13:25

    Doug M:

    Could someone please explain to me what Operation Twist is actually supposed to do?

    Official answer: Reduce long term interest rates, so as to spur long term risky investment, without being inflationary.

    Probable answer: Reduce borrowing costs of government refinancing long term debt so as to enable it to borrow as much now before long term rates increase.

  49. Gravatar of ssumner ssumner
    22. June 2012 at 14:42

    Cthorm, That’s right.

    FEH, Yellen’s not close to the economist Bernanke is.

    David. That’s why we need a rule based system, not the current discretionary regime.

    Andre, I agree.

    123, Asset side losses on T-securities are not a problem as the Fed is part of the Federal government. It may be perceived as a problem, but it is not a problem.

    Wimivo, It’s hard to believe he co-authored papers with that guy. Why do so many smart people think central banks can’t debase their currencies?

    And does he not understand the move was priced in? Does he not understand the EMH?

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