All hail Ben Bernanke

Here’s John Hilsenrath, the reporter with the best Fed sources:

Drawing broad support for the plan was important to Mr. Bernanke in part because the policies he was formulating could outlast him. His term as Fed chairman ends in January 2014. Seeing a return to U.S. full employment as a distant goal, Mr. Bernanke needed the support of officials who might remain at the Fed after he left.

.  .  .

To move forward, Mr. Bernanke needed to corral several colleagues, including regional Fed bank president Dennis Lockhart from Atlanta, who had a vote on the Federal Open Market Committee, the Fed’s decision making body. Under Fed rules, four of the 12 regional Fed banks vote on the committee on a rotating basis; a fifth, the New York Fed, always votes.

.   .   .

Like others, Mr. Lockhart had reservations about the effectiveness of Fed policies. Earlier bond buying hadn’t yet produced strong growth. The banking system, still damaged by the financial crisis, wasn’t delivering credit the way economists expected, given historically low interest rates. Still, Mr. Lockhart thought a program targeting the U.S. housing market might help.

Mr. Bernanke also worked on nonvoters, including Narayana Kocherlakota, who was going through his own transformation.

Several months after becoming president of the Minneapolis Fed in 2009, Mr. Kocherlakota believed the job market had structural problems beyond the reach of monetary policy—for example, too many construction workers who couldn’t easily be trained for other jobs.

Mr. Kocherlakota joined Fed skeptics, so-called hawks, who doubted the effectiveness of central bank activism. During his turn as a Fed voter last year, he voted twice against loosening credit, moves championed by Mr. Bernanke.

.   .   .

Mr. Kocherlakota and Mr. Bernanke exchanged emails over months, debating structural unemployment—the idea that unemployment was caused by mismatches between employer needs and the skills and location of workers. In Mr. Bernanke’s view, employers weren’t hiring because of weak demand for their goods and services, which Fed policies might help remedy.

“I’ve learned a lot by talking to him,” Mr. Kocherlakota said in an interview after the September meeting. Mr. Bernanke’s “thinking is framed by data and models,” he said. “It beats coming in there with just your gut.”

By summer, Mr. Kocherlakota said, his views about structural unemployment were shifting as he found the evidence less than persuasive. This left an opening for Mr. Bernanke.

As the Fed’s August meeting approached, Mr. Bernanke and his inner circle, which included Fed Vice Chairwoman Janet Yellen and New York Fed President William Dudley, were thinking that any Fed action should be a comprehensive and novel package, rather than an incremental step, according to people familiar with their views. They agreed to take time to confirm their views of the U.S. economy and develop consensus for a plan.

.   .   .

The Fed’s policy committee emerged from the August meeting with familiar fissures. Opponents of the Fed’s easy-money policies said the measures weren’t giving the economy much of a lift, while risking future inflation.

Dallas Fed president Richard Fisher said the Fed was like a doctor over-prescribing Ritalin to attention-deficient Wall Street traders. Richmond Fed president Jeffrey Lacker dissented in August for the fifth straight meeting, taking issue with a policy already in place: An assurance the Fed had given that short-term interest rates would remain near zero through late 2014. Philadelphia Fed President Charles Plosser said in an interview that he urged Mr. Bernanke to wait until year-end before deciding on any new programs.

Despite their public disagreements, Fed officials were friendly behind the scenes. Mr. Plosser, who favors tighter credit policies, and the Chicago Fed’s Charles Evans, who wants easier credit, play golf together. They joined Mr. Fisher and Mr. Lockhart for a round at the Chevy Chase Country Club after the August meeting.

.   .   .

Many Fed activists wanted a open-ended program of bond purchases that would continue until the economy improved. Among them, some wanted to go big—at least a few hundred billion dollars worth over several months—with a promise to keep buying as needed. Moreover, some wanted to replace Operation Twist with bigger purchases of mortgage-backed securities and Treasurys.

As the September meeting neared, Mr. Bernanke needed to assure colleagues who still had reservations about moving too aggressively. In addition to Mr. Lockhart, Cleveland Fed president Sandra Pianalto had been wavering. She was among those who worried more Fed bond buying could disrupt markets.

Another fence-sitter was Washington-based Fed Governor Elizabeth Duke, a plain-spoken Virginia banker nominated to the Fed board by President George W. Bush in 2007.

Fed officials described the Fed chairman’s phone calls as low-pressure conversations. Mr. Bernanke sometimes dialed up colleagues while in his office on weekends, catching them off guard when their phones identified his private number as unknown. He gave updates on the latest staff forecasts, colleagues said. He asked their thoughts and what they could comfortably support, they said.

The calls helped Mr. Bernanke gauge how far he could push his committee. It also won him trust among some of his fiercest opponents, officials said. Nearly all of Mr. Bernanke’s colleagues described him as a good listener.

“Even if you disagree with him on the programs, you know your voice has been heard,” said Mr. Fisher, one of his opponents. “There is no effort to bully.”

Negotiations stepped up in the week before the meeting. Fed staff circulated language for policy options. Officials debated how different approaches would be described in the policy statement, which would be released after the meeting.

Officials at Fed policy meetings typically consider three options: one representing activists who want to use monetary policy aggressively; another supporting officials seeking conservative use; and a middle-ground option that typically prevails.

The premeeting documents this time listed four options, including an aggressive approach favored by activists, and no bond buying, favored by hawks. Among two middle-ground proposals was a compromise that Ms. Duke originated.

.  .  .

At the meeting the following week, the Fed adopted the compromise that Ms. Duke helped spur. The Fed would continue Operation Twist through December but add an open-ended mortgage-bond buying program.

Activists got what they most wanted: An open-ended commitment to buy mortgage bonds until the job market improved, with the strong possibility of additional Treasury purchases later. Fence-sitters got a promise to review the plan before deciding to proceed with a bigger program in 2013. Mr. Lockhart said the chance to reassess the program based on inflation and the performance of the job market helped win him over.

With an agreement on bond buying largely in place, Fed officials at the September meeting left unanswered this question: When could they leave growth of the U.S. economy on its own? Mr. Kocherlakota and Mr. Evans failed to get agreement for inflation and unemployment thresholds to determine when to raise short-term rates, according to people familiar with the talks.

That’s exactly how a leader should manage a committee.

No one can say Bernanke is not well-intentioned, even if they wish he’d moved a bit faster.  Does anyone know how the timing of bringing in the management consultant (Robinson) compares to Larry Ball’s paper on Bernanke’s quiet personality?


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14 Responses to “All hail Ben Bernanke”

  1. Gravatar of marcus nunes marcus nunes
    1. October 2012 at 06:37

    Scott
    Ball´s NBER paper was published in February this year. According to reports, Bernanke met with Mr Robinson 4 times between May and July this year.
    But apparently they had 2 meetings in 2011.
    Maybe he had an advance copy of Ball´s paper, or maybe Ball talked to him about it…

  2. Gravatar of D.Gibson D.Gibson
    1. October 2012 at 08:02

    Bernanke’s movement is great, but is the action really significant? $40B/month is a tiny amount of money. That will take >4 years to make up for the $1T+ we lost in M4. I don’t think that $40B/month is enough to keep up with economic growth. Does that $40B/month translate into a bigger effect on the money supply? Have the votes changed, but the policy been kept ineffectively small?

  3. Gravatar of Bob Murphy Bob Murphy
    1. October 2012 at 08:28

    Scott Sumner wrote:

    No one can say Bernanke is not well-intentioned, even if they wish he’d moved a bit faster.

    You’re not my dad! You can’t tell me what to say!

  4. Gravatar of Saturos Saturos
    1. October 2012 at 08:59

    Scott, what do you think of this (fantastic) Noah Smith post? http://noahpinionblog.blogspot.com.au/2012/09/engineering-vs-science-in-macroeconomics.html

    Where does MM fit in? (In all the fuss about the EconoTrolls, everyone missed this much more valuable previous post.) And please try to engage with his thinking, instead of making vague comments about pragmatism.

  5. Gravatar of Saturos Saturos
    1. October 2012 at 09:31

    I mean, the money illusion post was a great step forward in terms of this argument: http://noahpinionblog.blogspot.com.au/2012/03/why-bother-with-microfoundations.html

  6. Gravatar of Major_Freedom Major_Freedom
    1. October 2012 at 10:51

    “Even if you disagree with him on the programs, you know your voice has been heard,” said Mr. Fisher, one of his opponents. “There is no effort to bully.”

    No, the bullying part comes after the FOMC makes their decision. The SWAT teams ensure social compliance with the Fed’s toilet paper system.

    The Fed economists are much too sophisticated and civil to sully themselves with the necessary part of central banking.

  7. Gravatar of Major_Freedom Major_Freedom
    1. October 2012 at 10:52

    All Hail the SWAT teams!

  8. Gravatar of johnleemk johnleemk
    1. October 2012 at 10:55

    Joe Wiesenthal at Business Insider practically wet his pants at Bernanke’s speech today: http://www.businessinsider.com/ben-bernanke-speech-five-questions-about-the-federal-reserve-and-monetary-policy-2012-10

    I have to agree, it’s brilliant. This is the Bernanke we needed 3 or 4 years ago. I’m just glad the Bernanke from the 1990s is back in action. Maybe he’s been reading The Money Illusion?

    At one point he was asked what Milton Friedman would have said about the Fed’s actions these days. His answer was excellent. He pointed out that Friedman advocated QE for Japan during its struggle against deflation and weak growth. He also recalled one of Friedman’s most important lessons, that low interest rates are not the same as loose policy.

    Bernanke said specifically, when citing the lesson of Milton Friedman: “We didn’t allow the fact that interest rates were very low to fool us into thinking that monetary policy was accommodative enough.”

    You can practically hear him bellowing “Never reason from an interest rate change!”

  9. Gravatar of Saturos Saturos
    1. October 2012 at 11:11

    john, that’s incredible, Scott will have a post on this. It confirms that it has been the same Bernanke all along. (It also confirms that Bernanke’s behavior has been constrained by politics and not knowledge.)

    Bob Murphy has a very interesting new article on carbon taxes: http://www.econlib.org/library/Columns/y2012/Murphycarbon.html

  10. Gravatar of Philo Philo
    1. October 2012 at 11:15

    Hilsenrath would have liked an answer to this question: “When could they [the FOMC] leave growth of the U.S. economy on its own?” He should have recognized the nonsensicality of the question: inevitably Fed policy, whatever it is, will affect the economy.

  11. Gravatar of Saturos Saturos
    1. October 2012 at 11:22

    Increased bank reserves held at the Fed don’t necessarily translate into more money or cash in circulation, and, indeed, broad measures of the supply of money have not grown especially quickly, on balance, over the past few years.

    So, Bernanke’s great, but he’s not quite there yet.

    What was really beautiful though, was this, in Wiesenthal’s own words:

    Ultra-low rates are evidence that money is still too tight, since it means monetary policy is failing to induce the desired inflation.

    Yes, I know, it’s terrible he’s using the phrase “desired inflation”, but come on, the MSM have made progress!

    But in this piece, Wiesenthal fails to make the requisite connection:

    Rising rates are an artifact of loose policy, which is what the Fed is currently trying to pursue, to limited effect. If you want higher rates for savers, the only way out is to do whatever you can to boost the economy, which itself will cause interest rates to rise.

    http://www.businessinsider.com/charlie-evans-what-do-you-mean-by-low-interest-rates-2012-10

    He fails to see that, ergo, low rates till 2015 (contra Yglesias) is a therefore terrible promise to make! Rates rise now to the extent that a recovery has been caused now!

  12. Gravatar of Saturos Saturos
    1. October 2012 at 11:34

    That Evans interview is very interesting, especially the vague ways in which he responds to those asking him how the policy will work, and what the “monetary policy multiplier” will be.
    (Root cause of crisis: B-school graduates all think in terms of old-Keynesian macro – except maybe those from Bentley.)
    Evans also has a long-and-variable lags approach (well so does everybody); predicting we will see some labor-market improvement but only at the end of next year.

  13. Gravatar of Saturos Saturos
    1. October 2012 at 11:35

    Another piece: conditional fiscal stimulus? and Romer’s projections: http://www.businessinsider.com/david-leonhardt-on-obamanomics-2012-9

  14. Gravatar of Needed: More jam sessions with Carl Robinson | Historinhas Needed: More jam sessions with Carl Robinson | Historinhas
    1. October 2012 at 12:58

    [...] “All hail Ben Bernanke”, Scott Sumner links to Jon Hilsenrath´s take on Bernanke convincing recalcitrant FOMC members [...]

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