The NYT misquotes Ben Bernanke

Yesterday I did a post pointing to a NYT report on a seemingly inexplicable comment by Ben Bernanke:

Mr. Bernanke was also asked why the Fed does not lower or eliminate the interest rate — already at 0.25 percent — that it pays banks for excess reserves kept at the central bank to encourage more lending.

He said that Fed officials had not ruled out that idea but that so far it appeared the benefits would be very small and that there were concerns that eliminating the interest takes away a tool used to control broader interest rates.

Bonnie sent me the actual link, and it turns out that Bernanke said nothing of the sort.  But what he did say is equally mysterious.  At one point (just after 40:00) he argues that cutting the IOR rate from 0.25% to zero would depress short term rates by only 8 or 9 basis points.  And the implication was that this meant it would provide very little boost to spending.  But let’s take that argument one step further.  Suppose short-term rates did not fall at all, and T-bill yields stayed at 8 basis points.  Would the stimulus be even less?  If you were a banker, how would a reduction of IOR from 0.25% to zero impact your demand for excess reserves, if the closest alternative investments paid 0.08%?  Wouldn’t your demand for ERs fall?

The problem with Keynesians is that they view monetary policy through the lens of short-term interest rates, whereas it is actually all about the supply and demand for the medium of account (the base.)  That’s why Keynesians screwed up in late 2008, when they failed to loudly scream for easier money (when us MMs were doing so.)  This is not to say that lowering the IOR would work miracles.  As always it depends on how it affected the future path of policy.  But if it failed, it would certainly not fail for the reason given by Bernanke.

Commenter extraordinaire Saturos sent me the following:

Bernanke says that CPI inflation has averaged 2% over the past 4 years, is that right?

Let’s assume that Saturos did not misquote Bernanke as the NYT did.  (I’m way too busy to listen to the entire interview.)  In that case Bernanke is wrong.  His favorite consumer price inflation index is the PCE, and this link shows consumer prices rising at a 1.37% rate over the past 4 years.  Oddly the Fed delivered inflation rates above 2% when unemployment was low around 2006-08, and has run sub-2% inflation rates during the recent period of very high unemployment. Of course their dual mandate calls for exactly the opposite.  How can we get the Fed to end this procyclical monetary policy regime?

Answer:  NGDPLT

Off Topic, Matt Yglesias has an excellent post discussing how the current fixation on “inflation” causes nothing but confusion.  Here’s an excerpt (but read the whole thing for context):

There’s tons of public confusion out there about inflation all the time, but rather than worrying about why the public is so confused about it I think we should worry first and foremost about why economists are working with such a confusing concept.

.  .  .

Monetary policy is about nominal problems. Bad weather is a paradigmatic real problem. “High prices” is an ordinary language word that’s ambiguous between a nominal issue and a real issue. But “inflation” is supposed to be an economist’s term of art. Yet instead of using it like a term of art—something with a precise meaning that distinguishes between real and nominal issues—it’s used as a synonym for “higher prices.”

.  .  .

The thing that people dislike is when nominal consumer prices rise faster than nominal incomes. It’s not difficult to understand why people dislike that, and it’s exactly the kind of thing that bad weather does cause. But if central bankers want the public to understand what they’re doing, they have to take more care in their own dialogue to distinguish between nominal issues and real scarcity.

That’s why central bankers should stop talking about inflation, and start talking about NGDP.  I also loved this Yglesias post:

I just noticed that Stephen Williamson took issue with my praise of Minneapolis Federal Reserve President Narayana Kocherlakota’s change of positioning on monetary policy issues.

He didn’t really explain himself in the post per se, but in ensuing comments in the discussion thread Williamson makes clear that he doesn’t buy the idea that Kocherlakota was persuaded to change his mind by evidence. Rather, he states that the only good theory he has for the flip-flop is that “ambition collides with economic science.” In general my impression is that people who run around talking a lot about “economic science” are generally engaged in an unscientific level of self-puffering and BS.

.  .  .

Here’s what I think about ambition. I think that if I were an ambitious monetary economist who believed in good faith that the current course being pursued by the FOMC will be ineffective in boosting employment and is likely to produce a troubling level of inflation, I’d be shouting that from the rooftops.

There’s a great blog post from M.C.K. over at Free Exchange:

The consensus was that the Federal Reserve had been suborned by nefarious elements. Instead of solely focusing on its mandate to restrain the pace of inflation, the allegedly corrupted Fed was concerning itself with trivia like ending the recession. The discussion felt a bit out of place. No matter how one evaluates the Fed’s overall performance, the inflation record since 2009 has actually been quite consistent with its stated target. If the Fed had indeed been captured by nefarious elements that had no regard for the price stability mandate, one would have expected faster inflation to have been the result, yet the pace of inflation has actually been slower since the recession began than in the years before.

Mr Warsh and Mr Poole (who was filling in for Allan Meltzer) made a sharp distinction between the “legitimate” efforts to fight the crisis and the subsequent easing actions that were, allegedly, unjustified by the economic fundamentals. According to them, the interventions of 2007-2009 were required to ensure that “the markets could clear”, as Mr Warsh put it, while the second round of easing was done to satisfy “political masters” by monetising the debt. In fact, Mr Warsh said that the Fed was being actively unhelpful by “crowding in” Congress’s supposedly poor policy choices. He reckoned the Fed would have had more room for maneouvre if the legislature had made a good faith effort to reform entitlements and close the budget deficit. Mr Warsh seems to prefer the approach taken by the European Central Bank (ECB), in which the unelected and unaccountable monetary authority more or less dictates to democratic governments. Supposedly, these conditions are required to prevent “moral hazard”. Yet Mr Warsh had no trouble when the Fed was providing unlimited liquidity to troubled financial firms at concessional rates in exchange for dubious collateral during the teeth of the crisis.

A cynic would say that the difference is that in 2008 the crisis threatened the wellbeing of big bankers, whereas the current crisis is unemployment.  I actually think these inflation hawks are well meaning, just too focused on fighting the last war (from the 1970s.)

And finally, Mark Thoma has an excellent post on wage rigidity:

It is not surprising at all that wage movements would be uninformative about labor market conditions when wages adjust sluggishly to economic conditions, but the prevalence of claims about the condition of the labor market based upon measures of compensation is a signal that people have missed this point. There can be both considerable slack in the economy (so let’s do something about it), and relatively stable wages.


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21 Responses to “The NYT misquotes Ben Bernanke”

  1. Gravatar of alexander alexander
    22. November 2012 at 15:45

    i would have thought it obvious that when BB says “inflation has averaged 2% over the last 4 years”, that he is talking about CPI. the fact that the ‘preferred’ Fed measure is something else, does not change the fact that “inflation”, in common parlance, equates to CPI.

  2. Gravatar of ssumner ssumner
    22. November 2012 at 17:36

    Alexander, Either way he’s wrong. When I use the CPI I gets tons of annoying commenters telling me I’m wrong because Bernanke uses the PCE. They are very similar; I thought that was “obvious” to use your wording—I can’t win with commenters too lazy to look up the data.

  3. Gravatar of DOB DOB
    22. November 2012 at 18:30

    Hi Scott,

    I wrote this post which hopefully should clarify what I was trying to say in our discussion on Swiss nominal exchange rate and also relate to your above comment on demand for the medium of account.

    Would be grateful if you’d point out where you think my reasoning is flawed when you have some time.

  4. Gravatar of The Market for Safe Assets | Catalyst of Growth The Market for Safe Assets | Catalyst of Growth
    22. November 2012 at 18:31

    [...] his latest post, Scott Sumner says The problem with Keynesians is that they view monetary policy through the lens [...]

  5. Gravatar of marcus nunes marcus nunes
    23. November 2012 at 05:17

    Scott
    John Taylor´s comments at the Cato meeting were terrible:
    “Like Mr Warsh and Mr Poole, Mr Taylor agreed that the expansion of the Fed’s balance sheet in the aftermath of Lehman’s collapse was appropriate, comparing the episode to what occurred after the terrorist attacks of September 11, 2001. He believes that the panic was a liquidity crisis rather than a solvency crisis, which is why he argued that the balance sheet should have shrunk back to its pre-crisis level by the beginning of 2009. Again, it is difficult to square this support of the Fed’s concessional lending programmes with his campaign against the evils of moral hazard. Unlike Warsh and Poole, however, Mr Taylor argued that he cared deeply about the fate of the unemployed. He seems to sincerely believe that reversing the Fed’s current policies would eliminate “uncertainty” and lead to a robust recovery. Regrettably, I was not able to ask Mr Taylor to provide more detail on how this would work.

    Despite the fact that your correspondent was not called on, Mr Taylor was nevertheless asked two interesting questions. One young man asked whether the adoption of a nominal GDP target would satisfy Mr Taylor’s desire for the Fed to be governed by rules rather than the whims of policymakers. Mr Taylor had no problem with steady nominal GDP growth as a goal of monetary policy but he did not see how a rule along the lines of “keep NGDP on its trend path” would be useful because it does not address how to achieve this objective. Expectations matter, he noted, but they are nothing without actions that justify those expectations. A policy rule is useless if it does not to relate to the instruments at the disposal of policymakers. Mr Taylor’s critique applies equally to consumer price inflation targets. In fact, he argued that the Fed was too concerned with the threat of deflation in the early 2000s. Unconstrained by a simple rule, policymakers acted too aggressively and, according to Mr Taylor, inflated an asset bubble.

    Interestingly, Mr Taylor seems to have had a different answer to this question back when he wrote about the subject twenty years ago (from the paper linked above):

    A policy rule need not be a mechanical formula, but here there is more disagreement among economists. A policy can be implemented and operated more informally by policymakers who recognize the general instrument responses that underlie the policy rule, but who also recognize that operating the rule requires judgment and cannot be done by computer. This broadens the definition of a policy rule significantly and permits the consideration of issues that would be excluded under the narrower definition. By this definition, a policy rule would include a nominal income rule in which the central bank takes actions to keep nominal income on target, but it would not include pure discretionary policy.

  6. Gravatar of Saturos Saturos
    23. November 2012 at 07:39

    There should be an option for me to display that under every post: “Saturos – commenter extraordinaire”.

    No, what do you mean, it hasn’t gone to my head at all…

  7. Gravatar of Saturos Saturos
    23. November 2012 at 07:41

    Sorry – I did misquote Bernanke! Matt Yglesias has it right, Bernanke said PCE, not CPI. And it seems he was wrong about that.

    I think CPI jumped into my head as soon as I heard Bernanke say “consumer price inflation”…

  8. Gravatar of Saturos Saturos
    23. November 2012 at 07:44

    The latest from our dear friend Jens Weidmann: http://uk.reuters.com/article/2012/11/23/uk-ecb-weidmann-idUKBRE8AM0BS20121123

    (Is it Weidmann or Weidemann? I’ve seen it spelt both ways)

    And who would have guessed? Borges is also the favorite writer of none other than Karl Rove: http://www.thedailybeast.com/articles/2012/11/20/what-karl-rove-s-learned-from-jorge-luis-borges.html

  9. Gravatar of Saturos Saturos
    23. November 2012 at 07:52

    Marcus, did you also read the comment I left under the MCK article? (It’s the first one down)

  10. Gravatar of ssumner ssumner
    23. November 2012 at 07:56

    DOB, I’ll respond to your earlier Swiss comment later today—but I don’t think we are that far apart. I agree that if other assets earn zero interest (forever) then they are effectively cash, and that OMOs do nothing. I also argued for negative IOR, indeed I think I was the first economist to publish an article advocating negative IOR.

    I would add that one can achieve roughly the same objective (as negative IOR) by setting a higher inflation/NGDP target, which also reduces real interest rates and (using my language) reduces the demand for the medium of account. If interest rates are not expected to be zero forever then a permanent injection of base money will tend to raise future expected prices and NGDP. If rates are expected to stay at zero forever then the national debt should be entirely cash, and fiscal policy would drive the price level.

    Marcus, Yes, I also found that answer to be unsatisfactory.

    Saturos, But that can’t be right, because commenter Alexander said it was “obviously” the CPI.

    The fact that Karl Rove likes Borges makes my head spin.

  11. Gravatar of Fonzy Shazam Fonzy Shazam
    23. November 2012 at 08:55

    As a banker close to the ground, I find the IOR issue (why the Fed continues to pay for excess reserves) is quite easily solved with public choice analysis. Banks are flush with cash due to low interest rates, poor credit demand, higher credit standards, et al. Every cash deposit begins as a costly liability because of FDIC insurance. Banks would rather pay the insurance and accept the deposit rather than go to the expense of vetting and discriminating against many deposits. But that decision is heavily influenced by the fact that the Fed is paying IOR. Banks lobby VERY hard through the regional Fed offices to maintain this arrangement. It is simply a much better (cheaper and easier) solution than the alternatives. The Fed doesn’t see it as highly contractionary, so the giveaway is continued. Path of least resistance meets concentrated benefits/distributed costs.

  12. Gravatar of Saturos Saturos
    23. November 2012 at 09:30

    Actually, the Daily Beast makes a pretty convincing case. Remember what Rove said about the Bush Administration and “creating our own reality”? That sounds more than a bit like T.U.O.T., doesn’t it?

  13. Gravatar of Scott Sumner Scott Sumner
    23. November 2012 at 09:39

    Saturos, Yes, I’ll do a post.

  14. Gravatar of Jon Jon
    23. November 2012 at 10:06

    Actually, the Daily Beast makes a pretty convincing case.

    Convincing up until the end when the statement is made about Obama being moderate. It’s true, he is like a Republican playing on the 1970s pitch, but the world changed. Now that it has and we’re more then a generate hence, it’s a confusion to call upon old labels to explain his position today.

    The middle moved toward market-liberalism. Airbrushing that away and just adopting the old labels anew? Now that’s T.U.O.T.

  15. Gravatar of marcus nunes marcus nunes
    23. November 2012 at 11:10

    Saturos
    I read your comment at MCK. It´s good but too long (reminded me of Major!
    And from now on when I refer to you I´ll shorten Saturos to “CE”.

  16. Gravatar of Full Employment Hawk Full Employment Hawk
    27. November 2012 at 06:33

    “A cynic would say that the difference is that in 2008 the crisis threatened the wellbeing of big bankers, whereas the current crisis is unemployment.”

    PRECISELY. That fully explains the position of the current opponents of expansionary monetary policy: If the wealth of the economic elite is threatened agressive monetary intervention is needed, but if commoners are suffering massive unemployment, tough shit. This has been the ruling philosophy that the Fed has followed since the financial crisis.

  17. Gravatar of Full Employment Hawk Full Employment Hawk
    27. November 2012 at 06:45

    “Mr Warsh seems to prefer the approach taken by the European Central Bank (ECB), in which the unelected and unaccountable monetary authority more or less dictates to democratic governments.”

    This is a form of fascism and totally incompatible with the principles on which a free, democratic society is based. Fortunately the U.S. constitution does not provide for an independent central bank and gives the power to coin money and regulate the value thereof to the elected representatives of the people.

    And look at the results of giving this kind of power to an unelected central bank: The ECB has killed the recovery in the Eurozone and thrown it into a second recession as well as playing a major role, along with Angela Merkel in bringing about massive unemployment in large parts of the zone. The unemployment in some parts of the Eurozone is approaching what it was in Germany in 1933 when Hitler took power.

  18. Gravatar of Major_Freedom Major_Freedom
    27. November 2012 at 07:09

    Full Employment Hawk:

    Did you go through a conversion? Wow.

  19. Gravatar of Full Employment Hawk Full Employment Hawk
    28. November 2012 at 10:01

    Major: What makes you think I went through a conversion? I have been repeatedly criticising the FOMC for blatently refusing to abide by its congressional mandate to seek maximum employment. I have argued against letting the presidents of the individual Federal Reserve Banks, who are not chosen by the elected representatives of the people, having a vote on the FOMC. And I have never indicated that I favor unelected bankers being able to dictate economic policy to democratically elected governments.

  20. Gravatar of Major_Freedom Major_Freedom
    28. November 2012 at 10:25

    Major: What makes you think I went through a conversion?

    Well, other than the pro-democracy bent, your two comments are full of comments I see very often in Austrian, anti-Fed circles. This comment especially:

    “Fortunately the U.S. constitution does not provide for an independent central bank”

    Although I would argue that even if the constitution did provide for it, it still would not be justified, since it is grounded in property rights violations (forcing the state’s money on property owners).

    I have been repeatedly criticising the FOMC for blatently refusing to abide by its congressional mandate to seek maximum employment.

    What if I told you that inflation doesn’t generate maximum employment?

    I have argued against letting the presidents of the individual Federal Reserve Banks, who are not chosen by the elected representatives of the people, having a vote on the FOMC. And I have never indicated that I favor unelected bankers being able to dictate economic policy to democratically elected governments.

    The same problem underlying central banking would remain, even if it were put under democratic powers. The problem is the lack of economic calculation in socialism. Even if everything were private except for money production, then the lack of economic calculation would be present in the production of money itself. No profit and loss constraints. The means of producing money would not carry a price. The state monopoly producers of money (even if they were elected) would not be in control of a private, competing property.

    Private property owners who incur losses can’t keep making wrong decisions. The market process has a built in correction mechanism. With state monopolized money, not only are the losses unobservable, but bad decisions can be made over and over again, and the costs are imposed on property owners who are coerced into the state monopoly of money, like your chosen people the proletariat.

    Greenbackers are not presenting an improvement.

  21. Gravatar of Full Employment Hawk Full Employment Hawk
    28. November 2012 at 22:19

    “your two comments are full of comments I see very often in Austrian, anti-Fed circles. This comment especially: “Fortunately the U.S. constitution does not provide for an independent central bank”

    Austrians are not the only people who oppose an independent central bank, there are other groups who hold this position, but often for different reasons than the Austrians. For example, an independent central bank that can sabotage the economic agenda of a progressive government is clearly not something that progressives like me would favor. When a progressive administration wins an election, its first priority must be to put people in charge of the central bank that supports its agenda. The failure of the Obama administration to appoint people who believed that restoring the economy to full employment had to be the first priority almost cost it the election.

    “What if I told you that inflation doesn’t generate maximum employment?” I would agree with you. In an economy that is depressed a more rapid growth in aggregate demand, or in a dynamic setting a more rapid NGDP growth is what is needed to bring the economy to full employment. The more of the adjustment to more rapid NGDP growth is in output, and the less in inflation, the better, but some increase in inflation has to be accepted. If the economy is at full employment inflation in excess of 2-3 percent is undesirable.

    I am not interested in entering another pointless debate about the Austrian dogma that you have at the end of your message.

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