My only conversation with Ben Bernanke

I only met Bernanke once, when he presented a seminar at Bentley on his 1983 paper claiming that that disintermediation played a big role in the Great Depression, independent of the contractionary monetary policy.  I asked just one question:  “What impact would the banking problems have had if the Fed had successfully targeted nominal GDP growth?”  It was many years ago, and I don’t recall his precise answer, but I am fairly certain that he hesitated, and then said something to the effect that the bank failures would still have had an impact on output, but that impact would be somewhat lessened.

How could he have answered otherwise?  He is known for his strongly held view that monetary policy can still be highly effective when rates hit zero, so he could hardly argue that nominal GDP targeting is not feasible, at least as a thought experiment.  And he couldn’t argue that the Depression would never have occurred with NGDP targeting, or his thesis that disintermediation was a independent shock would be discredited.

I recent months I have often thought of how ironic it is that my only question for Ben Bernanke lies at the center of my current disagreement with Fed policy.  I firmly believe that with nominal GDP targeting there would have been no recession at all, and that the banking troubles would have been far milder–as they were until AD began falling more sharply in August 2008.

Ben Bernanke was my first choice for Fed chairman.  I greatly respect him.  Later I’ll discuss why large institutions have trouble reacting to crises that call for creative thinking.

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