Ben Bernanke 1999, Adam Posen 2011

Here’s Ben Bernanke in 1999:

Needed: Rooseveltian Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take””-namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment””-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.  (Italics added.)

Here’s Adam Posen in the NYT:

BOTH the American economy and the global economy are facing a familiar foe: policy defeatism. Throughout modern economic history, whether in Western Europe in the 1920s, in the United States in the 1930s, or in Japan in the 1990s, every major financial crisis has been followed by premature abandonment “” if not reversal “” of the stimulus policies that are necessary for sustained recovery. Sadly, the world appears to be repeating this mistake.

The right thing to do right now is for the Federal Reserve and the European Central Bank to engage in further monetary stimulus. Having lowered short-term interest rates, they should buy (or in the case of the Fed, resume buying) significant quantities of government securities to help push down long-term interest rates and encourage investment.

If anything, it is past time for the Fed and its European counterpart to act. The economic outlook has turned out to be as grim as forecasts based on historical evidence predicted it would be, given the nature of the recession, the cutbacks in government spending and the simultaneity of economic problems across the Western world. Sustained high inflation is not a threat in this environment.   (Italics added.

So we’ve gone from “do whatever was necessary to get the country moving again” to “policy defeatism.”  How did that happen?

HT: Kai, Marcus Nunes


Tags:

 
 
 

30 Responses to “Ben Bernanke 1999, Adam Posen 2011”

  1. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 07:57

    “do whatever was necessary to get the country moving again”

    what is necessary is the defeat of Obama, and we are doing it.

    Scott, one more time, HYPOTHETICALLY, if the Fed was determined to end Obama and be as inobvious about it as possible, WHAT would their policy for the next 12 months be?

    1. end Obama
    2. be as inobvious as possible

    Game it out, what do they do?

  2. Gravatar of Benjamin Cole Benjamin Cole
    22. November 2011 at 08:07

    Terrific blog.

    Ii’s policy defeatism married to a peevish and nearly perverted fixation on inflation.

    Reconsider John Taylor’s stance on Market Monetarism.

    The last CPI reading was down, The last PPI reading was down. Unit labor costs are falling. The core CPI rate has never been so low for so long.

    Yet Taylor opens up his attack on Market Monetarism buy citing a hypothetical situation in which we had an inflationary jolt to the economy, and that NGDP targeting would somehow exacerbate that jolt, meaning that even later we would have to crank down harder.

    You see? Because beating even a hypothetical future inflation is more important than prosperity now. Never take a risk, not even for a large reward.

    So the answer, of course, is no prosperity now, no prosperity later, no prosperity for decades—the Japan answer. They beat inflation, and so can we.

    Still, I suspect Taylor is a GOP’er to the core, and thus just wants Obama out. The Europeans, on the other hand, have simply lost their marbles.

  3. Gravatar of John hall John hall
    22. November 2011 at 08:08

    I met Posen once at a Macroeconomic Advisers event. His talk was pretty good (maybe last September, I think) and he was saying a lot of the things you were about monetary stimulus.

    I suspect his influence was largely the reason (he had been dissenting for a while) why the BoE’s asset purchase expansion was much larger than the Fed or ECB’s covered bond program as a percent of GDP.

  4. Gravatar of John John
    22. November 2011 at 08:26

    It’s really funny that Bernanke admits that most of what Roosevelt did was a complete failure then applauds him for “doing what needed to be done.” No he didn’t!

    You could argue that Roosevelt helped fight the Depression but you could also look at the data and say, what would it look like if Roosevelt was doing his best to keep the depression going? I don’t think he could have done a better job keeping the nation unemployed if he had tried.

    Roosevelt did try to stabilize the banking system and devalue the currency. So did the Japanese in the 1990s and the U.S. recently. Roosevelt may have been more effective at generating inflation but the effort was there on the part of the Bank of Japan and the Federal Reserve. How else are they supposed to create inflation besides blowing up the monetary base?

    I think you can make the exact counter argument. The way to create a depression is to meddle with the banking system and create tons of moral hazard through bailouts and the like while inflating the money supply and waste money on ridiculous government infrastructure projects. That way seems to create a depression every time it’s been tried but somehow it’s the “respectable” policy prescription. Go figure.

  5. Gravatar of John Thacker John Thacker
    22. November 2011 at 08:33

    Benjamin,

    Perhaps about Taylor, but I’ve seen the same sort of inflation nonsense from libertarian economists who repeatedly and proudly state that they never vote Republican, and from another who says that he voted for Obama over McCain and would still do so today, even though he thinks Obama has been terrible.

    I think that it’s a mistaken belief, widely but sincerely held.

  6. Gravatar of Vincent Vincent
    22. November 2011 at 08:33

    I find myself at the opposite end of Morgan ideologically, but I think on this he’s absolutely right: the Fed’s behavior is much, much easier to explain once you stop assuming that they are doing their best-faith effort to improve the economy.

    this hypothesis is easy to test: they should reverse course some time in 2013, once romney is elected.

    remember how republicans, circa 2001-2008, couldn’t care less about deficits or hard money? more precisely, those who did care were marginalized. the goldbuggers will not be allowed on fox news anymore when romney is president.

    the beauty of it is that nobody will notice, even liberals, because this topic is so boring that people simply refuse to listen or read anything about it.

  7. Gravatar of John Thacker John Thacker
    22. November 2011 at 08:58

    But Vincent, the crisis unfolded when Bush was still President and the Fed’s inaction definitely led to the massive Democratic victory. Are you also claiming that the Fed wanted that, too?

  8. Gravatar of Mike Sax Mike Sax
    22. November 2011 at 09:10

    “So we’ve gone from “do whatever was necessary to get the country moving again” to “policy defeatism.” How did that happen?”

    That is the question and I which I-or anyone else-knew. You read people like Bernanke in 1999 or Fisher and Eggertsson today and these people at the Fed are not stupid-except maybe for the hawks. Yet despite the fact that Bernanke himsel undertands the need to do something where even questionable actions are better than no actions still they undershoot.

    I will say this: comparatively-not that it’s a very high bar-Bernanke does look decent comparted with Europe. If not for the aggressive action that was taken in 2008 when Berannke and the rest of the world coordinated cuts, the rest of the aggressive moves by the fed in bond buying, the system would have totally imploded-during the Lehman Bros. phasse we saw Libor spreads explode like we are seeing in European bond yields right now.

    And the U.S. economy has recoverd during the second half, today’s disappointing GDP number notwithstanding-there was strong consumer spending and the first drop in business inventories since the 4th quarter of 2009

  9. Gravatar of Vincent Vincent
    22. November 2011 at 09:32

    John, are you saying the Fed should have popped the bubble back in 2005-20006? or that, given the housing bubble plus the cdo mess, the recession could have been prevented at all? or that they should somehow have bailed out lehman brothers? if i recall correctly it was paulson who took that decision, no?

  10. Gravatar of Rajat Rajat
    22. November 2011 at 09:32

    Not to defend him, but I suspect Bernanke would say that the Fed is doing what is necessary and is constantly experimenting, as evidenced by the relatively recent Operation Twist.

  11. Gravatar of marcus nunes marcus nunes
    22. November 2011 at 10:00

    Scott And Mike Kimel insists, this time not mentioning you, that Fiscal Policy “did it” in the 1930´s. He illustrates with graphs. Since I think mine are much better I did a post.
    http://thefaintofheart.wordpress.com/2011/11/22/a-picture-war/

  12. Gravatar of John Bennett John Bennett
    22. November 2011 at 10:14

    If one admits that our recession problem lies with inadequate aggregate demand.one has no choice but to blame the FED for failing to act and equally to blame the GOP veto in the Congress for refusing to use fiscal policy. The FED seems to be a captive of the same ideological view among the big private sector bankers who dominate it, that deficits are the problem. They are but will go on being so as long as we have heavy unemployment.
    It was nice for many years to have a FED that appeared above politics. That no longer seems to be the case. The Occupy Wall Streeters have a point here, as does Dr. Sumner and the others who support NGDP targetting.

  13. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 10:21

    Posen: “Central banks and governments can engage in forms of coordinated action that will target the burden of past debts that is hanging over the global economy.” Now I understand why previous civilizations undertook debt forgiveness on a massive scale. It was to keep the power structures from falling apart.

  14. Gravatar of Marcelo Marcelo
    22. November 2011 at 10:56

    Scott,

    Apparently NGDP was discussed at the latest Fed meeting. Below is a quote about the discussion of a policy switch at the last Fed meeting.

    “The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.”

    found: http://www.federalreserve.gov/monetarypolicy/fomcminutes20111102.htm

    Now it would seem that you just need harp on these downsides to NGDP targeting! The fed is moving, albeit quite slowly. Perhaps when the last of the hawks are out next year…

  15. Gravatar of Marcelo Marcelo
    22. November 2011 at 10:57

    Scott,

    Apparently NGDP was discussed at the latest Fed meeting. Below is a quote about the discussion of a policy switch at the last Fed meeting…

    “The Committee also considered policy strategies that would involve the use of an intermediate target such as nominal gross domestic product (GDP) or the price level. The staff presented model simulations that suggested that nominal GDP targeting could, in principle, be helpful in promoting a stronger economic recovery in a context of longer-run price stability. Other simulations suggested that the single-minded pursuit of a price-level target would not be very effective in fostering maximum sustainable employment; it was noted, however, that price-level targeting where the central bank maintained flexibility to stabilize economic activity over the short term could generate economic outcomes that would be more consistent with the dual mandate. More broadly, a number of participants expressed concern that switching to a new policy framework could heighten uncertainty about future monetary policy, risk unmooring longer-term inflation expectations, or fail to address risks to financial stability. Several participants observed that the efficacy of nominal GDP targeting depended crucially on some strong assumptions, including the premise that the Committee could make a credible commitment to maintaining such a strategy over a long time horizon and that policymakers would continue adhering to that strategy even in the face of a significant increase in inflation. In addition, some participants noted that such an approach would involve substantial operational hurdles, including the difficulty of specifying an appropriate target level. In light of the significant challenges associated with the adoption of such frameworks, participants agreed that it would not be advisable to make such a change under present circumstances.”

    found: http://www.federalreserve.gov/monetarypolicy/fomcminutes20111102.htm

    Now it would seem that you just need harp on these downsides to NGDP targeting! The fed is moving, albeit quite slowly. Perhaps when the last of the hawks are out next year…

  16. Gravatar of Marcelo Marcelo
    22. November 2011 at 10:57

    sorry about the double post.

  17. Gravatar of Morgan Warstler Morgan Warstler
    22. November 2011 at 10:58

    Becky, debt forgiveness is EASY, there is an exact moment when you forgive debt, when you got as much as you could out of the debtor, and they know going forward money will be more expensive upfront.

    This isn’t about debt forgiveness to maintain power structures, it is about ENDING the recently gained power of public employee unions, cutting back entitlements, and cutting regulations.

    Once you get those, here or abroad, forgiving debt is FINE.

  18. Gravatar of John John
    22. November 2011 at 11:06

    Vincent,

    They shouldn’t have pumped up a new bubble after the dot com debacle and they certainly shouldn’t have done anything to bail out or prop up companies in the latest disaster.

  19. Gravatar of Lars Christensen Lars Christensen
    22. November 2011 at 11:12

    Scott, frankly speaking I am no big fan of Adam Posen’s view. I agree that both the US and the European economy need more “stimulus” in the sense that NGDP is well below pre-crisis trend. However, what we need is not more QE without proper rules. We need a NGDP target and then we will see how much or how little QE would be need to hit the target.

    In fact I think it is highly problematic to call for more QE without changing the target of the ECB, the Fed and BoE as QE is unlikely to have any powerful and lasting impact unless it is formulated within a proper NGDP level targeting framework. It is especially problematic that BoE has a credible inflation target – as we want to overshoot that target in the short-term.

    Anthony Evans has formulated this nicely:

    “being surprised about why QE doesn’t work when you’re trying to keep inflation expectations at 2% is like being surprised why people don’t have a party at a “free” bar if you make it clear you will remove alcohol from anyone who starts to feel drunk”.

    http://marketmonetarist.com/2011/11/18/british-style-binge-drinking-and-qe-all-we-need-is-chuck-norris/

  20. Gravatar of Adam Posen calls for more QE – that’s fine, but… « The Market Monetarist Adam Posen calls for more QE – that’s fine, but… « The Market Monetarist
    22. November 2011 at 11:49

    […] also Marcus Nunes and Scott Sumner on Adam Posen’s […]

  21. Gravatar of dwb dwb
    22. November 2011 at 12:01

    huh? would continue adhering to that strategy even in the face of a significant increase in inflation.

    significant inflation means nominal GDP is likely over the target. These people have PhDs in what, exactly?

  22. Gravatar of James in London James in London
    22. November 2011 at 12:39

    The problem with Posen is where he is coming from. He is a fairly old-fashioned, central planning, big-spending socialist. He always appears to lick his lips at the thought of all those prudent savers (“rentiers” in Marxiste) getting their just desserts. He is really scary. I think he has a hidden agenda and should not be trusted. The sooner he leaves the MPC the better.

  23. Gravatar of Britmouse Britmouse
    22. November 2011 at 12:48

    “has a credible inflation target – as we want to overshoot that target in the short-term”

    We’ve been doing that for years! If you project steady 2% CPI growth from any CPI index level going back to 2000, we’re well above it now. We are 5-6% above a 2% projection CPI starting in any of 2004-2008. Perhaps price level targeting would have been possible if using CPIY (CPI w/out indirect tax changes), but I can’t see how it would be better with CPI.

    With “flexible inflation targeting” the BoE should be setting MP such that their forecast is always 2%, right? That is pretty close to what they have been doing. They allowed the forecast to drift too high earlier in the year and didn’t correct it.

    The problem is not the practice, the problem is the target.

  24. Gravatar of Jason Odegaard Jason Odegaard
    22. November 2011 at 13:07

    Morgan, I think you may be overestimating the Fed’s ability to have a master plan about who becomes the next President. Most of the elaborate excuses for stupidity end up dying to Occam’s razor, and stupidity ends up being the real reason. The Fed may just be making a huge mistake right now, not secretly trying to defeat a liberal incumbent President.

    Also, thanks for linking to your blog post a few posts back – I’ll start commenting on one of those to discuss your guaranteed minimum income plan more.

  25. Gravatar of Becky Hargrove Becky Hargrove
    22. November 2011 at 13:44

    “Policy defeatism: how did that happen?” First I want to look at the way fractional reserve lending occasionally gets ramped up. How much does that actually depend on what happens at the Federal level? For it would appear banks seem to have a mind of their own, when they choose to lend and when they choose not to. And banks like to lend when they see opportunity. Let’s define opportunity as a new situation that can be taken advantage of in the marketplace…exactly, where is it. Tight money tends to reflect tight markets in which not a lot of change is going on that banks can actually take advantage of. There are infinite ways to open holes in tight markets but no one has really gone down that path, yet. So, given the tight market, what are the possibilities of further upper and lower income spending? Lower income is held back by tight markets in both physical assets and skills, but upper income is only held back by tight markets in skills and services. Which means upper income just wants to save for a future in which consumption is way more important that the present. Why? Because that uncertain future (in individual terms) consists of having to pay people for services that who knows how much they will cost by the time I retire. (Morgan, not many doctors would want to work for $10 but a lot of them would be willing to teach skills to LSE.)

    So, how might the person of upper income be enticed to spend more in the present? It would be if he or she knew for certain that services could be provided in ways that one could actually match for, even with sickness and disability. That is a role lateral skills exchange could fill. Now, about those vacation plans…

  26. Gravatar of ssumner ssumner
    22. November 2011 at 14:14

    Ben, Taylor certainly seems to be becoming more hawkish–he’s dropped the dual mandate aspect of the Taylor Rule.

    John Hall, But UK policy is getting tighter in recent months, so the ECB really needs to get moving.

    John, He’s applauding FDR’s effective actions, such as dollar depreciation. I don’t doubt that Bernanke thinks the NIRA was a bad idea.

    Vincent, I agree with John Thacker, the Fed also screwed McCain when he ran in 2008.

    Mike Sax, The recovery still seems way too weak to me. I focus more on NGDP and jobs than RGDP, which has proved very unreliable in the past (huge revisions to numbers from earlier years.)

    The only significant reduction in unemployment was in late 2010 and early 2011.

    Rajat, I agree Bernanke would say that, but why stop doing QE2? It seemed to lead to extra jobs being created. Why not do more?

    Marcus, He has a graph looking for a model. There is no model where nominal nondefense spending matters. It should be real government output, or the cyclically adjusted deficit. I really don’t know what he’s trying to do. It’s certainly not the Keynesian model being tested.

    John Bennett, It would be nice to see the OWS crowd focus more on monetary policy.

    Becky, Debt forgiveness is what happens when monetary policy screws up.

    Marcelo, Thanks, I did a post.

    Lars, I agree, and I like the Evans quotation.

    dwb, They are probably worried about a fall in trend RGDP growth, but that’s a phony issue–see my new post.

    Britmouse, I assume that under flexible inflation targeting the target is not always 2%, otherwise you have strict inflation targeting.

  27. Gravatar of Jason Odegaard Jason Odegaard
    22. November 2011 at 14:38

    Scott, the problem is that even on the left they fear the Fed “debasing the dollar”. Either that or a lot of Ron Paul supporters decided to hang out at OWS in Zuccoti Park. I’ve talked to people who think that QE is just another “fat-cat banker bailout”.

    Either way, most people seem to view money creation as a suspicious, evil force.

  28. Gravatar of Britmouse Britmouse
    22. November 2011 at 15:08

    Scott, the BOE do “inflation-forecast targeting” (a la Svensson); they look at the forecast for CPI inflation two years out, and tighten or loosen the policy stance if the forecast is not at 2%. They are very flexible about the current inflation rate, but fairly strict about the forecast being at or near 2%.

  29. Gravatar of Doc Merlin Doc Merlin
    23. November 2011 at 02:34

    ‘So we’ve gone from “do whatever was necessary to get the country moving again” to “policy defeatism.” How did that happen?’

    They did the things that Keynesian theory suggested and they failed miserably. Now there is nothing they know how to do.

    What they should have done: massively cut government spending, increase allowances for natural resource extraction, end the ethanol program, not create any new entitlements or regulations. It didn’t happen however so we have massive price increases in raw materials and food and stagnation. Inflation is near 4% but growth is stagnant.

  30. Gravatar of ssumner ssumner
    24. November 2011 at 06:48

    Jason, I’ve always said the man on the street doesn’t understand monetary policy, and that the Fed made a huge mistake in calling for a “higher cost of living” as they announced QE2. They should have called for higher incomes for Americans.

    Britmouse, I think my previous answer focused on the US, I didn’t see that you were focusing on the UK. So I agree with you, but there is also the issue of informal NGDP targeting, which some believe the BOE to be doing.

    Obviously if they are hitting their forecast target for inflation, and most people think Britain needs more AD, then inflation isn’t the best indicator of AD. I’ve noticed that Britain usually exceeds it’s inflation target, so I never took that too seriously.

    Doc Merlin. Headline inflation has averaged 1.23% over the past 3 years, and it’s expected to average 1.42% over the next 10 years. They aren’t hitting their inflation targets and inflation isn’t 4% over any meaningful time scale.

Leave a Reply