Bernanke should look to the Supreme Court for inspiration

There is a widespread perception that the Fed tries hard to avoid being deeply split on important decisions.  In most cases, no more than a single member of the FOMC dissents from the majority decision.  Today there were three dissents, which I see as a hopeful sign.  Perhaps Bernanke will take a page from the Supreme Court and start pushing for the best possible policy, even if it means a 6-4 decision.

The Supreme Court often splits 5-4, even over important issues such as the election of a President.  Admittedly, these splits do somewhat lower the prestige of the Court.  But eventually people accept the decisions, and life goes on.  If Bernanke has been held back by the hawks (admittedly a big if) then I wish he’d reconsider the way the Fed operates.  According to the “wisdom of the crowds” theory, group decisions are most effective when made by the median voter. 

[Of course this assumes the median voter would push the Fed to be more aggressive.  Obama had the opportunity to pick 5 of the 7 members of the Board of Governors, including the Chair.  He squandered that opportunity, probably because of bad advice from Larry Summers. ]



13 Responses to “Bernanke should look to the Supreme Court for inspiration”

  1. Gravatar of Bob Murphy Bob Murphy
    9. August 2011 at 18:00

    Scott wrote:

    Of course this assumes the median voter would push the Fed to be more aggressive.

    Doesn’t that give you pause, Scott? Do you really want the Fed to change the way it conducts monetary policy forever, or do you not like its decisions in the past 3 years and so you want to do anything that will change it right now? (I’m not asking sarcastically.)

    It reminds me when there’s a filibuster and people flip out about our archaic rules. But then, when the roles switch and the Congress is trying to push through something the critic finds awful, the filibuster becomes a heroic last stand for honor and decency.

  2. Gravatar of Shane Shane
    9. August 2011 at 18:57

    It’s not all that bad. If the pundits are right, Mitt Romney will win the nomination. Mitt Romney pretends to be a knuckle-dragger, but signs say he actually understands macro quite well. So once he wins, he’ll quickly drop his primary side show and get to work on serious monetary stimulus. And as a Democrat, I’m not even all that worried about it, as Obama’s signature achievement is nationalizing RomneyCare. So politically things won’t be that different. But at least we will have full employment. And as one of the lucky ones, I’m only out the 100 some bucks I donated to Obama in 2008.

  3. Gravatar of Benjamin Cole Benjamin Cole
    9. August 2011 at 19:46

    According to the BLS, the CPI-All Urban Consumers was at 225.722 in June 2011. It stood at 219.964 on July 2008.

    That is a 2.62 percent increase in three years. And next month is likely to be deflation, due to oil prices.

    Ironically, we have not had inflation this low in decades and decades.

    Every investment entails risk. Bondholders, despite their pathetic moral pettifogging and posturing, are no better than stock buyers, real estate investors, or homebuyers. And George Gilder would argue it is productive and innovative who are really the valuable actors in our economy, not the rentier class.

    We can choose to protect bondholders forever, and we will suffocate the modern economy.

    An unhealthy obsession with minute rates of inflation does not become our modern right-wing, It suggests a sort of dementia has set in.

  4. Gravatar of Cameron Cameron
    9. August 2011 at 22:22

    I think Bernanke’s thought process is this : Monetary policy is about the future path of monetary policy, and the best way to ensure future stance of monetary policy will be closest to his view is to try and limit the number of dissents. A 6-4 vote for lower IOR may be less effective than a 9-1 vote for QE3, for example, because a small rise in inflation may turn a few moderates against maintaining lower IOR.

    For all we know, hawks formed a voting coalition and agreed to dissent if fed statements got slightly more dovish to maximize their total influence (3 dissents are much more than 3 times as meaningful as 1). If so, that line was obviously crossed today.

    The real question I have is this : why don’t we see any dissents from doves? Bernanke can’t do it, but what about Yellen or Dudley? Make it clear to markets that in addition to the FOMC having members who think policy is dangerously easy, there are also those who think monetary policy is dangerously tight!

  5. Gravatar of FT Alphaville » Further reading FT Alphaville » Further reading
    9. August 2011 at 23:07

    […] Ben “SCOTUS” […]

  6. Gravatar of Morgan Warstler Morgan Warstler
    10. August 2011 at 01:10

    FINALLY! I agree 100% with Scott.

    Ben should be politicized and use the Fed to make sure conservatives win elections.

    See: Citizens, Bush vs. Gore

  7. Gravatar of Dtoh Dtoh
    10. August 2011 at 02:49

    I think you need to ask why the current policy is seen as being right by the majority and too stimulative by the dissenters. If that was the case, jaws should drop, but in reality isn’t there in fact a fundamental lack of understanding of monetary policy even within the FOMC. If polled them, how many would agree with your views on policy… NDGP targeting, etc.

  8. Gravatar of tom tom
    10. August 2011 at 05:08

    “According to the “wisdom of the crowds” theory, group decisions are most effective when made by the median voter.”

    The wisdom of the crowds is about large numbers and biases. If 1% of the population has good information and the other 99% is randomly biased the larger the crowd of voters becomes the more likely the 1% will flip the vote in the correct direction.

    It doesn’t apply to small groups well and it doesn’t apply to non random groups (or non random biases), which takes the Fed right out of it.

  9. Gravatar of Scott Sumner Scott Sumner
    10. August 2011 at 05:46

    Everyone, It will take several days to sort through the hundreds of comments. Some responses will be short.

    Bob, I’m one of the very few who always opposes the filibuster, regardless of who’s in power. I would like to see the Fed adopt a more effective voting procedure, regardless of whether they support my ideas or not.

    Shane, I agree about Romney. I support Johnson, but of the “big” candidates, Romney’s my favorite.

    Benjamin, That’s a good point about how far behind the 2% inflation trend we’ve fallen.

    Cameron, Good point, but a couple observations:

    1. With Obama filling the empty seats, the Fed won’t have any trouble adhering to promises to stimulate.

    2. The problem with the doves is that they already see Fed policy as dovish, and hence see no reason to dissent.

    Morgan, I’m not sure that’s exactly what I meant, but thanks.

    dtoh, I’m not sure the majority does think policy is currently “right.” I sort of assumed that Bernanke wanted to do a bit more, but was held back by fear of a badly split Fed. Perhaps he’s already moving a bit in my direction on the split vote issue.

    Tom, I don’t agree. I think the idea also applies to smaller groups, just not as strongly as for large groups.

  10. Gravatar of Morgan Warstler Morgan Warstler
    10. August 2011 at 08:15


    Hypothetically, let’s assume the economists that inform the Fed naturally favor conservative fiscal policy…

    1. I don’t care about changing this idea.
    2. I don’t care about arguing with this idea.

    What I want is your thought experiment analysis:

    1. What should those that seek looser monetary policy do to get it?
    2. How does that jibe with your basic NGDP cheerleading?

  11. Gravatar of Scott Sumner Scott Sumner
    10. August 2011 at 17:53

    Morgan, Persuade them it’s in the best interest of the country?

    I’m guessing you’ll say something more Machiavellian.

  12. Gravatar of Morgan Warstler Morgan Warstler
    10. August 2011 at 18:31

    “Morgan, Persuade them it’s in the best interest of the country?”

    God you are such a wuss. You can’t even make yourself sit through the exercise.

    The task is what can SCOTT SUMNER do to deliver conservative fiscal policy? Because you are ACCEPTING that that’s what they think is best for the country.

    To get Loose Monetary Policy you have to trade / deliver Conservative Fiscal Policy…

    What can you invent to give them what they want? Personally, I JUDGE how badly you want it by what you are will do to get it?

    I don’t know the answer, but I’m telling you 100% what the REAL question is…

    If you refuse to give them what they really want, so you won’t get what you really want. This is basic deal making stuff. It isn’t a waste of time, it’s how the sausage gets made.

    If you are smart enough to dream up ending IOR, you can surely be forced to use your brain on this question.

  13. Gravatar of Scott Sumner Scott Sumner
    11. August 2011 at 19:01

    Morgan, You said;

    “If you refuse to give them what they really want, so you won’t get what you really want. This is basic deal making stuff. It isn’t a waste of time, it’s how the sausage gets made.”

    But it’s not how successful countries are run. You need civic virtue.

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