Dual mandate, RIP

I actually think Bernanke misspoke here, as I don’t think he seriously intends to walk away from the Fed’s dual mandate:

I guess the question is: does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very reckless. We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to expectations or destabilization of inflation. To risk that asset for what I think would be quite tentative, and perhaps doubtful, gains on the real side would be an unwise thing to do.

There’s a great deal of confusion about the difference between a 2% inflation target, and a 2% inflation goal.  The Fed can only hit one target at a time.  Thus if it targets inflation at 2%, then it is completely incapable of doing anything to address the problem of unemployment.   A 2% inflation target would be a single mandate.  That’s the ECB policy—an inflation target, with no weight given to the unemployed.

If the Fed does intend to adhere to a dual mandate, then it must target some sort of weighted average of inflation and output (Taylor Rule, NGDP, etc.)  That means if unemployment is too high, the Fed must try to push inflation above 2%, and vice versa.  If they don’t try to do so, if they keep targeting inflation at 2% despite high unemployment, then they are not implementing a dual mandate.  They would be doing a simple inflation target.

I think what Bernanke meant to say was that the Fed should not raise its long run inflation goal when unemployment is high.  And that’s certainly a defensible proposition.  But he didn’t express this view clearly, and hence got hammered by people like Paul Krugman and Brad DeLong.  And I can’t blame them, because the Fed is acting as if they don’t care at all about the unemployed.  It’s acting like the ECB.   Inflation has averaged much less than 2% since mid-2008, which would be an excessively tight policy even if the Fed didn’t care at all about the suffering of the unemployed.

My hunch is that Bernanke does care about the unemployed, and wishes the Fed had done more.  My hunch is that he doesn’t have the Fed with him, but feels forced to defend Fed policy for political reasons.  This is very awkward, and he occasionally stumbles.  (It’s also a very poor reflection on Obama’s leadership, as he appointed 80% of the Board of Governors, including Bernanke.)

It’s much easier to be head of the ECB, because you don’t even have to hide the fact that you don’t care about the unemployed.  Commenter J.V. DuBois sent me the following:

The utter stupidity of ECB representatives is breathtaking. Have a look at this interview of Mario Draghi for Bild Zeitung: http://www.ecb.europa.eu/press/key/date/2012/html/sp120323.en.html


“The key data for the euro area, such as inflation, the balances of payments and in particular budget deficits, are better than in the United States, for example”

Does anybody noticed what is missing there? Like mentioning such an unimportant data like unemployment/employment or growth? This is looking very bad.

Of course the eurozone unemployment situation is much worse than ours, and deteriorating further every month.  But that’s not “key data” to Draghi, who worries instead about things like balance of payments surpluses.  At least the ECB admits that it doesn’t care about the unemployed, the Fed merely acts like it doesn’t care.

PS.  There’s another irony in the Bernanke quotation; he seems to suggest that the aggregate supply curve is currently very steep.  That would be very odd given the high levels of unemployment.  Is there any evidence for that?  Given that unemployment has recently fallen from 9.8% to 8.2%, despite weak growth in AD, it seems likely that the SRAS curve is currently relatively flat.  Why does he think otherwise?



56 Responses to “Dual mandate, RIP”

  1. Gravatar of Saturos Saturos
    25. April 2012 at 20:13

    Yes, this interview will indeed be seen as the tombstone on “flexible inflation targeting”.

    He did stammer a lot though, so I hope he knows he’s guilty.

    About the AS curve, I think it’s plausible that the very short run AS curve is steep and to the left of potential output. Of course if AD returned to where it should be and stayed there, then AS would shift back to the right a few months later, employing all the jobless. But that would require a brief spell of visibly higher core inflation. Judging by the interview, I think that’s become politically impossible.

  2. Gravatar of Saturos Saturos
    25. April 2012 at 20:15

    Of course there is some structural unemployment and hysteresis in there too, but Krugman’s right, most of it’s got to be cyclical.

  3. Gravatar of Saturos Saturos
    25. April 2012 at 20:40

    Though, if you combine what he says there with what he says here: http://ftalphaville.ft.com/blog/2012/04/25/974591/bernanke-and-the-wrong-credibility-issue/

    it does lend credence to Krugman’s “expectations trap” theory.

  4. Gravatar of Manny C Manny C
    25. April 2012 at 23:01

    Bernanke doesn’t speak his own mind at these pressers. He speaks the consensus / median view of the FOMC. The rationale for doing so, is because of his legacy. He doesn’t want monetary policy tied up with a few outliers, even the chairman. He wants a monetary policy that will outlast the current members. He made that clear in a previous presser he gave. I can’t remember the reason for this.

  5. Gravatar of RebelEconomist RebelEconomist
    26. April 2012 at 00:41

    There is a difference between caring about the unemployed, and being able to do something about it. I believe that, apart from the possibility of hysteresis, it is generally understood that the central bank can only affect real activity in the short run, right? After that, monetary easing just leaves elevated inflation – to show that the central bank “cares” if you like – with an activity debt to be paid if the central bank wants to lower inflation. Therefore, if you believe that the economic worth of low inflation is substantial, you can argue that the best contribution that the central bank can make to real activity is to maintain low inflation, as Duisenberg, and even Mervyn King before he sold out, used to say. If I had been Bernanke, I would have made that point forcibly to Congress as soon as I had been appointed as Fed Chairman, and taken my chances.

  6. Gravatar of 123 123
    26. April 2012 at 01:41

    The ECB never admits that it does not care about the unemployed.

    One year ago, Trichet agreed that the main problem is unemployment in an interview with L’Espresso:

    “L’Espresso: The main problem being unemployment?

    Trichet: Yes, creating new net sustainable jobs is a necessity to combat unemployment.”

    We’ll never know if Bild has asked Draghi the same question. What we know is that the typical reader of Bild does not care about the unemployment.

    DuBois has used a cheap rhetorical trick that obfuscates the problem. Here is what Draghi said about the unemployment after the latest monetary policy decision, why didn’t DuBois quote that:
    “And, given current conditions with respect to output and unemployment – with the latter at a historical high – talking about any exit strategy would, for the time being, be premature.”

    It would be much more useful and constructive to discuss the actual views of the ECB. Here is B. Couere one month ago ( http://www.ecb.int/press/key/date/2012/html/sp120326.en.html ):
    “Did systematic compression of inflation volatility come at the price of more erratic real activity? Let me move on to my next slide [6]. Here, each dot represents a major economy: it gives information on the standard deviation of inflation and the standard deviation of output growth which each economy has experienced since 1999. In this space, you want to be as close as possible to zero. Why? Because the lower-left part of the chart is populated by economies with low macroeconomic instability, i.e. low inflation volatility and low growth volatility. Indeed, you can see that the euro area has been closer to zero than any other economy except one, Switzerland – the dot to its left. The low variance of inflation rates in the euro area did not come at the expense of unsteady economic growth.”

  7. Gravatar of Saturos Saturos
    26. April 2012 at 01:41

    RebelEconomist, this is the confusion that Mishkin’s textbook has perpetuated. Output gains from monetary expansion are indeed ephemeral – if you’re already at potential output*. But if you have a demand-deficient output gap, then that can last for years and years (as we’ve seen) and it’s in the power of the central bank to return us to potential output, which would be a permanent gain.

    Central bankers are supposed to get this, but the fact that people have always talked about controlling inflation (the “laundry list” approach) rather than aggregate demand itself indicates some deep buried confusion, which has played out in recent years – indeed in Bernanke’s speech here.

    *I am counting suppy shocks such as union-activity as “reductions in potential output”. That is, potential output occurs when there is enough effective demand to employ as many resources as possible without price distortion, so any resource unemployment must be due to supply-side factors. Having ensured sufficient aggregate demand, the central bank must not induce further artificial expansion – but that’s not to say it should allow massive demand deficiencies!

  8. Gravatar of J.V. Dubois J.V. Dubois
    26. April 2012 at 02:12

    123: Read the whole interview with Bild. If anything, I quoted the mildest parts of it. Draghi has far more bold statements, including political judgements of how the EU should look like. These are just a few:

    “The Prussian element is a good symbol of the ECB’s key task: to maintain price stability and to protect European savers.”

    “The old European welfare state model is in fact dead, because it had to make debts far too often”

    “Should the inflation outlook get worse, we will immediately take preventive steps”

    “The fact is that European taxpayers have taken on a lot for Greece. Their money must be protected. This is also why the ECB did not take part in the debt relief – because the cost would have been borne by taxpayers.”

    “Generally speaking, the fact remains that if we want to protect taxpayers’ money, the euro area cannot be turned into a transfer union, where one or two countries provide the money, the rest spend, and the whole thing is financed by joint Eurobonds. That cannot happen.”

    Honestly, the whole interview gave me the chills. This cannot end well.

  9. Gravatar of RebelEconomist RebelEconomist
    26. April 2012 at 03:24

    @Saturos, presumably in such circumstances, monetary policy could be eased without an increase in inflation, in which case most central bankers would oblige.

    @JVD, I find this a heartening interview. Since actions speak louder than words (especially words likely to please the audience), I have been suspicious of Draghi ( http://reservedplace.blogspot.co.uk/2011/11/easing-in.html ), but I guess he is really painting himself into a corner here.

  10. Gravatar of J.V. Dubois J.V. Dubois
    26. April 2012 at 03:39

    RebelEconomist: “Since actions speak louder than words”

    I am afraid that this idiom does not apply to any central banker. Central banker’s words (or lack thereof) lie at the core of what he is actually doing. Or at least what he is supposed to be doing.

  11. Gravatar of Becky Hargrove Becky Hargrove
    26. April 2012 at 04:01

    It is probably best that we get this over with now and deal with it on the terms in which it actually exists: the unemployed are going to have to find new ways to survive and cope in the world, otherwise they are not the only ones who are going down – so also will countless communities where they live. The sooner we start the process of rethinking human skills and knowledge use, the better.

  12. Gravatar of dwb dwb
    26. April 2012 at 04:25

    wages are sticky, so why do we keep saying more stimulus would be raise inflation? The Fed spends too much time doing voodoo divining future from the entrails in their models, rather than looking at actual forward guidance.


    as a defacto inflation targeting regime, there is a 50% chance they will hit their growth real objective. Their models have proven to be overlay optimistic, so i would say more like 40% (which means they need good luck like good weather just to hit it!) .

    that also means a substantial chance (15%-20%) of recession at any given time.

  13. Gravatar of Master of None Master of None
    26. April 2012 at 04:27

    “It’s also a very poor reflection on Obama’s leadership, as he appointed 80% of the Board of Governors, including Bernanke”

    Come on Scott; it’s not fair to make a statement like that without pointing out that 2 of his nominees are being stonewalled by the Republicans in Congress.

  14. Gravatar of marcus nunes marcus nunes
    26. April 2012 at 04:42

    I think you cut Bernanke a lot of slack, him being a victim of his peers and all. He´s a chameleon but has on occasion shown his true colors:

  15. Gravatar of MMJ MMJ
    26. April 2012 at 04:51

    @ Scott:

    1) The ECB’s mandate is determined by a treaty written by politicians.

    2) As per RE’s comment, the central bank cannot determine the long-run rate of unemployment, which is fairly high in Europe relative to the US for supply side reasons.

  16. Gravatar of J.V. Dubois J.V. Dubois
    26. April 2012 at 05:16

    MMJ: “central bank cannot determine the long-run rate of unemployment”

    I object. I would say that the possible impact of CB on economy is asymmetric. While there is limit to how much they can do to spur real growth/employment, there is virtually no limit on how much they can mess the economy up. The limit on positive impact basically depends on how much they botched it yesterday.

  17. Gravatar of flow5 flow5
    26. April 2012 at 05:37

    Sure, a natural rate of sticky unemployment, a natural rate of sticky inflation, a relative natural nominal interest rate….ad absurdum.

    Clearly, the notion that unemployment can be permanently reduced to a tolerable level of 5 to 6 per cent simply by pumping up aggregate demand is both naïve and dangerous (a la Phillip’s curve)…the FED’s mandate not withstanding.

    But it is also axiomatic that the smaller the degree of price competition in a market and the greater the degree of private unregulated monopoly power over prices and output, then the higher the amount of unit prices, the greater the tendency for restricted output and employment and the smaller the degree of downward price flexibility. Under these conditions, unless money expands at least at the rate prices are being pushed up, output could not be sold and hence the work force would be cut back.

    Confronted with this dilemma, our monetary policy makers have almost always opted to increase the money supply at a rate far in excess of the expansion of real-output, thus more than validating the problem that created the dilemma originally.

    It isn’t within the power or responsibility of the Federal Reserve to hold unemployment to a 5 or even a 6 per cent. In fact, to assume that the Federal Reserve can solve our unemployment problem is to assume the problem is so simple that its solution requires only that the manager of the Open Market Account buy a sufficient quantity of U.S. obligations for the accounts of the 12 Federal Reserve Banks. This is utter naiveté.

  18. Gravatar of Morgan Warstler Morgan Warstler
    26. April 2012 at 05:47

    Lets admit was is true and factual:

    The ECB and the fed mandate or no, are saying “sustainable jobs” = jobs that exist even if there is less tha 2% inflation.


    No one disagrees that this is what they mean.

    None of you disagree. You might not like it, but you know this is what they mean.

    This means that jobs that can exist at 3% inflation, but not at 2% inflation are not “sustainable,” because the CB does not intend to get anywhere near that.

    You can abstract a layer of reasoning above it, you can make charts and graphs but get this straight….

    The Democrats / Socialists do not get to create any kind of rules, regs, and guarantees they want…. and THEN we run monetary to try and make that possible,

    Govt. does NOT run money. The people who got together and created money also created govt. and they did so for very specific and personal reasons that have down market positive effects for everyone else.


    First there is a man. Then there is a state, and the organizers of the state are not selfless altruistic beings.


    Look, everybody gets all offended when I say this, as if you all really care about the poor, and not mainly about reducing distance between yourselves and the folks at the top.

    Your lack of honesty keeps you from being able to form optimal policy for yourselves:

    1. If you want to reduce the distance between yourselves and the tippy top, then the progressives need to offer up policy proposals that MAIN STREET CONSERVATIVES LOVE and Wall Street financiers / Fortune 1000 hate.

    This is tax, labor, and regulatory policy that is STILTED just enough to incentivize the best and brightest to go teh SMB route.

    This is knowable and doable, an dyes it will reduces the blue state elites income and hurt progressive causes int he short term, but that is OK.

    2. Everyone needs to run around promoting my Guaranteed Income plan because it is the future:


    GIVE THE FED WHAT IT WANTS! Downward wage pressures, efforts to unstick wages, reduce fiscal spending over the long term, and they will give you your trend path.

  19. Gravatar of Jon Jon
    26. April 2012 at 05:53

    “If the Fed does intend to adhere to a dual mandate, then it must target some sort of weighted average of inflation and output (Taylor Rule, NGDP, etc.) That means if unemployment is too high, the Fed must try to push inflation above 2%, and vice versa.”

    Scott, you’re consistent on this point, but not necessarily right. As I’ve told you before, the message from the Fed has often been that they see so called-dual mandate as requiring them to pick an inflation target as close to zero as possible (price stability) while selecting an inflation target high enough to allow monetary policy to be highly-effective–and over the past thirty years guiding inflation down toward zero in way that doesn’t induce unemployment beyond the natural rate (full employment).

    Many people at the Fed believed in the ZRB, so that’s why we got a 2-2.5% target. Given that now more believe that policy is highly effective even at the ZRB, the trend ought to be to push the inflation target lower. That’s just what we’ve seen lately where the band has shifted to 1-2%.

    Depending who wins the argument on expectations driven policy effectiveness, we’ll see the target drift lower or higher…

    “PS. There’s another irony in the Bernanke quotation; he seems to suggest that the aggregate supply curve is currently very steep. That would be very odd given the high levels of unemployment.”

    Well if oil is the limited input of production, I say “not surprising”. Figuring out how to increase production without using more oil is Arnold’s PSST. I see labor market barriers interfering with this process as well (licensing requirements, wage bars (union/prevailing wage laws, in some extreme cases minimum wage), tax wedges (SS), education costs), and investment return uncertainty (future tax regime is very unclear).

  20. Gravatar of Morgan Warstler Morgan Warstler
    26. April 2012 at 05:57

    Also Scott, I’m out in field looking at market stabilizers in inland foreclosure markets…


    I’m looking at $100K homes that were $100K homes in 2001, and $450K homes in 2007.

    There are 8-12M of them. None of them EVER were worth $450, not worth $200K under a NGDPLT trend path from 2000.

    Please stop running from this fact, and make your friggin story explain that you stop this craziness from ever happening again.

    You are weakest when you try to act as if, the house values can go through the roof, and then fall back without a GUTTING – it can’t happen.

    You need to say how house prices can’t go thru roof formt he start.

  21. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 06:25

    Very thought provoking piece Scott! I certainly agree with you that the ECB doesn’t care about the unemployed-based on their actions anyway which is all that matters.

    On Bernanke, I’ve never been a Bernanke basher. I always thought he’s a pretty good, sharp guy-based largely on his writings like on Japan that you mention above. But you got to agree with Krugman here-it is very disappointing. Not only that he speaks against raising the inflation rate-let alone NGDP-but his reasoning just sounds very weak.

    Your gloss-that for political reasons he’s standing by others on the Fed who have overruled him is for me the most charitable take. I’d like to believe that this is not how he really feels. There are times when I feel like I’d think more of a guy if he’s not telling you how he really feels-that he’s a hypocrite-and this is one of those times.

    The worst case is that this is realy how he feels now-that like Krugman wonders he’s been turned into a cyborg or has suffered a lobotomy.

    As to your comments about Obama, I will admit I’m an Obama partisan-I’m instictively mistrustful of Obama bashing whether from the Right or Left-there is a lot from the Left whether your’re aware of that or not.

    However it does touch on an interesting point. In my view I don’t like the current makeup of the SJC very much right now. Yes for me it seems run by ideological conservatives who don’t care about the law-witness their attitude on the Arizona law. Again my perspective.

    But you make a great point. Obama has had the opportunity to uniquely shape the Fed. So far it doesn’t seem like he’s tried very hard to put on any bomb throwing Keynesians or really anyone tremendously interesting.

    The question I don’t konw that answer to but would love to konw is what does Obama think about monetary policy? Does he or his economic advisors have much of any opinion at all? Have they in any way tried to shape the Fed towards their own agenda? What is their agenda? There have been a few good books on Obama-one by David Corn.

    But I haven’t read anyone who sheds much light on the true attitude of this Adminstartion towards monetary policy.

  22. Gravatar of Philo Philo
    26. April 2012 at 06:30

    The journalists’ questions for Benanke at his press conference yesterday were better than their usual standard, but they should have pressed him more on the Fed’s view of the trade-off between inflation and unemployment. They should have asked him: if the Fed were to push core inflation from 2% to 3%, how much of a reduction in unemployment could that achieve? And suppose it would reduce unemployment from 8.2% to 7.2%: would that make it attractive? *How much* of a reduction in unemployment would the Fed demand to justify a 1% rise in core inflation?

    Maybe at his next press conference.

  23. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 07:24

    “GIVE THE FED WHAT IT WANTS! Downward wage pressures, efforts to unstick wages, reduce fiscal spending over the long term, and they will give you your trend path.”

    Morgan that sounds like what they’re doing in the EU. Really tremednous results your “structural reforms” are giving us. What a stimulus austerity is!

    The only reason we don’t have that here is your Tea Party guys don’t have the White House. That’s a big part of the reason we’re not in the sorry shape the austerity loving Europeans are in.

  24. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 07:36

    123 obivously the ECB can’t admit they care nothing about the unemployed even they are not quite that politically illiterate, however actions are what counts not words.

    They care much more about “protecting savers”-ie, the bondholders- than the people who are unemployed. Prove me wrong.

  25. Gravatar of Rien Huizer Rien Huizer
    26. April 2012 at 07:37


    Mr Draghi is a diplomat. And he has a sense of humour. Plus anyone familiar with “Prussian” economic policy probably knows that it was the great grand daddy of the development state model. Racing towards the highest possible level of industrial modernization, at the expense of private consumption and by bribing the working class with universal free education, an old age pension and rudimentary universal healthcare. And a sort of gold standard, but that was pretty universal in those days. Highly effective and regrettably discredited a conspiracy of American economic historians, usually with German sounding names. The German inflation phobia dates from after WWII when Preussen had basically ceased to exist (it still did, formally, but “Germany” had taken over. The anti inflation bias was more of a Western Germany thing.

    More importantly, the German economic reforms of the early 2000s are very important and an amazing result in political economy terms. Worth emulating, as probably many people in Italy think. One way to stay “competitive” without losing democracy.

  26. Gravatar of 123 123
    26. April 2012 at 08:24

    @Mike Sax
    Default of Greece had the potential to become a second Lehman. Draghi has handled Greece much better than Bernanke had handled Lehman in terms of unemployment.

  27. Gravatar of Marcelo Marcelo
    26. April 2012 at 08:33


    My friend directed me to this blog post where it seems that 2% inflation targeting BB is the actual BB: http://thefaintofheart.wordpress.com/2012/04/25/bernanke-answers-krugman-and-comes-out-looking-like-the-real-bernanke/

    I am starting to buy this argument that Bernanke is only interested in stopping deflation and feels the Fed has a 2% inflation ‘ceiling’. Which got me thinking, what if this really IS Bernanke’s ideal Monetary policy? What does this mean for the future?

    Thanks and keep up the great blogging!

  28. Gravatar of 123 123
    26. April 2012 at 08:34

    @J.V. Dubois

    “welfare state model is in fact dead”
    According to the ECB, this model is dead because of the high unemployment.

    “Generally speaking, the fact remains that if we want to protect taxpayers’ money, the euro area cannot be turned into a transfer union”
    Draghi has done the most to preserve the macro stability without using taxpayers’ money for bailouts. In fact, this is one of the goals of market monetarism – to make no-bailout policy feasible.

    “Should the inflation outlook get worse, we will immediately take preventive steps”
    This is all according to the treaty. The treaty should be changed to NGDP targeting, so Draghi could say “Should the NGDP overshooting outlook get worse, we will immediately take preventive steps”. But so far the ECB is successfully targeting the implicit price level target.

  29. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 08:41

    Thanks for the link Dubois.

    123 the more I read that interview the more surreal it sounds. Listen to Draghii:

    “The banks to which the ECB has lent the money have, by and large, not fed this into the economic cycle but have used it to meet old liabilities. So the money in terms of inflation has, so to speak, been neutralised. This action is not inflationary. And we will watch very carefully if and how the money is fed into the economic cycle”

    So in other words it hasn’t been lent out but just put towards the banks own liabilities-no inflation and no benefit to the economy.

    I mean this is surreal. The onloy justification for pumping up the banks is if they’re going to put it out into the economy. Draghi is proudly telling us that no they just serve private interests.

  30. Gravatar of Morgan Warstler Morgan Warstler
    26. April 2012 at 08:45

    Sax, you can have the Monetary Stimulus as soon as we FIRE public employees and shrink govt. spending.

    You must decide how badly you want Monetary.

  31. Gravatar of 123 123
    26. April 2012 at 08:57

    @Mike Sax

    The justification for loans was to prevent the inflation from falling to below 2% over the medium term. That’s what Draghi was trying to accomplish.

  32. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 09:01

    Morgan why do I have to submit to your blackmail? I hardly see the point.

  33. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 09:02

    In any case we have fired plenty of public employees already at the state level while Obama had a hiring freeze at the start of 2011. Don’t see the benefits yet.

  34. Gravatar of Morgan Warstler Morgan Warstler
    26. April 2012 at 10:09

    you got to have QE2

  35. Gravatar of Bonnie Bonnie
    26. April 2012 at 11:15

    I don’t see the justification in capping growth in order to achieve a cap on government, as some have proposed is what is really taking place here.

    It’s one of those false choices, like between being smashed in the head or having your legs broken. We are, in effect, taking the concept of raising all boats through expansion of the pie off the table completely, and that certainly results in this deplorable condition of affairs. In this scenario, I don’t see any dramatic improvement in the level of employment among those of working age(which should be the focus of the measure) over time as things stand because there is no way to stop government from doing what government does; if it can’t spend directly it will do more distortion of markets to keep the objects of desire off budget, like what it did with the mortgage fiasco, and thus directly consuming larger and larger portions of potential growth from the total pie.

    I was far more content when we accepted the misgivings of government in a general way and dealt with it without inducing circumstances that cause the effect to either smash us in the head or break our legs on a very devastating and personal level for every individual no matter how we slice it. At least I had a very bright future full of opportunity to look forward to under the previous set of circumstances, and I cannot say that now. I think that the only real way to cap government is to do that, and leave the money alone. If we can’t do it that way, then we can’t do it and nothing good will come of forcing the issue on an unwilling public and punishing them for not capitulating.

    I cannot figure out why congress has abrogated all responsibility for the Fed and morphed it into a quasi-fourth branch of government that it can cannot control, and left it alone to make such choices for society as whole without being elected, or even accountable for what it does. Money management is the responsibility of congress, and I would venture to guess that the condition of the Fed now is a constitutional no-no.

    I have been a Republican all my life, but since they appear to have thrown Milton Friedman, supply-side economics, and Reaganism under the bus, I am starting to rethink it because I cannot imagine a more uncivil way to deal with political issues than the way this has been dealt with.

  36. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 12:18

    Well Morgan, what can I tell you? It’s all academica anyway. There won’t be any more fiscal stimulus anyway-unless the Democxrats do better than I could hope right now in taking back the House and holding on to the Senate.

    So there is no fiscal stimulus, and there is no monetary stimulus either. Beranke isn’t offering QE3.

    It’s all a wash.

  37. Gravatar of Becky Hargrove Becky Hargrove
    26. April 2012 at 15:53

    For what it’s worth, the Democrats haven’t done much better. Those up close and personal terms you spoke of, Republicans have given up on their unemployed friends and family much more recently than the Democrats, who were letting their friends go when the office jobs started to disappear in the 90s. Like Reagan, I didn’t give up on my Democrat friends they gave up on me. Now, I would say to any extended family, either Democrat or Republican, try to be a bit more kind to those forgotten family members and old friends, for they could use your compassion now.

  38. Gravatar of Salem Salem
    26. April 2012 at 16:08

    Look, the ECB has to follow the law. They are not being stupid, they are doing their jobs. And a good thing too.

    Professor Sumner, you are always writing about the superiority of rules over discretion in monetary policy. And you are of course quite right. It is therefore extremely depressing when you advocate the destruction of a rules-based system (ECB carries out its legal role) and its replacement with a discretionary one (ECB pursues some notion of welfare at its own caprice). You are probably correct that should the ECB disregard the law, it would probably be impossible for anyone else to force it to comply. But this would cause huge and permanent damage to the governance capabilities of the Eurozone member states. The democratic deficit is bad enough as it is without a rogue central bank.

    I agree that the ECB’s mandate is ill-conceived. But the solution is to change the ECB’s mandate by the legal process (inter-governmental treaty), not to pressure the ECB to choose a new mandate more to your liking in defiance of the law. You should consider:

    1. That if the ECB changes its mandate to pursue NGDP targeting, it can change its mandate again (and perhaps to one you hate)
    2. As a result policy becomes more discretionary and less rule-based as there is now no clear rule but rule-contention
    3. That this would politicize the ECB as different factions strive for contention.
    4. This is the opposite of the model of central bank independence that you normally subscribe to.

    NGDP targeting is a good thing. But it is a good thing because it allows the fulfilment of mutual prior and long-held expectations. It does in a small way what the rule of law does in the general way. To get NGDP targeting but lose the the rule of law is an economic disaster.

  39. Gravatar of 123 123
    26. April 2012 at 20:15



  40. Gravatar of Rien Huizer Rien Huizer
    26. April 2012 at 21:49


    Could not agree more. But the mandate appears to be somewhat ambiguous, looking at the criticism from German officials (who tend to do their homework and are watched by a well-informed press (well- Kantoos does not quite agree, but anyway). There is probably too much room for discretion -given that the ECB was conceived as an almost “robotic” device, alongside the equally robotic Stability Pact. Without the Stability Pact and without the better solution, a fiscal union (although I would not particularly like to be in a fiscal union with Ruritania or whatever) and with the acuumulated imbalances, the robot cannot function properly and under the circumstances the ECB has been following a quite discretionary policy, but more or less by stealth. It does appears to follow the formal mandate with its interest rate policy, but it (IMO) deviates dangerously by running credit risk. And while the FED does that too -maybe at a much larger scale (in terms of potential losses), it is part of the US public sector and ultimately only the US’s own credit is affected. In the EU that is not the case. Not only are the benefits of this policy highly asymmetric, they also affect sharholders of the ECB that are not even in the EUR

    So my wish list would be
    (a) stopping the current, highly risky (credit risk) form of commercial bank facilitation (IMO becoming a case of moral hazard at the centre of the Eur monetary system) and replacing it by something that recognizes these risks and makes responsibilities explicit. To be somewhat clearer: the Target 2 balances resulting from current account financing via the Eurosystem must be moved out of the shadows and officially sanctioned (not “repaid” as some mugs want) and more importantly, the potential for instability resulting from deteriorating collateral against 3-year facilities must be addressed and also sanctioned (which would probably be a political hot potato) .
    (b) NDGP LEVEL targeting should be turned into an operational doctrine ( even more difficult than in the US) and and integrated in the formal mandate. By making the doctrine operational I mean that there should be indicators and models that could be used for deliberations within the ECB Governing Council and fairly immune to manipulation by member countries. In addition the financial system will have to be modeled wrt its transmission characteristics (the present system is characterized by market failure). Since this at least several years away, the interim solution should be a higher inflation target (and maybe a negative published interest rate target once the higher inflation target causes the MRO to become zero) a la Sumner.

  41. Gravatar of Mike Sax Mike Sax
    26. April 2012 at 23:14

    Salem I would make one point about the idea that the ECB is just following their stated mandate.

    Ok, true. But there are times when you can’t just follow the letter of some law or rule. Bernanke himslef by the way argued years ago in the 90s in his book on inflation targeintg that there is really no such thing as rules based monetary policy. I know some people do belive in it but Bernanke based on what he said doesn’t.

    Mindlessly following a rule can be stupid. If the house is burning down it’s pointless to say the hose is in the back yard and I was instructed not to go back there. Sometimes you have to react to events on the ground-rules or no.

  42. Gravatar of Rien Huizer Rien Huizer
    27. April 2012 at 01:18

    Mike Sax, you said:

    “Mindlessly following a rule can be stupid. If the house is burning down it’s pointless to say the hose is in the back yard and I was instructed not to go back there. Sometimes you have to react to events on the ground-rules or no.”

    It may be stupid but suppose that was your job. What would you do? Mr Draghi cannot be fired under normal circumstances but the decisions are made by the Board of Governors. Most of its members are high level messenger boys (diplomats) who have replaced previous CB presidents with real authority. It is a well-known phenomenon that if you put naturally risk-averse people (and public sector workers tend to be not risk-loving or even risk-neutral) in a committee bound by restriction that they have no control over, they will avoid the boundaries of their mandate, let alone cross them. Nothing stupid about that. Crossing would be.

  43. Gravatar of J.V. Dubois J.V. Dubois
    27. April 2012 at 01:30

    Salem: Perfectly valid points. Only nobody in ECB or Fed for that matter thinks or speaks as if the old inflation rule is insufficient. It would be good to know that Bernanke and/or Draghi would like to do more for AD but they cannot due to some legal constraints.

    And by the way, Draghi seems perfectly OK with non-rule and discretionary loans to european banks all the while Bernanke seems to be ok with similar non-standard monetary tools (AKA quantitative easing).

    Another thing is that I am highly uncomfortable with Draghi clearly overstretching his position such as when he was claiming that his mandate is to protect European savers, European taxpayers or that the the transfer union cannot be. Imagine that such claims would come from president of secret service or somebody from highest military command. Does it give you shivers?

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. April 2012 at 04:26

    Master of None: (1) 80% is 80%. (2) If Obama can get people on to the Supreme Court, he can get them on the Fed Board. It is a matter of trying hard enough. (3) Remember those months of empty Board seats without any nominees.

    I read posts like this with comments and I think; thank goodness for the RBA, a central bank that is not mad.

  45. Gravatar of David Beckworth on Bernanke’s inconsistencies « The Market Monetarist David Beckworth on Bernanke’s inconsistencies « The Market Monetarist
    27. April 2012 at 05:10

    […] Sumner has two post on Bernanke – here and here. Marcus Nunes also has a comment on Bernanke’s […]

  46. Gravatar of Mike Sax Mike Sax
    27. April 2012 at 08:45

    “Nothing stupid about that. Crossing would be.”

    Rien we disagree. There are times when it’s wholly irrational to keep following a rule when there is an emergency situation that you can actually do something about but say “sorry can’t break the rules.”

  47. Gravatar of Mike Sax Mike Sax
    27. April 2012 at 08:47

    I’d go as far sas saying not only is that stupid but it could even be criminally negligent.

    If you let the house burn down because doing something about it is not in your offical job description

  48. Gravatar of ssumner ssumner
    27. April 2012 at 10:17

    Saturos, The SRAS is generally assumed to be flatter in the short run, I’m not quite sure how you find the opposite.

    The problem with the expectations trap theory is that it’s only a trap if the Fed wants it to be—there is no evidence that the Fed can’t change inflation expectations, just that they don’t want to. So I reject the term ‘trap.’

    Manny, That’s right.

    Rebeleconomist, Bernanke certainly doesn’t agree with that view, as he’s made quite clear.

    123, That’s exactly why they should focus on NGDP, not inflation.

    Master of None, You said;

    “Come on Scott; it’s not fair to make a statement like that without pointing out that 2 of his nominees are being stonewalled by the Republicans in Congress.”

    Is this a joke? Everyone he appoints is a disaster and you tell me the problem is he hasn’t been allowed to appoint even more?

    Marcus, As I said a few posts back; “it’s complicated.”

    MMJ, I agree with both points, but the eurozone also has cyclical unemployment right now. And their mandate would allow for more expansion, if they wanted to.

    Jon, You are factually wrong, the Fed recently raised their inflation target to 2%.

    And they target core inflation, so oil prices are no excuse.

    Mike Sax, Obama is 100% brain dead on monetary policy–there is nothing more to say–no need for a book.

    I’m not sure if me calling Bernanke a liar is being “charitable.”

    Philo, They need to get far more aggressive.

    Rien, Interesting comments, although I’m not quite sure how they relate to this post.

    Marcelo, I’m pretty sure Bernanke does care about jobs.

    Salem, I am not claiming that the ECB should violate any laws. The issue is much more complicated than you make it seem. I don’t think the EU ever expected the ECB to maintain a precisely constant inflation rates, which in any case is almost impossible.

  49. Gravatar of 123 123
    27. April 2012 at 10:37

    “That’s exactly why they should focus on NGDP, not inflation.”

    I agree that they should focus on NGDP. But the treaty tells them to focus on a price level target, and the statistics is telling them they are doing the best job in terms of volatility of inflation and real output.

  50. Gravatar of Evan Soltas Evan Soltas
    27. April 2012 at 11:09


    I have trouble reading that as Bernanke misspeaking. Seems much more like he doesn’t believe the target-gives-us-flexibility line we got in January, b/c now he has to defend it or there is a cost to central bank credibility.

    Moreover, it sounds like, given the committee member projections and the other comments you didn’t quote, that he’s saying what you and I would fear — that he’s not willing to deviate counter-cyclically from the inflation target anymore, that the real conditions have improved sufficiently.

    If he did mean that, it’s terribly disturbing and a major retreat from the position the Fed struck in January in its “longer-run” goals statement, where they talked about weighing the magnitude and duration of deviations in very much the same language that Bernanke used at the press conference. So this is way more than a retreat from Bernanke’s Japan views…I wrote a blog post about this issue this morning which might interest you: http://esoltas.blogspot.com/2012/04/fed-argues-with-itself.html

    The Economist, by the way, thinks Bernanke is under severe pressure from the hawks.

    – Evan Soltas

  51. Gravatar of Saturos Saturos
    27. April 2012 at 11:10

    Scott, Bernanke says this:

    The central banks of the world have, over many years now, established a great deal of credibility for inflation rates in the vicinity of about 2 per cent and it would be a very risky transition if we in any way reduce our commitment to a 2 per cent or approximate 2 per cent inflation target.”

    “We’re not sure how expectations would react. It could be that 4 per cent would not be a stable equilibrium and that people would expect an even higher inflation rate after that.”

    I understood Krugman’s argument as saying that even if the Fed announces a higher target, no one will believe that they won’t renege on it at the first opportunity and people will behave as if the target hadn’t been raised.

    My vertical SRAS curve comes from the rule that elasticity is always lower in the shorter run. Producers can’t immediately respond to higher spending by hiring more labor and capital, output is fixed in the very short run and they will only put up prices at first. This will freak out the Republicans. But as you say, there will be commodity inflation as demand recovers, which will spook everyone who complains about inflation without knowing what it is.

  52. Gravatar of dwb dwb
    27. April 2012 at 11:55

    I have trouble reading that as Bernanke misspeaking.

    he’s saying what you and I would fear “” that he’s not willing to deviate counter-cyclically from the inflation target anymore

    Bernanke sounded far too defensive to be read as misspeaking. It sounded like a 2% inflation target with no catch-up and really 2% is a ceiling. He called slightly higher inflation “reckless.”

    The Economist, by the way, thinks Bernanke is under severe pressure from the hawks.

    i have not seen the article. The only way to reduce the pressure from the hawks is to show that the phantom inflation they fear that seems to be spurting forth from their models is completely wrong. I mean they keep predicting it, it keeps not appearing, its amazing they have any credibility left. Fisher even called for rate hikes in august 2008, I wish THEY had to face the reporters. Bullard got resounding trashed in the blogosphere for a peculiar theory that wealth shocks destroy capacity. facts dont seem to be a barrier to ones opinion at the Fed

  53. Gravatar of Jon Jon
    27. April 2012 at 18:04

    Scott, writes:

    Jon, You are factually wrong, the Fed recently raised their inflation target to 2%.

    My point had a lot more nuance that that. So I hardly see how Bernanke mentioning that his target is 2% would constitute a contradiction….

    And they target core inflation, so oil prices are no excuse.

    That’s an obtuse rejoinder. Obviously I know they cite core inflation as their relevant metric. I’m talking about oil prices as they are embedded in the price of goods and services.

  54. Gravatar of ssumner ssumner
    28. April 2012 at 16:52

    123. Unemployment hit 24.4% in Spain today, how’s that doing a good job on real output?

    Evan, I don’t see the first two Krugman statements you cite as being contradictory. He clearly believes the Fed should stick to its goal of 2% inflation. He’s never, ever suggested they would change that under any circumstances. But he’s always allowed for the possibility that the Fed might allow more or less than 2% inflation for limited periods of time, if it would help achieve their employment objectives. I see no reason to suppose he’s abandoned that policy.

    Having said that, I do see some inconsistency in his remarks, as his personal beliefs clearly differ somewhat from Fed policy—indeed elsewhere in the interview he basically admitted that he was struggling to get a consensus behind a slightly more expansionary policy, but wasn’t entirely successful.

    Saturos, Most American firms of any size are monopolistically competitive. When there’s an increase in demand for their products, they respond initially by ramping up production, as their prices are sticky.

    dwb, See my answer to Evan regarding Bernanke misspeaking. I agree that the hawks are really pressuring him.

    Jon, Maybe I missed the nuance, but I still don’t agree that the Fed reduced its inflation target, nor do I agree that they now have increased confidence in the power of monetary policy at the zero bound.

  55. Gravatar of Saturos Saturos
    29. April 2012 at 02:51

    “Most American firms of any size are monopolistically competitive.”

    Whoops, yes, you’re right.

  56. Gravatar of The Bernanke Disappointment | Last Men and OverMen The Bernanke Disappointment | Last Men and OverMen
    27. February 2017 at 05:35

    […]        http://www.themoneyillusion.com/?p=14065#comments […]

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