Mr. Bernanke: You are playing Wii, not mini golf

Ben Bernanke recently used a golf metaphor to describe monetary policy:

In remarks simply titled “Gradualism,” then-Governor Bernanke explained the case for policymakers “to move slowly and cautiously” when they can’t be sure about the consequences. He cited a classic 1967 article by Brainard, a Yale economist, who “showed that when policymakers are unsure of the impact that their policy actions will have on the economy, it may be appropriate for them to adjust policy more cautiously and in smaller steps than they would if they had precise knowledge of the effects of their actions.”

Then he gets into miniature golf:

“Imagine that you are playing in a miniature golf tournament and are leading on the final hole. You expect to win the tournament so long as you can finish the hole in a moderate number of strokes. However, for reasons I won’t try to explain, you find yourself playing with an unfamiliar putter and hence are uncertain about how far a stroke of given force will send the ball. How should you play to maximize your chances of winning the tournament?

“Some reflection should convince you that the best strategy in this situation is to be conservative. In particular, your uncertainty about the response of the ball to your putter implies that you should strike the ball less firmly than you would if you knew precisely how the ball would react to the unfamiliar putter. This conservative approach may well lead your first shot to lie short of the hole. However, this cost is offset by the important benefit of guarding against the risk that the putter is livelier than you expect, so lively that your normal stroke could send the ball well past the cup. Since you expect to win the tournament if you avoid a disastrously bad shot, you approach the hole in a series of short putts (what golf aficionados tell me are called lagged putts). Gradualism in action!”

That’s way too gradual.  Bernanke is playing something closer to electronic golf.  After each practice swing in Wii, the likely distance the ball will travel is shown on the computer screen.  The practice swings are the recent policy statements by Fed officials.  The reactions of markets (everything from stocks to TIPS spreads) show us the likely effects.  Yes, there is a circularity problem here–but at least it gives us a ballpark estimate.  And the Fed’s still not swinging hard enough.

Target the forecast!  Set monetary policy at a level expected to produce desired growth in AD.  We’re still far from that level.  I hope Bernanke doesn’t choke under the pressure.  I hope he remembers what he told the Japanese a few years back:

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.



12 Responses to “Mr. Bernanke: You are playing Wii, not mini golf”

  1. Gravatar of Steve Steve
    27. October 2010 at 05:28


    What is this black art, this devil worship, that you seek to practice? (I say in jest of course)

    “…stoking change with monetary policy is a ‘bargain with the devil,’ Hoenig said Monday at the University of Kansas in Lawrence…”

  2. Gravatar of marcus nunes marcus nunes
    27. October 2010 at 05:53

    Another “indicator” in the panelfor “how strongly the Fed is swinging”:

  3. Gravatar of Tony McGovern Tony McGovern
    27. October 2010 at 06:21

    This is your best effort yet at convincing us of nominal targeting. It’s simple, yet still a compelling argument.

  4. Gravatar of mlb mlb
    27. October 2010 at 06:22

    Scott, I suggest you read the latest quarterly letter by Jeremy Grantham (link below). He is one of the investors who has proven a market-beating understanding of the economy/markets over several decades.

    I know you think “great investors” are the product of luck but I can prove that is not the case. If I put you in a room with 20 random macro investors, among whom were 10 with excellent multi-decade track records, you would easily pick out at least 8 of the 10 as being notably smarter. If it were truly luck your intuition on “smarts” would not correlate at all with performance.

    Here is the link…(free registration required). “Night of the Living Fed” is the paper.

  5. Gravatar of Doug Bates Doug Bates
    27. October 2010 at 06:33

    It is a lot easier to tell somebody else to take more risks, than to take more risks yourself 😉

  6. Gravatar of W. Peden W. Peden
    27. October 2010 at 08:02

    Doug Bates,

    That’s the problem with discretionary monetary policy: unless one is constrained (and protected!) by clear rules, subjective risk can become a big problem.

    If the Fed had a better mandate (we can debate which one is best, but there are clearly many superior alternatives) then Bernanke wouldn’t have to worry so much about his reputation re: monetary stimulus. Provided they do what is adequate for some socially acceptable interpretation of the rules, the Fed could always say “Hey, we’re just doing our job”.

    One of the rarely-trumpeted virtues of inflexible, boneheaded central bank rules is that the dangers of the human factor (which has been so important in the case of Japan) can be limited. Vigorous monetary responses can be explained to the public using the rule.

    Another, of course, is that it would mitigate the deleterious effects of modern central bankers’ obsession with “credit”, “lending” and “interest rates”. It doesn’t matter how much they want to think in these terms: a clear, sensible monetary policy mandate would reconcile their doctrinal errors with a sensible monetary policy.

  7. Gravatar of ssumner ssumner
    27. October 2010 at 08:32

    Steve. I saw that too. Ridiculing that in a blog post would be like stealing candy from a baby—too easy. I’ll leave that to others who are more creative than me. Oh wait–I have an idea. I’ll propose a 6%-6%-6% solution. 6% NGDP growth for three years to catch up, and then 5% thereafter. how does that sound? Or how about “Sympathy for the Devil?” (Mick Jagger went to the London School of Economics before starting a rock band.)

    Marcus, They focus too much on the 10 year inflation rate. That’s not the problem. The two year TIPS spread is about 1.2%, and may underestimate inflation expectations. The CPI futures market show 1.4% inflation over the next two years, and it probably overestimates inflation.

    Thanks Tony.

    mlb, He would not be one of the 8 I would single out; he’s not even talking about monetary policy, he’s talking about debt. Even I agree that more debt is not the answer.

    Doug, Yes, I understand that. But if you target the forecast, and do level targeting, there is little risk–you immediately see whether you have done too much or too little.

    W. Peden Good points. (Of course I know from the smiley face that Doug was just joking.)

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    27. October 2010 at 10:40

    Bernanke’s giving some really bad golf advice too. You should aim to sink the first putt–absent some special danger such as the green sloping away behind the hole, with a water hazard looming (the Augusta National dilemna)–since if you miss by 3 feet you’re only 3 feet away. If you aim to come up 3 feet short, and miss by the same 3 feet, you’re 6 feet away.

    Doesn’t matter whether you’re familiar with the putter–which will obey the laws of physics; the ball will travel in accordance with the weight of the putter head and the speed with which it was hit.

    Ya know…there might be a lesson in monetary policy there.

  9. Gravatar of FT Alphaville » Further, further reading FT Alphaville » Further, further reading
    27. October 2010 at 12:01

    […] Bernanke is playing Wii, not mini […]

  10. Gravatar of Mephistopheles Mephistopheles
    27. October 2010 at 12:12

    Psst, Benny, FIVE percent nominal GDP! Target the forecast! Indulge us with the elixir of QE, the earthly pleasures of economic growth, and you will be admired for your academic wisdom!

  11. Gravatar of scott sumner scott sumner
    27. October 2010 at 17:47

    Patrick, Yes, he’s too cautious.

    Mephistopheles, Hoenig warned me about you.

  12. Gravatar of FT Alphaville » Godzilla QE FT Alphaville » Godzilla QE
    29. October 2010 at 03:15

    […] bye, bank note rule’ – FT Alphaville Nikkei 63,000,000 – FT Alphaville Mr Bernanke: you playing Wii, not mini golf – Money […]

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