Mr. Bernanke’s real friends
People sometimes tell me that I’m too hard on Bernanke. Yes, he may secretly favor doing more, but the Fed faces strong opposition to additional steps toward monetary stimulus.
Actually I’m not very hard on Bernanke, I’m hard on the Fed. Bernanke is in the position of being almost forced to say things he doesn’t really believe—how else could he defend current Fed policy?
In any case, if it’s really true that Bernanke would like to do more but right now most of the political pressure is coming from the “inflation nutters,” then we need to redouble our efforts. Bernanke needs more economists demanding additional monetary stimulus, so that he can do the right thing.
When doing the right thing is not “realistic,” one has two options:
1. Try to change reality to make it more feasible.
2. Give up.
There is no such thing as “public opinion” on NGDP targeting, level targeting. All that matters is the consensus opinion of economists. Change that, and the Fed will eventually follow. We market monetarists haven’t yet convinced the median economist, but we have been far more influential than I would have expected back in late 2008. We’ll probably lose this battle, this business cycle, but win the war.
A few months back Tyler Cowen had this to say:
On this issue I feel Scott Sumner is insufficiently Sumnerian. He correctly stresses the role of expectations and credible commitments, but I still do not understand why he does not accept the implied pessimism in this, at least for May 2012. 2008-2009 was the time to act, in a Ludwig Erhard/Douglas MacArthur/Alexander Haig “I’m in charge now and we’re doing ngdp targeting try to challenge me in the chaos and confusion” sort of way.
5. The Fed already has failed to act, for whatever reasons. That makes it all the harder to achieve the credible commitment now. The market expectation has become “the Fed can/will only do so much.” It’s like a guy hemming and hawing on the marriage proposal for three or four years, and then trying to suddenly set it right and show real commitment to the woman.
I’m trying to get the Fed to spend $3 trillion on a diamond ring, I mean on QE. That’ll wake people up. Seriously, if every academic economist woke up tomorrow morning as a reborn market monetarist, including the academic economists at the Fed, then the Fed would do a lot of monetary stimulus, it would be believed, and it would help a lot. That’s who I’d like to convince. Tyler continues:
I still believe in a looser monetary policy, I just think that what we can get for that now is much much less (a fifth? a tenth?) of what we could have received in 2008-2009.
. . .
This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.
. . .
I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp). Same views, but I do see the clock ticking on the wall.
I take my cue form the markets. In 2006 they didn’t care much about monetary policy. Now they care a lot. That means two things; they think monetary policy is way off course, and they think it is possible that the Fed might still do a lot of good—at least in absolute terms, perhaps not realtive to the size of the problem. As long as they care, I care.
I do talk about “real factors” as well, but as this Austan Goolsbee quote (linked to by Tyler Cowen) points out, real factors are very marginal issues right now:
Of all the public reactions to last Thursday’s surprise ruling from the Supreme Court on the Affordable Care Act, one of the most interesting came from the markets: Nothing happened.
Tags:
6. July 2012 at 05:30
“I take my cue form the markets. ”
Stock markets in Europe have fallen since the ECB Deposit Rate cut to zero from 25bp. The Deposit Rate affects around $500b in bank reserves — not quite the level of our ER’s, but certainly enough to unleash velocity.
Meanwhile, the 2-yr bund yield went negative.
The Danish OMX index is up .3% in the two days since that central bank’s decision to implement a negative (-.2%) IOR.
Possible conclusions:
-markets are inefficient, this is a big buying oppty.
-markets think a zero or -.2% IOR is immaterial
-markets understand something that I don’t (a possibility I am readily willing to entertain).
6. July 2012 at 05:36
BTW, unlike the Fed, the ECB can implement a negative IOR/Deposit Rate. From the FT:
FT Alphaville asked President Mario Draghi whether the ECB board has considered negative rates (and also the implications of negative yields on German bonds). After all, the deposit rate is now zero.
He first said the ECB does not pre-commit…
…and then, in a follow-up question, Draghi signalled that negative rates belong among the central bank’s non-standard measures.
6. July 2012 at 06:25
Why is this explanation being dismissed out of hand?
1. Republicans want to make Obama fail.
2. Bernanke is a Republican.
Conclusiion: Bernanke wants to make Obama fail.
If I were Bernanke and wanted to do as much as I could to help defeat Obama without most people catching on about what I was doing, I would do exactly what Bernanke is doing.
Using Friedman’s Methodology of Positive Economics, Bernanke is acting AS IF he wants to make Obama fail.
However, no matter what Bernanke’s real objectives are, there is no question that his monetary policy amounts to economic sabotage of Obama.
Reappointing Bernanke was Obama’s most serious policy blunder. Reappointing him was the equivalent of what Roosevelt reappointing Hoover’s head of the Fed would have been. If Obama loses, this is by far the most important reason. To be fair to Obama, this was not at all apparent when the reappointment had been made. Even Krugman supported it. (And so did I. How could I have been so incredibly stupid?)
6. July 2012 at 06:59
It seems to me that, whether right or not, the barrier to the median economist accepting the Market Monetarist framework is the lack of a mathematical model. As much as I enjoy reading this blog every day (the blog responsible for liberating me from fiscal Keynesianism), in terms of the big picture, perhaps it’s time to concentrate your efforts into producing a formal DGE model?
6. July 2012 at 07:14
David, I have a new post on negative IOR.
FEH, You said;
“Why is this explanation being dismissed out of hand?”
1. Because the vast majority of criticism of Bernanke is from the right.
2. Because it doesn’t explain the Fed’s tight money policy in 2008, which greatly helped Obama.
Robert, I did post a month back explaining what such a model would entail. I asked someone to produce such a model for me. No one did. Why don’t you? If it’s a good one I’ll do a post and give you credit.
Seriously, if people want to read technical papers on NGDP targeting by one of the best macroeconomists in the world, just read Bennett McCallum. These policies have been debated for decades, there’s nothing new to say. If I tried to come up with a technical model, it would be a grossly inferior version of something McCallum has already done. So why bother?
6. July 2012 at 07:21
“Actually I’m not very hard on Bernanke, I’m hard on the Fed. Bernanke is in the position of being almost forced to say things he doesn’t really believe””how else could he defend current Fed policy?”
Where are the other Obama appointments on the BOG and FOMC? One of the last two was a Republican that was needed to get the Republicans in the Senate to allow the vacancies to be filled. But where are the other 4? Why are they not agressively pushing to make the Fed comply with its mandate to achieve maximum employment? If Bernanke actually attempted to get the Fed to comply with its mandate, would he not get solid support from them?
And there are things the BOG can do without requiring the vote of the troglodites on the FOMC, and Obama appointments have a clear majority there and should be expected to support any expansionary policy Bernake wanted to engage in. Reducing the interest on excess reserves and even making them negative is the most obvious one. But reducing the discount rate would be another, although they might get resistance from some of the Federal Reserve Bank Presidents, who have to submit the discount rate for their district to the BOG for approval. Finally, reduction in the reserve requirements, while largely symbolic in light of the huge amount of excess reserves, could have an important expectational effect.
6. July 2012 at 07:32
The ironic thing is that one of the worst hawks on the Fed, Richard Fisher, has actually run for office as a Democrat.
6. July 2012 at 07:35
Full Employment Hawk
No dcout Republicans want to see the President fail-indeed the day after the election in 2008 Rush Limbaugh declared-he had failed!
After all he was elected Tuesday and the market was down Wednesday.
However, I’m not entirely sure Bernanke wants Obama to fail all those the premise is plausible-it’s the Morgan Warstler Premise.
I’d like to think that he truly has enough respect for his own office, a sense pf professionalism and indeed love of his own country not to do such a thing. Though again it is plausible.
I think both premises are plausible.
6. July 2012 at 07:44
Scott like I’ve said before as you’re Friedman 2.0 you got figure out how 1.0 got it accepted by the median economist-sure it’s an interesting story.
And to Robert’s point I guess you can argue that Friedman didn’t write any models either.
So who knows-maybe models are what get written after the success of a Macro idea.
6. July 2012 at 07:49
“in terms of the big picture, perhaps it’s time to concentrate your efforts into producing a formal DGE model?”
In spite of the fact that DSGE models are methodoligical straightjackets that interfere with our ability to understand how real world economies work at the macroeconomic level, since this is the way the game is currently played in the academic world, some market monetarists who are adept at playing this game clealy need to do this to get market monetrarism more widely accepted.
For a really excellent criticism of DSGE modeling, see
IS MODERN MACRO OR 1978-ERA MACRO MORE RELEVANT TO THE UNDERSTANDING OF THE CURRENT ECONOMIC CRISIS, by Robert J. Gordon. It is available at the following link:
http://faculty-web.at.northwestern.edu/economics/gordon/GRU_Combined_090909.pdf
6. July 2012 at 07:56
“However, I’m not entirely sure Bernanke wants Obama to fail all those the premise is plausible-it’s the Morgan Warstler Premise.”
While I strongly disagree with Morgan on normative issues, on understanding what conservatives are really up to, Morgan is right on. Not only is he right, but, unlike most of them, he is willing to say what they are up to instead of trying to conceal it with platitudes.
“Because it doesn’t explain the Fed’s tight money policy in 2008, which greatly helped Obama.”
A lot of people in the financial community were for Obama in 2008 and now want to defeat him. Bernanke may well be one of them.
6. July 2012 at 07:58
Scott,
Challenge accepted. Just finished my undergrad and I fully intend to do my masters research on the Market Monetarist framework. I’ll get back to you in two years.
If I recall correctly, McCallum favoured NGDP growth rate targeting, and US NGDP growth is reasonably close to trend isn’t it, only off by about 1%? Isn’t the unique feature of Market Monetarism targeting the level, which has fallen 9%?
6. July 2012 at 08:27
Goolsbee: “A fair read of the data suggests that the economy is growing slowly today because we are still making our way out of a deep financial crisis. This isn’t easy because we cannot return to growth driven solely by consumer spending and housing construction. Instead we must grow our exports and capital investment, nurturing the rebound of manufacturing.”
I agree with your point but the Goolsbee piece you quoted goes bad at the half-way point. He’s advocating more manufacturing and more exports in lieu of consumption (AD). Take a tour of the world, and that seems to be the policy everywhere: Exports For Prosperity!!!
6. July 2012 at 08:57
Sax:
Friedman did lots of modeling.
Robert:
There are market monetarists more adept than Scott (or me) in modeling.
Instead of insisting that Scott do that, understand that he is trying to recruit other economists to do it. Like you. Glad you took up the challenge.
Scott:
Do you really think that McCallum has already said it all?
As I see it, we don’t worry much about economists who say, show us your formal model before we will pay attention to you.
As for empiricism, it is hard to see how that applies well to judging the consequences of a new moneary regime.
But we should be encouraging of the efforts of others to develop formal models and simulations. If it some kind of absolute proof of the undesirabilty of NGDLP targeting results, well, it I guess is was a bad idea. If models are developed that illustrate benefits–great. If models suggest problems, but the problem is an artifact of the model, well, what a great opportunity for a response.
And the futures targeting–I think there is room for lots of formal work in that area.
Is it too rude to say, “you don’t think it will work? You develop the formal model and show it won’t work.”
6. July 2012 at 09:06
Bill,
I by no means meant to come off as being insistent. It was just an observation.
6. July 2012 at 09:12
Bill he did a model of the Growth Supply Rule?
6. July 2012 at 09:21
The irony is I meant to suggest maybe Scott doesn’t need a model. I didn’t realize that Friedman had a great amount of prowress in models.
Was this why Volcker went Monetarist-he read Friemdan’s model of the Money Supply Growth Rule?
6. July 2012 at 09:56
People sometimes tell me that I’m too hard on Bernanke. Yes, he may secretly favor doing more, but the Fed faces strong opposition to additional steps toward monetary stimulus.
Actually I’m not very hard on Bernanke, I’m hard on the Fed. Bernanke is in the position of being almost forced to say things he doesn’t really believe””how else could he defend current Fed policy?
By believing it is the best policy? You can’t say he doesn’t really believe what he says based on a 2003 statement. Bernanke is a mind changer. Just look at his erratic behavior.
In any case, if it’s really true that Bernanke would like to do more but right now most of the political pressure is coming from the “inflation nutters,” then we need to redouble our efforts.
Then you deflation nutters will face re-tripled efforts from those who know the best thing to do is shut down the Fed before it destroys what’s left of the market economy.
Bernanke needs more economists demanding additional monetary stimulus, so that he can do the right thing.
That would be the wrong thing. It is precisely monetary stimulus that has, and continues to, wreak havoc on economic calculation and hence on the division of labor.
When doing the right thing is not “realistic,” one has two options:
1. Try to change reality to make it more feasible.
2. Give up.
When doing the wrong thing is realistic, we’re in trouble.
There is no such thing as “public opinion” on NGDP targeting, level targeting. All that matters is the consensus opinion of economists. Change that, and the Fed will eventually follow. We market monetarists haven’t yet convinced the median economist, but we have been far more influential than I would have expected back in late 2008. We’ll probably lose this battle, this business cycle, but win the war.
The war on economic calculation won’t be over however, and so the economy will still have a cancer that needs purging.
I’m trying to get the Fed to spend $3 trillion on a diamond ring, I mean on QE. That’ll wake people up.
People are not asleep. They are being continually harmed by non-market money production.
$3 trillion? Why not a flippitybajillion, or a dodedeckadillion instead?
Seriously, if every academic economist woke up tomorrow morning as a reborn market monetarist, including the academic economists at the Fed, then the Fed would do a lot of monetary stimulus, it would be believed, and it would help a lot.
It won’t help the average American. It will help the bankers and politicians, but it will hamper the price system even more.
This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.
Now that’s funny. Austrians are already way ahead of you. You should have been talking about real factors much sooner.
I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp). Same views, but I do see the clock ticking on the wall.
Some might call that being an ideologue.
I take my cue form the markets.
Now that’s even more funny.
You don’t take your cue from the markets. That’s a fraudulent claim. You take your cue from the non-market centralized (government) money production monopoly.
If you took your cue from the markets, then you would seek to abolish the non-market Fed, and then wait and see what money the market process would entail.
In 2006 they didn’t care much about monetary policy. Now they care a lot. That means two things; they think monetary policy is way off course, and they think it is possible that the Fed might still do a lot of good””at least in absolute terms, perhaps not realtive to the size of the problem.
Not exactly. “Caring” also entails a desire among people not to just reform the Fed, but to abolish it outright. That movement has picked up incredible steam since 2008.
The more businessmen everywhere spend time and resources researching what the Fed will do, the less time and resources they can devote to researching what the consumers want.
I do talk about “real factors” as well, but as this Austan Goolsbee quote (linked to by Tyler Cowen) points out, real factors are very marginal issues right now
Real factors are very marginal issues to Monetarists and Keynesians. They both are almost universally fixated on government printing and spending money.
Of all the public reactions to last Thursday’s surprise ruling from the Supreme Court on the Affordable Care Act, one of the most interesting came from the markets: Nothing happened.
Surprise ruling? It was already priced in.
6. July 2012 at 10:36
“Why is this explanation being dismissed out of hand? 1. Republicans want to make Obama fail. 2. Bernanke is a Republican. Conclusion: Bernanke wants to make Obama fail.”
1. Why do all of Obama’s BoG appointees want him to fail?
2. Why does the ECB want Obama to fail?
3. Why did Bernanke want McCain to fail?
(Remember that McCain was even-to-ahead in the polls until the late 2008 worst-since-the-Depression deflationary plunge. If Obama gets that he’ll have something to complain about.)
6. July 2012 at 10:57
“Possible conclusions:
-markets are inefficient, this is a big buying oppty.
-markets think a zero or -.2% IOR is immaterial
-markets understand something that I don’t (a possibility I am readily willing to entertain).”
_____
The markets are correct, the ECB never does more than the minimum forced upon it, which is always too little too late?
6. July 2012 at 10:59
“Why do all of Obama’s BoG appointees want him to fail?”
Of the 6 Obama appointments Bernanke was a major blunder. No matter why he is doing it, he is sabotaging Obama economically.
One of the last two appointes was a Republican who was needed to get the Republicans to let the last two vacancies be filled.
That leaves a 4 out of 12 minority on the FOMC. But yes, I am puzzled why they are not trying to put intense pressure on Bernanke to obey the full employment mandate.
Not since Nicholas Biddle has a head of a U.S. central bank worked so hard to unermine a President economically.
“Why does the ECB want Obama to fail?”
The ECB is not concerned with Obama. It is determined to not do what a central bank was traditionally expected to do; act as a lender of last resort.
“Why did Bernanke want McCain to fail?
What he did there was an unintended error. This did not go on for years, so there was no time for the Fed to recognize it had made an error and correct it before the bottom fell out of the economy. But what he is doing now has gone on long enough to make it obvious that the Fed is sabotaging Obama.
6. July 2012 at 13:30
FHE,
You have an incredibly cynical point of view.
If Bernanke is trying to sabotage Obama, the that would mean that Ron Paul is 100% correct, and the fed needs to be abolished.
Is Bernanke a Republican? He certainly seems to be two steps to the left of his predecessor. Just because he was appointed by Bush (and reappointed by Obama) doesn’t force him to be a Republican.
6. July 2012 at 14:01
“You have an incredibly cynical point of view”
I cannot read Bernanke’s mind. I may be completely wrong about his intentions, but, following Friedman’s THE METHODOLOGY OF POSITIVE ECONOMICS (which everybody should read) he is behaving AS IF he wants Obama to be defeated (whether that is his actual intention or not).
I ask myself what would I do if I were in Bernanke’s place and wanted to do everything I could to defeat Obama without most people catching on that this I what I am doing. And the answer is: precisely what Bernanke is currently doing.
In any case, whether it is intentional or the by-product of other factors, the reality is that Bernanke, in blatently refusing to comply with the congressional mandate to achieve maximum employment, is sabotaging Obama.
“Just because he was appointed by Bush” In addition to being appointed Fed chair by Bush, he also served as Chairman of Bush’s Council of Economic Advisors for a time. When Obama reappointed him Obama was still suffering from the illusion that he could be a post-partisan President who would work together with both Republicans and Democrats in a bipartisan manner to solve the nantion’s problems and had not yet caught on to the fact that the Republicans’ overriding priority was to make him fail.
6. July 2012 at 14:11
“that would mean that Ron Paul is 100% correct, and the fed needs to be abolished.”
That does not followed. The performance of the monetary and finacial system before the Fed indicates that a central bank is needed to conduct monetary policy.
But the Fed does need to be reformed. The current situation where 5 out of the 12 members of the FOMC are primarily chosen by bankers is totally unacceptable and probably unconstitutional, since the constitution gives the right to coin money and regulate the value thereof to Congress and not bankers. This must be ended. There are several ways of doing this. A simple way is to give control of open market operations to the BOG. Another way is to restrict the election of the presidents of the individual Federal Reserve banks to the Class C directors.
6. July 2012 at 18:07
Scott,
Perhaps Bernanke believes:
1. The Fed has supplied sufficient money for economic actors to engage in all the activities they currently have the appetite for;
2. The lack of appetite for more transactions is due to their perception of the risk of additional transactions in consideration of the uncertainty of the stability of governments, banks, global political stability, etc.;
3. That it is not the responsibility (or the prerogative) of the Fed to force those economic actors to choose between these system risks and the risk that the money they hold will lose value because the Fed is buying up all the assets required to drive up NGDP.
4. That it is the responsibility of political actors and financial institutions to reduce the uncertainty as the correct way to create additional transactions.
Hugh
6. July 2012 at 18:22
Wonks, So did Rick Perry.
Robert, Yes, but for how long do you keep trying to go back to the old trend line. I now think we should only try to go a third of the way back.
Steve, I agree.
Bill, I agree, I found that my National Affairs paper seems to have influenced some big names, so I’m not worried on that score.
Hugh, Based on what I know about Bernanke’s beliefs, there is ZERO chance he believes that. You make him sound almost Austrian.
6. July 2012 at 19:07
Robert, I think your paper is going to be LEGEN – wait for it – DARY.
Sorry.
6. July 2012 at 19:34
FEH, there’s a simpler answer to all those questions: Why Bernanke ‘wants’ Obama to fail … why Bernanke ‘accidentally’ guaranteed McCain would fail when he wanted McCain to win … why the ECB is doing all it can for Obama to fail … why Larry Summers wants Obama to fail — as he goes on and on about impossible fiscal proposals with, over the last four years, not a word about the Fed doing more monetary stimulus.
To wit: Market Monetarism is — left and right, at home and abroad, in the Fed and outside of it — a distinctly minority belief system. People just don’t believe it.
Simple. Occam’s Razor.
The real question in all this regard: Why does Larry Summers want Obama to fail??
Making Obama believe that “It’s clear monetary policy has shot its wad” was the killer. Obama’s believing that is the full explanation for why the WH has put *no* pressure on his BoG appointees or the Fed overall — either directly or through politics — to do more.
Who taught Obama that? Why? Those are the questions to answer.
Personally I think the answers are “Larry Summers” and “Because he really thinks the Fed’s been impotent through all this”. (Though I suppose it is imaginable that he was a mole for the Republicans.)
Though why Obama bought that wholesale without ever asking for a second opinion — when there were so many so readily available to him — is another question to ponder. And the answer to that is entirely on Obama.
6. July 2012 at 20:49
“Perhaps Bernanke believes:”
But almost certainly he does not.
There is nothing in his writing or statements to give anyone any basis suspecting that he believes such a patently false set of ideas.
6. July 2012 at 20:57
“Larry Summers wants Obama to fail “” as he goes on and on about impossible fiscal proposals with, over the last four years, not a word about the Fed doing more monetary stimulus.”
The choice of Larry Summers as chief economic advisor was another major blunder by Obama. He should have listened to Christina Romer instead. This error, among other things, explains the failure to promptly fill the vacancies on the BOG with people who take the Fed’s mandate to achieve maximum employment seriously. And it may explain the fatal decision to reappoint the former chair of Bush’s council of economic advisors, Bernanke, as Chair of the Fed.
6. July 2012 at 21:05
“Though why Obama bought that wholesale without ever asking for a second opinion … is another question to ponder.”
True. If I were in Obama’s place and had been following the advice of my economic advisors and the economy kept having such unsatisfactory results, I would have started suspecting that I was getting bad advice, and started seeking outside opinions, especially from people who were criticising my policies.
6. July 2012 at 21:19
“It is precisely monetary stimulus that has, and continues to, wreak havoc on economic calculation and hence on the division of labor.”
If the depression were due to a faulty division of labor, the labor surpluse is some markets would be matched by equivalent labor shortages in other markets. But the empirical evidence shows that there are labor surpluses in the great majority of markets and shortages in very few. This shows that faulty division of labor is not the cause of the depression, lack of demand is the problem.
The Austrians could get away with their misallocation of resources theory in the 1930s, when very little data on the state of labor markets was available. But to stick with such a theory when it is clearly falsified by the much better data available now reprsents blind adherence to ideological data.
7. July 2012 at 10:29
[…] retirement enough that I’ll do fine under either regime. Anyway, as SRW notes, this is why Scott Sumner’s desire for NGDP targeting will have great difficulty ever catching on. This entry was posted in Economics, Finance, Politics […]
7. July 2012 at 11:26
FEH –
“But the Fed does need to be reformed. The current situation where 5 out of the 12 members of the FOMC are primarily chosen by bankers is totally unacceptable and probably unconstitutional, since the constitution gives the right to coin money and regulate the value thereof to Congress and not bankers. This must be ended. There are several ways of doing this. A simple way is to give control of open market operations to the BOG. Another way is to restrict the election of the presidents of the individual Federal Reserve banks to the Class C directors.”
I agree with you that having bankers appoint directors of the Regional Fed Banks is outrageous. I don’t think it’s unconstitutional because the law was passed by Congress, but it is wrong. My solution is to change the law to have the President appoint the Class A and B directors instead of the banks. Or perhaps the States could appoint them.
8. July 2012 at 21:28
Another possibility is to have the BOG appoint ALL the directors.
Having the states appoint them may well violate the Constitution.
23. April 2017 at 07:57
[…] http://www.themoneyillusion.com/?p=15135 […]