The Bernanke/Sumner explanation for the crash of 2008

The paper used in my previous post is a gold mine, and we are far from exhausting all its riches.  If there are any GMU professors reading this, I have a question.  Are academics allowed to present someone else’s paper in a seminar (if we correctly identify the author?)  I would like to present Bernanke’s paper next time I do a seminar.  If you think that strange, read the rest of this post and the previous one as well.  BTW, the Bernanke paper I am discussing in these two posts is titled:

Japanese Monetary Policy:  A Case of Self-Induced Paralysis?

The answer is yes; now let’s get into the details of what went wrong.  The opening sentence sets the scene:

The Japanese economy continues in a deep recession. The short range IMF forecast is that, as of the last quarter of 1999, Japanese real GDP will be 4.6% below its potential. This number is itself a mild improvement over a year earlier, when the IMF estimated Japanese GDP at 5.6% below potential.

So the level of output is 4.6% below trend.  Does that sound familiar?  On the other hand things are getting better.  Over the past year growth was 1% above trend.  So the “recovery” is well underway.  Time to tighten monetary policy?  I think you already know the answer.  For Japan, no.  For the US in 2010?  I fear the answer may be yes.  Then there is this:

Japan’s weakness has also imposed economic costs on its less affluent neighbors, who look to Japan both as a market for their goods and as a source of investment.

And isn’t that also true for the US today?  Bernanke then discusses flaws in the Japanese banking system, before focusing on the main topic:

In the short-to-medium run, however, macroeconomic policy has played, and will continue to play, a major role in Japan’s macroeconomic (mis)fortunes. My focus in this essay will be on monetary policy in particular.  Although it is not essential to the arguments I want to make””-which concern what monetary policy should do now, not what it has done in the past””-I tend to agree with the conventional wisdom that attributes much of Japan’s current dilemma to exceptionally poor monetary policy-making over the past fifteen years (see Bernanke and Gertler, 1999, for a formal econometric analysis). Among the more important monetary-policy mistakes were 1) the failure to tighten policy during 1987-89, despite evidence of growing inflationary pressures, a failure that contributed to the development of the “bubble economy”; 2) the apparent attempt to “prick” the stock market bubble in 1989-91, which helped to induce an asset-price crash; and 3) the failure to ease adequately during the 1991-94 period, as asset prices, the banking system, and the economy declined precipitously. Bernanke and Gertler (1999) argue that if the Japanese monetary policy after 1985 had focused on stabilizing aggregate demand and inflation, rather than being distracted by the exchange rate or asset prices, the results would have been much better.   (emphasis added.)

Look at the section I italicized.  Isn’t that exactly what I said caused the current steep recession?  Bernanke continues . . .

Bank of Japan officials would not necessarily deny that monetary policy has some culpability for the current situation. But they would also argue that now, at least, the Bank of Japan is doing all it can to promote economic recovery. For example, in his vigorous defense of current Bank of Japan (BOJ) policies, Okina (1999, p. 1) applauds the “BOJ’s historically unprecedented accommodative monetary policy”. He refers, of course, to the fact that the BOJ has for some time now pursued a policy of setting the call rate, its instrument rate, virtually at zero, its practical floor. Having pushed monetary ease to its seeming limit, what more could the BOJ do? Isn’t Japan stuck in what Keynes called a “liquidity trap”?

I will argue here that, to the contrary, there is much that the Bank of Japan, in cooperation with other government agencies, could do to help promote economic recovery in Japan. Most of my arguments will not be new to the policy board and staff of the BOJ, which of course has discussed these questions extensively. However, their responses, when not confused or inconsistent, have generally relied on various technical or legal objections””-objections which, I will argue, could be overcome if the will to do so existed. My objective here is not to score academic debating points. Rather it is to try in a straightforward way to make the case that, far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.

I had a number of posts last year arguing that the Fed doesn’t realize how much easier things would be if it took the plunge, that a much more expansionary policy would not be more risky, but in fact would be much less risky for the economy.

So what was the basic problem? Was it the banking crisis, as most people think?  Or was it something much deeper, was it a fall in NGDP that caused the worsening of the financial crisis:

I do not deny that important structural problems, in the financial system and elsewhere, are helping to constrain Japanese growth. But I also believe that there is compelling evidence that the Japanese economy is also suffering today from an aggregate demand deficiency. If monetary policy could deliver increased nominal spending, some of the difficult structural problems that Japan faces would no longer seem so difficult.  (italics added.)

Increased NGDP?  I hope that I don’t even need to say anything.  I must have written something almost identical at least a 100 times in the past year.

But how do we know that then problems are monetary?  Perhaps they are structural:

Taken together with the anemic performance of real GDP, shown in Table 2, column (5), the slow or even negative rate of price increase points strongly to a diagnosis of aggregate demand deficiency. Note that if Japan’s slow growth were due entirely to structural problems on the supply side, inflation rather than deflation would probably be in evidence.

But haven’t some countries in the past prospered with stable prices, or even mild deflation?

Perhaps more salient, it must be admitted that there have been many periods (for example, under the classical gold standard or the price-level-targeting regime of interwar Sweden) in which zero inflation or slight deflation coexisted with reasonable prosperity. I will say more below about why, in the context of contemporary Japan, the behavior of the price level has probably had an important adverse effect on real activity. For now I only note that countries which currently target inflation, either explicitly (such as the United Kingdom or Sweden) or implicitly (the United States) have tended to set their goals for inflation in the 2-3% range, with the floor of the range as important a constraint as the ceiling (see Bernanke, Laubach, Mishkin, and Posen, 1999, for a discussion.) Alternative indicators of the growth of nominal aggregate demand are given by the growth rates of nominal GDP (Table 1, column 4) and of nominal monthly earnings (Table 1, column 5). Again the picture is consistent with an economy in which nominal aggregate demand is growing too slowly for the patient’s health. It is remarkable, for example, that nominal GDP grew by less than 1% per annum in 1993, 1994, and 1995, and actually declined by more than two percentage points in 1998.  (emphasis added.)

Holy cow!  Are you telling me that NGDP fell by 2% in 1998?  More importantly, look at the italicized sentence.  Inflation below the 2% to 3% range is to be avoided just as  strenuously as inflation above the 2% to 3% range.  What other indicators do we have that money has been too tight?

The yen has generally strengthened over the period, which is consistent with the deflationist thesis. As I will discuss further below, even more striking is the surge of the yen since 1998, a period that has coincided with weak aggregate demand growth and a slumping real economy in Japan. As column (2) shows, however, the fact that inflation in Japan has been lower than in the United States has left the real terms of trade relatively stable. My interpretation is that the trajectory of the yen during the 1990s is indicative of strong deflationary pressures in Japan, but that a too-strong yen has not itself been a major contributor to deflation, except perhaps very recently. Columns (3) and (4) of Table 2 shows rates of change in the prices of two important assets, land and stocks.

The table shows falling stock and land prices.  So we have the same stock price/real estate/exchange rate indicators I used to call out the Fed in late 2008, being used by Bernanke to call out those reactionaries at the BOJ.

OK, things are kind of deflationary, but how do we know it’s the BOJ’s fault.  What do traditional monetary policy indicators show?

A glance at Table 3 suggests that the stance of monetary policy has been somewhat different since 1995 than in the 1991-94 period. As mentioned earlier, there seems to be little debate even in Japan that monetary policy during 1991-94 was too tight, reacting too slowly to the deflationary forces unleashed by the asset-price crash. Interest rates came down during this period, but rather slowly, and growth of both narrow and broad money was weak. However, one can see that there has been an apparent change in policy since 1995: In that year the call rate fell to under 0.5%, on its way down to effectively a zero rate today, and lending rates fell as well. The fall in the nominal interest rate was accompanied by noticeable increases in the rates of money growth, particularly in the monetary base, in the past five years.

I can just imagine my Keynesian readers saying “See Sumner, after 1995 there was nothing more the BOJ could do.”  Here’s the very next paragraph from Bernanke:

Monetary authorities in Japan have cited data like the 1995-99 figures in Table 3 in defense of their current policies. Two distinct arguments have been made: First, that policy indicators show that monetary policy in Japan is today quite expansionary in its thrust””- “historically unprecedented accommodative monetary policy”, in the words of Okina quoted earlier. Second, even if monetary policy is not truly as expansionary as would be desirable, there is no feasible way of loosening further””-the putative liquidity trap problem. I will address each of these two arguments in turn (the second in more detail in the next section).

The argument that current monetary policy in Japan is in fact quite accommodative rests largely on the observation that interest rates are at a very low level. I do hope that readers who have gotten this far will be sufficiently familiar with monetary history not to take seriously any such claim based on the level of the nominal interest rate. One need only recall that nominal interest rates remained close to zero in many countries throughout the Great Depression, a period of massive monetary contraction and deflationary pressure. In short, low nominal interest rates may just as well be a sign of expected deflation and monetary tightness as of monetary ease.  (Italics added.)

If you are “sufficiently familiar with monetary history” please continue.  If not, get out of my blog and go read some 1938 vintage Keynesian blog.  But what about real interest rates:

A more respectable version of the argument focuses on the real interest rate. With the rate of deflation under 1% in 1999, and the call rate effectively at zero, the realized real call rate for 1999 will be under 1%, significantly less than, say, the real federal funds rate in the United States for the same period. Is this not evidence that monetary policy in Japan is in fact quite accommodative?

I will make two responses to the real-interest-rate argument. First, I agree that the low real interest rate is evidence that monetary policy is not the primary source of deflationary pressure in Japan today, in the way that (for example) the policies of Fed Chairman Paul Volcker were the primary source of disinflationary pressures in the United States in the early 1980s (a period of high real interest rates). But neither is the low real interest rate evidence that Japanese monetary policy is doing all that it can to offset deflationary pressures arising from other causes (I have in mind in particular the effects of the collapse in asset prices and the banking problems on consumer spending and investment spending). In textbook IS-LM terms, sharp reductions in consumption and investment spending have shifted the IS curve in Japan to the left, lowering the real interest rate for any given stance of monetary policy. Although monetary policy may not be directly responsible for the current depressed state of aggregate demand in Japan today (leaving aside for now its role in initiating the slump), it does not follow that it should not be doing more to assist the recovery.

A couple comments here.  Real interest rates were very high during the crucial period late last year when things fell apart.  Second, he goes on to show how monetary policy errors of omission could be associated with low real rates, if there are banking problems and a deep and prolonged recession:

My second response to the real-interest-rate argument is to note that today’s real interest rate may not be a sufficient statistic for the cumulative effects of tight monetary policy on the economy.

.   .   .

To take an admittedly extreme case, suppose that the borrower’s loan was still outstanding in 1999, and that at loan initiation he had expected a 2.5% annual rate of increase in the GDP deflator and a 5% annual rate of increase in land prices. Then by 1999 the real value of his principal obligation would be 22% higher, and the real value of his collateral some 42% lower, then he anticipated when he took out the loan. These adverse balance-sheet effects would certainly impede the borrower’s access to new credit and hence his ability to consume or make new investments. The lender, faced with a non-performing loan and the associated loss in financial capital, might also find her ability to make new loans to be adversely affected.  This example illustrates why one might want to consider indicators other than the current real interest rate””-for example, the cumulative gap between the actual and the expected price level“”-in assessing the effects of monetary policy.   (emphasis added.)

Or how about the cumulative gap in AD, as measured by nominal GDP?  And here’s another difference from the gold standard period:

Further, unlike the earlier period, rising prices are the norm and are reflected in nominal-interest-rate setting to a much greater degree. Although deflation was often associated with weak business conditions in the nineteenth century, the evidence favors the view that deflation or even zero inflation is far more dangerous today than it was a hundred years ago.

OK, OK, monetary ease is needed, but what more can the BOJ do?

The second argument that defenders of Japanese monetary policy make, drawing on data like that in Table 3, is as follows: “Perhaps past monetary policy is to some extent responsible for the current state of affairs. Perhaps additional stimulus to aggregate demand would be desirable at this time. Unfortunately, further monetary stimulus is no longer feasible. Monetary policy is doing all that it can do.” To support this view, its proponents could point to two aspects of Table 3: first, the fact that the BOJ’s nominal instrument rate (column 1) is now zero, its lowest possible value. Second, that accelerated growth in base money since 1995 (column 4) has not led to equivalent increases in the growth of broad money (column 5)””-a result, it might be argued, of the willingness of commercial banks to hold indefinite quantities of excess reserves rather than engage in new lending or investment activity. Both of these facts seem to support the claim that Japanese monetary policy is in an old-fashioned Keynesian liquidity trap (Krugman, 1999).

It is true that current monetary conditions in Japan limit the effectiveness of standard open-market operations. However, as I will argue in the remainder of the paper, liquidity trap or no, monetary policy retains considerable power to expand nominal aggregate demand. Our diagnosis of what ails the Japanese economy implies that these actions could do a great deal to end the ten-year slump.

I recall that Japanese unemployment rate averaged about 5% during their long slump, well above the usual 2% rate.  In the US there are many who believe that unemployment during 2008-18 may average 8%, well above our usual 5% rate.  It’s a pity that our central bank can’t do anything about our 10-year slump.

PS.  In the previous post there are more quotations from this paper, all showing that the Fed refuses to undertake policy actions in the US that 11 years ago we pressed upon the Japanese in a similar situation.

HT:  Marcus Nunes



28 Responses to “The Bernanke/Sumner explanation for the crash of 2008”

  1. Gravatar of pushmedia1 pushmedia1
    5. January 2010 at 15:36

    I think you confuse Bernanke’s criticism of a policy stance with your criticism of a single policy mistake. Bernanke’s criticism is of the BOJ’s policy stance of assuming they were powerless to effect inflation or expectations of inflation.

    Your criticism of the Fed in 2008, the way I read it, is that they made a mistake. For decades they had the right policy stance and then suddenly they gave up and handed the reins over to the fiscal authorities. There’s nothing in that criticism that requires their overall policy stance to be wrong. They just made a mistake in Fall of 2008. At least they started QE in the Spring and there were all the statements about how there would be low rates continuing well into the recovery. Also, did you notice Bernanke cited the Woodford and Eggerttson papers in his speech on Monday?

    The Fed gets it. Their job is to manage expectations. They had a momentary lapse in Fall of 2008.

    This is entirely different than the policy mistake made in Japan. There, the Bank just gave up from the beginning of the lost decade and it has never seemed to realize its job was to manage expectations. This is what Bernanke was criticizing in his paper.

  2. Gravatar of scott sumner scott sumner
    5. January 2010 at 16:56

    pushmedia1, Bernanke says that just because there’s been a lot of QE doesn’t mean money has been sufficiently easy. You have to look at other indicators. We have output way below trend, 1% inflation expectations for the next few years. Those are the sort of problems the Japanese faced. He says you need to catch up to the old trend line. That’s what the whole paper is about, starting at the very first sentence. And the Fed is not trying to catch up to the old trend line, they’ve basically admitted as much. There is no way that current policy is consistent with his criticism of the BOJ.

    BTW, even if you are right there is the rest of the economics profession to consider. You can count on one hand the number of economists who think tight money caused the crash of 2008. So I’ll keep beating this dead horse a bit longer.

  3. Gravatar of pushmedia1 pushmedia1
    5. January 2010 at 17:08

    Well, I don’t want Bernanke to respond to your criticism (and eventually he’ll have to) by saying “what I said about Japan doesn’t apply to our situation and here are the 10 reasons why…”. This would be beside the point, just like countering Taylor was beside the point.

    We have to change to a error correcting policy (e.g. level targeting). The question is what is the best way to transition to the new policy. The Fed has said that it is worried that doing so now would unanchor expectations. Is there a way to introduce level targeting and skirt this issue?

  4. Gravatar of StatsGuy StatsGuy
    5. January 2010 at 20:39

    There is a serious question about whether the events of Fall 08 resulted from a simple mistake, or from a certain set of priorities. The spectacle of various FOMC members sniping at each other in various forums only adds to the confusion.

  5. Gravatar of rob rob
    5. January 2010 at 21:21

    Scott, you make such a convincing case–and you have for the past year–that your case becomes unconvincing–because you are so good at making convincing cases. How do I know you aren’t just good at making convincing cases?

    OK, maybe I’ve spent too much time at the Flat Earth Society, but how do I know you couldn’t convince me that the earth is flat? Convince me you couldn’t do that.

  6. Gravatar of Doc Merlin Doc Merlin
    5. January 2010 at 23:07

    For some reason, Scott, your article made me think of this.
    Why we need free banking:

    The level of and kind of money/credit within a country would create political pressure of different kinds. If fiat currency money (which is really a kind of debt) dominates then that would create popular political pressure for deflation. Where credit and private debt created money dominates in a central banking system the political pressure would be for the central bank to make inflation.

    If political pressure can create inflation/deflation, then monetary systems have another source of potential instability. If a central bank is truly independent then this doesn’t apply, but I don’t see how its possible for one to be completely independent.

  7. Gravatar of Tobias Tobias
    6. January 2010 at 02:41

    In Japan, the expansion of the monetary base led to excess reserves that didn´t affect broader aggregates.
    One way to correct this problem would have been negative interest rates on reserves like the Swedish Riksbank implemented in 2009.

    But as pointed out before, it´s all about managing expectations. And there is no sign that QE can affect these.

    The Fed is afraid of unanchored inflation expectations, that´s why they don´t change the monetary policy.
    Why not trying to implement a targeting rule? A self commitment to follow a dynamic rule might be a better solution instead of waiting for a recovery. Maybe they fear that a change in monetary policy could be interpreted as a correction of their former mistakes. But with a good communication policy, the loss of reputation would be moderate and they have still an anchor for expectations.

  8. Gravatar of January 6, 2010 – Greg's Blog January 6, 2010 – Greg's Blog
    6. January 2010 at 07:04

    […] is an interesting discussion of the current policies of Bernanke-Sumner – using their analysis of Japan’s problems […]

  9. Gravatar of David Pearson David Pearson
    6. January 2010 at 08:27


    Your palpable frustration with the Chairman stems from his patent unwillingness to communicate: he changed his mind, his prior opinion flowed from the very research that established his academic reputation, and yet, he won’t tell us why.

    We are left to speculate as to how his thinking on QE and NGDP(AD) morphed into “credit easing”. Here are some possibilities:

    1) He believes long term interest rates are the target of policy, and he thinks buying close to $1.8tr in Treasuries, Agencies and MBS was the most he could muster without jeopardizing the perception that the Fed is independent (i.e. not engaging in monetization). Perhaps as an academic, he underestimated the risk to long term inflation expectations from monetizing large, structural fiscal deficits.

    2) He does not believe deflation was a significant risk for the U.S., unlike Japan. Perhaps this is because the Fed’s asymmetric policy had “taught” market participants to expect that the Fed would not allow NGDP to crash for long, and so, in the end, he can do much less than he was asking of the BOJ and achieve the same result. A corollary is that deflation COULD ONLY happen if the financial crisis wrecked the credit transmission mechanism, so he focused most of his efforts on fixing that. A further corollary is that the purpose of asymmetric monetary policy is not to target NGDP, but to prevent it from going below zero for a significant length of time.

    3) The FOMC is deeply divided, and he is the Chairman is trying to keep from having more than two potential dissenters at each meeting, as that result would challenge his authority. This is a legacy of the Greenspan era, where the Fed’s credibility rose from the power and reputation of the Chairman. Sacrificing that power and reputation to dissent would therefore harm the Fed’s long term ability to set expectations.

    Of course, the three explanations are not mutually exclusive: maybe they all came into play. I would say that if “explanation 2)” is valid, then the relatively quick recovery in NGDP this year means the Chairman is patting himself on the back for a job well done. All indications point to this being the case.

    Scott, here’s a revolutionary idea. You can roll all of the above explanations into the discounting mechanism that is the stock market. It is my view that the Fed has targeted the S&P for some time now. Stocks are telling Bernanke he’s done his job, and until they tell him differently, his policy will not change. As to whether the 2008/2009 fall in stock prices was “Bernanke’s fault”, I think he would say,

    “Not my fault — just a temporary miscalculation on the part of asset markets, who simply panicked. They stopped believing in asymmetric policy, and they needed to be reminded that it is the bedrock of the Fed’s thinking. Are markets efficient? Most of the time, but asymmetric policy exists because sometimes they are not. Otherwise, why would we need it? So yes, my research showed that the Great Depression was caused by a crash in NGDP, but also by bank panics which were not addressed by the Fed soon enough. Bank panics are caused by market inefficiency, and therefore I am not in full agreement with EMH.”

    BTW — the above is Bernanke’s supposed thinking, not my own.

  10. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    6. January 2010 at 11:10

    I have been judging Bernanke by how well he implements his own previous views all along since I generally agreed with them. In this post on Kevin Drum’s blog, I made that point, and was treated to some very foul language:

    “I’m not sure what your problem is. I was measuring Bernanke by his own standards put forth in the 2002 paper. We should have done more, and done it faster. Since my whole point was that I generally agreed with him, I simply wanted to make the point that we should have acted faster. It might seem to you that we did a lot, but since we were facing a Debt-Deflationary Spiral, that wasn’t enough. As I said, I’m glad that he was there as opposed to others.”

    I’m simply assuming that he either thinks that the Congress and Administration have no future fiscal credibility, so he’s pushing the Fed in a direction that he believes compensates for that, or there is a lot of opposition to his views in the Fed and Fed Govt. I wonder how he would be received if he advocated some of Mervyn King’s stronger views about changing the financial system. Not well, in my view.

  11. Gravatar of azmyth azmyth
    6. January 2010 at 13:51

    I’m curious as to why GMU professors have become the authorities on plagarism/citations. People present the ideas of others all the time, especially when they are as famous as Bernanke.

  12. Gravatar of scott sumner scott sumner
    6. January 2010 at 14:05

    pushmedia1, Here’s what they need to decide. First of all, are the expectations for growth in NGDP over the next couple years where they want them to be? If the answer is yes, then they just set the target where the expectations already are. No need to unanchor expectations.

    If expectations for NGDP growth over the next few years are lower than the Fed would like to see, then set the target at the level they would like to see. In that case they would want expectations to become unanchored, as they are too low.

    Statsguy, Exactly.

    rob, Why do I need to convince you the Earth is flat? Everyone already knows that.

    My critics who don’t like my post-modern theories of truth say that when the experts all agree we can be sure something is true. Well, 5000 years ago all the experts agreed the Earth was flat. And surely it didn’t go from flat to round in 5000 years. So it must still be flat. Otherwise the post-modern theory of truth would be true, and we would have to doubt all scientific knowledge. But if we have to doubt all scientic knowledge, then let’s go with the gut. And the Earth sure looks flat, doesn’t it?

    Doc Merlin, I’m not sure the political forces are that clearcut. We’ve had both inflation and deflation with fiat money, but mostly inflation.

    Tobias, It is interesting that you mention the negative interest idea. Last spring I had many posts advocating negative interest on ERs. At one point it was a sort of obsession of this blog. I was happy when the Swedes tried it out. But I’m told the way it was set up was more symbolic, as banks can easily evade it. But it could work if the central bank was determined to get rid of ERs.

    David, I think you are right about a lot of what you say. We will avoid the sort of persistent deflation that Japan experienced. But that’s not the only issue. As Bernanke himself said in that paper, even below target inflation can be very harmful during a financial crisis. The mistake in late 2008 was to let NGDP and prices fall. The fact that from this point forward prices and NGDP are rising helps, but unless NGDP rises much faster over the next two years, the recovery will be very slow. But again, the big damage was done in late 2008, and Bernanke’s paper clearly indicates that the Fed never should have let the dollar appreciate strongly in a period of deflation.

    I think your comments about the internal politics at the Fed are very perceptive; you probably have better instincts on that issue than I do.

    Don the Libertarian Democrat, You said;

    “I’m simply assuming that he either thinks that the Congress and Administration have no future fiscal credibility, so he’s pushing the Fed in a direction that he believes compensates for that, or there is a lot of opposition to his views in the Fed and Fed Govt.”

    I see your point, but let’s not forget that it was Fed policy that caused NGDP to fall, and that’s the main reason the budget deficit rose so sharply. (I understand you are presenting their perspective–so treat my reply as a reply to Bernanke if you like.) BTW, I also had a favorable view of Bernanke. Reading that paper reminded me of why he was my first choice back in 2006.

  13. Gravatar of scott sumner scott sumner
    6. January 2010 at 14:16

    azmyth, Well they are relatively open-minded, and this would be an odd thing to do. I am 54 and have never seen or heard of someone presenting a paper that was written by someone else. You might write a paper that talks about another paper written by someone else. That happen alot.

  14. Gravatar of jean_ jean_
    6. January 2010 at 14:32

    Krugman has a strange reaction to Bernanke’s paper:

  15. Gravatar of Doc Merlin Doc Merlin
    6. January 2010 at 15:08

    “Doc Merlin, I’m not sure the political forces are that clearcut. We’ve had both inflation and deflation with fiat money, but mostly inflation.”

    Yes, there are other political forces than the ones I mentioned, but these two in particular seem particularly bad as they would be pro-cyclical.

  16. Gravatar of Matthew Yglesias » Endgame Matthew Yglesias » Endgame
    6. January 2010 at 15:15

    […] I want this Ben Bernanke […]

  17. Gravatar of Mike Sandifer Mike Sandifer
    6. January 2010 at 15:21

    Bernanke looks like a deer caught in headlights during every public appearance of his I watch. Having my attention turned to various previous papers and statements revealing his current hypocritical posture on US monetary policy leads me to a thought: he’s scared. He’s risk averse.

    It may seem simplistic, but it may tell much of the story. He might have the education and insight to do the right thing, but not the temperament. He’s too small a man for the job. Likewise, if we don’t replace him as Fed chairman, as a counry, we’re too small for the job as well.

  18. Gravatar of TGGP TGGP
    6. January 2010 at 18:56

    My critics who don’t like my post-modern theories of truth say that when the experts all agree we can be sure something is true.
    I thought it was the reverse: the post-modern theory is that truth is what we say it is.

  19. Gravatar of JimP JimP
    7. January 2010 at 07:25


    How can the morons running the Fed allow this to happen?

    to quote the article:

    begin quote
    Shrinking real money supply is likely to nip any recovery in the bud….

    But money still matters, even if policy-makers ignore it.

    Indeed, four years ago the Fed ended tracking the broadest measure of the money stock, known as M3. To fill that gap, John Williams Shadow Government Statistics ( estimates M3 from published sources as part of his mission to strip away the obfuscation prevalent in many government economic statistics.

    The Fed still publishes the narrow measure of money, M1, consisting of currency and checking deposits; M2, which adds consumer savings and money-market accounts, and MZM, or Money of Zero Maturity, which includes M1 plus other accounts with check-writing privileges, such as money-market funds.

    But M3, which takes in savings and institutional deposits, arguably is a superior measure of the liquidity in the economy. During the credit bubble from mid-2005 to the beginning of 2008 (just when the Fed stopped publishing M3 data), the broad money measure soared, attesting to the gusher of liquidity evident to all. The official M’s failed to reflect the massive liquidity expansion during that time.

    Now, Williams writes, SGS’ estimate of M3 is signaling the opposite; it is shrinking in real terms, that is, after adjusting for inflation. That’s happened only four times before last November, and each time it signaled either the onset of a major recession or a sharp deterioration in a contraction already underway.

    “Not all economic downturns are triggered by liquidity crises, but all liquidity crises trigger or intensify economic downturns,” he asserts.
    end quote

    good lord

  20. Gravatar of Joe Calhoun Joe Calhoun
    7. January 2010 at 14:52

    David Pearson’s comment about Bernanke seeking consensus on decisions makes me wonder why this is a desirable outcome of an FOMC meeting. If I were chairman, I think I’d push for a decision that was a bare majority. Right now there are 10 members on the FOMC so I’d be looking for a policy that generated a 6-4 vote. What would policy have looked like if Bernanke had done that in the summer and fall of 2008?

  21. Gravatar of ssumner ssumner
    7. January 2010 at 19:11

    jean, Yes, I also thought it a bit overdone. But then Krugman thinks bubbles are more important than I do.

    Doc merlin. Maybe.

    Mike, I noticed that he doesn’t handle questions all that well. The problem with replacing him is that most of the profession seems to think he’s done a fine job. How many economists think money needed to be much more expansionary in late 2008, and also believe money needs to be more expansionary right now? Not many.

    TGGP, Yes, but the realists think it is then objectively TRUE, not just regarded as true.

    JimP, I agree, but I should add that the aggregates can be misleading. I think it more likely that we’ll get a sluggish recovery, rather than an outright double dip.

    Joe, Good point, does anyone know the hawk/dove split on the current FOMC?

  22. Gravatar of The Politics of Fed(merica) « It Don't Mean Much, These Seats are Cheap. The Politics of Fed(merica) « It Don't Mean Much, These Seats are Cheap.
    2. March 2010 at 01:45

    […] status quo will likely remain. The FOMC is where good monetary theory goes to die [Ex.1A: Ben Bernanke]. The difference between populist rhetoric in politics and monetary policy is that the […]

  23. Gravatar of TheMoneyIllusion » What if Ben Bernanke were in charge? TheMoneyIllusion » What if Ben Bernanke were in charge?
    31. May 2010 at 07:51

    […] This is a shorted version of a much more complete analysis of Bernanke’s 1999 views here and here.  The differences are startling.  BTW, I hope these posts don’t sound too sarcastic.  I […]

  24. Gravatar of TheMoneyIllusion » Strange new respect from Krugman TheMoneyIllusion » Strange new respect from Krugman
    23. August 2010 at 10:26

    […] similar posts, going over Bernanke’s writings on Japan with a fine tooth comb.  (Here and here and here, from January 2010, for instance.)   Krugman ends his post with this sarcastic comment: […]

  25. Gravatar of TheMoneyIllusion » The lonely ones TheMoneyIllusion » The lonely ones
    18. September 2010 at 07:37

    […] shifted far to the right since the days when Bernanke was criticizing the Japanese for showing a lack of boldness, a lack of what he called “Rooseveltian resolve.”  Or perhaps he finds himself […]

  26. Gravatar of I Have a Moral Hazard Fantasy… « feed on my links I Have a Moral Hazard Fantasy… « feed on my links
    23. April 2011 at 11:28

    […] Bernanke, stirred from his slumber, shrugs off his chains and leads the emerging Bern-umner consensus on financial crisis […]

  27. Gravatar of TheMoneyIllusion » The most important meeting of the Obama presidency? TheMoneyIllusion » The most important meeting of the Obama presidency?
    10. August 2011 at 12:00

    […] And there’s lots more ammo in this post and this […]

  28. Gravatar of Catherine Catherine
    10. August 2011 at 18:26

    re: the Earth

    Ptolemy theorized that the Earth was round, but that knowledge was lost with knowledge of Greek.

    During Medieval times, people with access to ships knew that the Earth was round because when a ship disappeared from view over the horizon the mast was still visible. Obviously the ship hadn’t fallen off the edge of the Earth.

    The ancient Greeks apparently didn’t know how to make sails well enough to sail ships past the horizon.

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