The real Bernanke

Roger Lowenstein has a very revealing portrait of Ben Bernanke in The Atlantic:

But his restrained manner belies a forcefulness and a willingness to take political heat. Early in 2008, the Fed was mulling a small interest-rate cut to ease the escalating mortgage crisis; cutting rates was controversial because hawkish economists, of whom there were many, feared inflation. Bernanke decided to cut rates by three-quarters of a point””a very big move. As he told a colleague, he was going to be pilloried for whatever he did, so there was no sense holding back.

One of my very first blog post discussed that move.  The tone of the entire article suggests that Bernanke is rather dismissive of critics that claim he’s creating an inflationary time bomb (although you have to read between the lines to fully appreciate his attitude.)  Here’s a couple paragraph’s that show he leans in a dovish direction:

I pushed him, in one of our interviews, to elaborate, and he said, “There is a thesis that the only way to restore the economy is by a necessary purging of previous excesses. In disagreeing, I am not saying there are not imbalances that need to be fixed. That said, there is still scope for policy to ameliorate the effects of necessary rebalancing on the public, to help shorten the recession. A massive decline in employment slows the rebalancing and deleveraging processes rather than speeds them; people don’t have the income to pay their debts. So the argument is: where you can, you try to short-circuit the process by urging banks to take losses and modifications, and recapitalize. Obviously, you need to get bank balance sheets healthy, and individual consumers healthy””but subjecting the system to high unemployment and high rates of bankruptcy and foreclosure is a very inefficient way to get there.”

Bernanke is more conservative than his Republican critics imagine, but as he has stated publicly, he finds the prospect of millions remaining unemployed “unacceptable.” He is particularly worried about the many people who have been out of work for more than six months. Like FDR, he is willing to try what works, or what might work, and this puts him at odds with the economic originalists. He sees no evidence of inflation, but he does see economic distress, and so the latter is a greater concern. Though he recognizes the potential for inflation, he told 60 Minutes in December 2010 that he was “100 percent” certain of his ability to control it (a surprising, and troubling, certitude for a normally humble banker). When I brought up the argument that the purchase of mortgage-backed assets””inflationary impact aside””amounts to inappropriate “credit allocation,” Bernanke gave a tired frown, as if the fine points of monetary theory cannot hold water against the concrete fact of unemployment. “I would argue the mortgage-backed securities we purchased probably moved the market closer to an efficient state rather than away from it,” he told me.

When it comes to his critics on the left, his attitude seems quite different.  Here’s Bernanke responding to proposals to raise the inflation target:

Bernanke has given serious thought to the Krugman-Rogoff argument. One obstacle is practical. Fed policy works, in part, by getting the market to do the Fed’s work (if the Fed is buying bonds, traders who want to be on the same side of the markets as the central bank will buy bonds too). But any policy adopted by less than a 7-to-3 majority by the Fed’s Open Market Committee would not be viewed by markets as a credible policy, likely to endure, and Bernanke is not guaranteed to get this margin today. . . .

This might seem to support Krugman’s thesis that Bernanke would like to boost inflation but has chickened out. But after talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. . . .

My sense is that Bernanke is too much a sober central banker to want to risk the Fed’s credibility on inflation. His view represents a serious break from many of his fellow academics because, according to the world as left-leaning scholars depict it, raising inflation is the only thing that will work when the economy has hit dead air. Bernanke thinks he has other tools. One, of course, is quantitative easing.

My takeaway from the article is this:

1.  Bernanke is strongly opposed to the idea that money needs to be tighter.

2.  Bernanke is supportive of the notion that the Fed needs to do more, but is uncomfortable with the idea of arbitrarily changing the inflation target, for reason such as credibility.

3.  Bernanke prefers to raise AD using other tools such as QE.

Now let’s contrast that with market monetarism:

1.  MMs strongly oppose to the idea that money needs to be tighter.

2.  MMs are supportive of the notion that the Fed needs to do more, but are uncomfortable with the idea of arbitrarily changing the inflation target, for reason such as credibility.  We prefer a steady 5% NGDP target, level targeting, under any and all conditions.

3.  MMs prefer to raise AD using other tools such as QE and level targeting.  BTW, Bernanke once recommended the BOJ try level targeting.

Bernanke is certainly no market monetarist, but I see quite a few areas where our views overlap.  Go back to that first quotation.  Why did Bernanke insist on a 75 basis point cut in January 2008?  (A cut that occurred during an emergency Fed meeting, which is very unusual.)  After all, just a few weeks earlier the Fed had agonized between a 1/4% and 1/2% cut in the fed funds target, and opted for 1/4%.  What explains the dramatic turnabout?  The answer is that markets crashed minutes after the December 2007 meeting, signaling  the onset of recession.  Bernanke read the various market indicators and by early January realized that the Fed had made a mistake.  So he demanded a 3/4% cut, and about 10 days later another 1/2% cut.  That’s getting ahead of the curve.  That’s market monetarism.  Unfortunately, CPI inflation rose much higher in the first half of 2008 (for reasons unrelated to monetary policy–NGDP growth was slow), and this put the doves on the defensive.  They did not cut rates in the meeting after Lehman went bankrupt in mid-September.  They never recovered that aggressiveness, that ability to get ahead of the curve.  It’s been catch-up ever since.

PS.  Did you cringe like I did when Lowenstein called QE an alternative to creating more inflation?  In fairness, he might have meant an alternative to raising the official inflation target.  BTW, Bernanke arguably did raise the target slightly, from a range of 1.7% to 2.0%, up to simply 2.0%



9 Responses to “The real Bernanke”

  1. Gravatar of dwb dwb
    15. March 2012 at 06:10

    ok but he has not even been aiming for a 7-3 majority. If Plosser, Fisher, Kochlokera, and/or Bullard are not dissenting he’s not easing enough. only lacker dissented last time. aim for a 7-3 or 6-4 decision.

  2. Gravatar of Ryan Ryan
    15. March 2012 at 06:48

    Viewing liquidation as a decline in employment is precisely what critics of monetary and fiscal policy are arguing against. The question is, if I’m driving 130mph on the freeway, and slow down to 75mph, am I now driving “slowly?”

    The question is meta. What is “equilibrium?” What “should” the growth rate be? And really, how on earth do you know for sure?

  3. Gravatar of ssumner ssumner
    15. March 2012 at 07:18

    dwb, That’s right.

    Ryan, Don’t use phrases like “critics of monetary policy.” What does that mean? Too easy, or too tight? Or opposed to money and prefer barter?

    Otherwise I can’t answer your question.

  4. Gravatar of Philo Philo
    15. March 2012 at 09:00

    Bernanke doesn’t want to risk the Fed’s “credibility on inflation.” But how much credibility should it want to have? In fact, there are two reasons the Fed should *not* cultivate the reputation of ruthlessly counteracting all inflationary tendencies of whatever sort. The first is the second half of its “dual mandate”: the Fed is supposed to aim at “full employment.” The second is that the monetary authority should not combat inflation that is simply a market adjustment to a supply shock. The Fed should try to communicate to the public that, *because its concern is broader””namely, macroeconomic performance as a whole*–it is *not* narrowly focused on the rate of inflation. Then it needn’t worry about its credibility *regarding inflation*.

  5. Gravatar of Ryan Ryan
    15. March 2012 at 10:18

    Scott, yeah sorry. Really bad phrasing on my part. Working and commenting at the same time makes for lousy comments…

    What I meant was that the people Bernanke seemed to be addressing in his statement about “purging previous excesses” are not saying what he seems to assume they’re saying.

    Or else, he’s not interested in addressing them so much as giving people who already agree with him a statement that defuses the critics’ arguments.

    …That is, assuming my work-fried brain didn’t manage to muddle my whole point up. 😉

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    15. March 2012 at 14:19

    There are some real head scratchers from Lowenstein, such as;

    ‘Milton Friedman, thought the business of adjusting interest rates was so tricky, it would be better to yield the job to a computer. But Bernanke thinks a human can do it.’

  7. Gravatar of ssumner ssumner
    15. March 2012 at 15:59

    Philo, Yes, that would be logical, but . . .

    Ryan, There are lots of different structural arguments, I agree he didn’t address them all.

    Patrick, That’s simplified for readers of The Atlantic. 🙂

  8. Gravatar of Mike Sax Mike Sax
    16. March 2012 at 02:22

    Scott you said:

    “MMs are supportive of the notion that the Fed needs to do more, but are uncomfortable with the idea of arbitrarily changing the inflation target, for reason such as credibility.”

    So assuming you don’t get NGDP you wouldn’t like to see the inflation rate at 3%?

    In reality this is not so high. In fact 2% is very low, even considerably lower than the actual trend inflation rate during the GM.

    “MMs prefer to raise AD using other tools such as QE and level targeting”

    It’s debatable how effective QE is. Given a choice between QE and raising the inflation rate seems to me the latter is much stronger.

  9. Gravatar of ssumner ssumner
    16. March 2012 at 11:07

    Mike Sax, Level targeting is far more effective than either QE or raising the inflation rate. But I do think 3% would probably be enough. Given a choce, however, I’d prefer 3% NGDP growth target, level targeting, to 3% inflation target, and let bygones be bygones.

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