Gentle Ben

13 February 2012 at 5:29 pm 7 comments

| Peter Klein |

I don’t think of Ben Bernanke’s approach to monetary policy as soft, passive, or restrained, but of course my optimal monetary policy is no monetary policy. Laurence Ball thinks that Bernanke’s actions after 2008 were surprisingly cautious, compared to what Bernanke advocated as an academic and Fed Governor in the early 2000s.

From 2000 to 2003, when Bernanke was an economics professor and then a Fed Governor (but not yet Chair), he wrote and spoke extensively about monetary policy at the zero bound. He suggested policies for Japan, where interest rates were near zero at the time, and he discussed what the Fed should do if U.S. interest rates fell near zero and further stimulus were needed. In these early writings, Bernanke advocated a number of aggressive policies, including targets for long-term interest rates, depreciation of the currency, an inflation target of 3-4%, and a money-financed fiscal expansion. Yet, since the U.S. hit the zero bound in December 2008, the Bernanke Fed has eschewed the policies that Bernanke once supported and taken more cautious actions — primarily, announcements about future federal funds rates and purchases of long-term Treasury securities (without targets for long-term interest rates).

Ball describes a June 2003 meeting of the Fed’s Open Market Committee at which senior staffer Vincent Reinhart convinced Bernanke that when interest rates are near zero, the right policies are persuading market participants that federal funds rates will continue to fall, selling medium-term bonds and buying longer-term ones (“Operation Twist”), and quantitative easing. When the financial crisis hit, this is exactly what Bernanke did, although — according to Ball — Bernanke had long argued for much more aggressive moves.

Ball argues that Bernanke fell victim to groupthink:

We can interpret the June 2003 FOMC meeting as an example of groupthink. The recommendations in Reinhart’s briefing were presented as the views of a unified Fed staff. In the FOMC discussion, nobody, including Chairman Greenspan, seriously questioned Reinhart’s focus on his three preferred policy options. By the time Bernanke spoke, a consensus had emerged on a number of points, such as opposition to targets for long-term interest rates. Groupthink may have discouraged Bernanke from shaking up the discussion with his past ideas for zero-bound policy.

A reluctance to disagree with the consensus was common at the Greenspan Fed, according to some observers. Cassidy (1996) describes how Alan Blinder, Fed Vice Chair from 1994 to 1996, reacted to FOMC meetings: “The thing that surprised Blinder most was the way decisions were made at the Board. Most of the time, the governors were presented with only one option: the staff recommendation.”

He also suggests that Bernanke, unlike Greenspan, Paulson, Summers, and other key economic policy figures, is shy, withdrawn, and unassertive.

Without intending to, I think Ball makes powerful arguments against conventional monetary policy itself, which relies on a small, secretive, cabal of powerful technocrats, interest-group representatives, and fixers to design and implement rules and procedures that affect the lives of millions, that reward some (commercial and investment bankers, homeowners) and punish others (savers, renters), that shape the course of world events. Do we really want a system in which one person’s personality type has such a huge effect on the global economy?

Entry filed under: - Klein -, Bailout / Financial Crisis, People, Public Policy / Political Economy.

Against Brainstorming New ebooks — Knowledge on the Cheap

7 Comments Add your own

  • 1. Gentle Ben | The Beacon  |  14 February 2012 at 12:25 pm

    […] [Cross-posted at Organizations and Markets] […]

  • 2. srp  |  21 February 2012 at 7:26 am

    This argument proves too much. Military leaders screw up with great regularity (not surprising, given the difficulties of the fog of war), but the suggestion that we should rid ourselves of generals does not follow from this fact. One also needs to show that a leaderless alternative offeres superior feasible performance. The failure to convince most knowledgable people of this last point with respect to monetary policy is why suggestions to eliminate the Fed are not taken seriously.

  • 3. Peter Klein  |  21 February 2012 at 3:13 pm

    You’re joking, right? There are dozens, if not hundreds, of books and articles on free banking, the gold standard, Friedmanite fixed-money-growth rules, etc. The defenders of discretionary monetary policy — even those who see it as the least bad of the feasible alternatives — have never seriously engaged this literature, they simply ignore it.

  • 4. tmasuda01  |  21 February 2012 at 8:01 pm

    At the end of the day, it’s economics. You don’t know whether his policies are going to be good or bad in the long run, there are simply too many variables. So just let him do his thing. Interestingly, it may work out for the better.

  • 5. srp  |  21 February 2012 at 11:05 pm

    I’m not kidding. Even Friedman sort of dropped his fixed growth rate towards the end, if memory serves; the next popular book on the superiority of free banking will be the first to my knowledge; I’m not sure who is failing to respond to whom on the gold standard; and Hayek’s competing currencies ideas could already be partly implemented by structuring payments offshore and insisting on payment in whatever currency is desired.

    Restructuring the monetary system is a hugely consequential reform that normally prudent people would hesitate at. Yet the public and academic case for it has been pressed far less thoroughly than the case for school choice or even drug legalization. One interesting starting point might be some of Christie Romer’s early work claiming that the economy was no more volatile per-Fed than after, if she hasn’t repudiated that argument.

  • 6. Peter Klein  |  21 February 2012 at 11:30 pm

    Yes, Christy’s stuff is good, but doesn’t compare before and after 1913, but rather pre-WWII to post-WWII. Three of my former colleagues have a new paper on this, to choose just the first thing that comes to mind:

  • 7. Skepticlawyer » Broken by the fix  |  29 July 2012 at 11:02 pm

    […] (As economist Peter Klein reasonably asks, do we want so much of the world economy to depend on the personality of the Fed Chair or, extending the point, the dynamics of two committees–the FOMC and the ECB Executive […]

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