Bernanke on the defensive
The most entertaining speech of the week came last night, from Clint Eastwood; the most important came this morning, from Ben Bernanke. In his keynote speech at Jackson Hole, Bernanke reviewed the Fed’s actions since 2007, concluded that they have done a lot of good, and ended on a note suggesting that more of the same is in order.
Bernanke is fighting critics on three fronts: those who say that he has over-reached, those who say that zero interest rates have rendered the Fed powerless, and those who say that he hasn’t gone nearly far enough. He has something for all of his critics in this speech.
First, he addresses the most politically powerful faction, especially now that Paul Ryan has been added to the Republican ticket. And so when defending quantitative easing and other non-traditional tools of monetary policy, Bernanke is at pains to paint them as being fully in line with “the ideas of a number of well-known monetary economists, including James Tobin, Milton Friedman, Franco Modigliani, Karl Brunner, and Allan Meltzer”. Translation: this is mainstream economics, even on the right, and if Republicans don’t trust me, they should at least trust Milton Friedman.
Bernanke also addresses those who worry about financial losses associated with the massive expansion of the Fed’s balance sheet: “from a purely fiscal perspective,” he says, “the odds are strong that the Fed’s asset purchases will make money for the taxpayers, reducing the federal deficit and debt” — not that the Fed is worrying too much about such things.
He then moves on to the people who say that the Fed has run out of ammo, and that the only real hope for the economy at this point would come from fiscal stimulus, rather than monetary policy. Not so, says Bernanke: “a substantial body of empirical work” shows that the effects of QE were “economically meaningful” — somewhere on the order of a full percentage point on the 10-year Treasury yield, and on bond yields generally. It even helped boost stock prices.
And it’s not just markets which have been affected, he says, citing one study showing that quantitative easing “may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred”.
Even Bernanke admits that it’s incredibly hard to measure such things, however — and as Matt Yglesias points out, there’s an element of “he would say that, wouldn’t he” here:
For the Federal Reserve to alter its intellectual approach at this point would amount to admitting that the Fed is in part at fault for our current predicament. As an institution, it is naturally reluctant to do this.
Finally, Bernanke addresses those — like Yglesias — who say that the Fed really ought to be doing much more. And he starts out by admitting that things aren’t going according to plan:
In light of the policy actions the FOMC has taken to date, as well as the economy’s natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment.
Bernanke says that it’s not all his fault: between them, the sluggish housing market, the tight fiscal situation, and the ongoing European crisis have had a substantial negative effect as well. On top of that, he says, “the hurdle for using nontraditional policies should be higher than for traditional policies”, since nontraditional policies, like QE, are untested and could have unintended consequences.
Still, it’s the Fed’s job to counteract such things like housing and fiscal gridlock and European chaos. Which brings me to Bernanke’s final two paragraphs. The first is rousing, and strong, and undeniable:
We must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.
But then he ends on a much weaker note:
Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
Bernanke, here, is basically saying “we’ve done a lot, we should do more, but there are limits to what we can do”. And the final two words are “price stability”, which is Bernanke’s way of saying that he’s actually worried about inflation, and that he might ease more were it not for the fact that he has to keep inflation down.
The overall tone here, then, is defensive: Bernanke’s on the back foot, trying to justify past and future actions against critics on all sides. And when an institution is in a defensive crouch, it’s not going to do anything bold. The Fed was bold in 2008-9, at the height of the financial crisis; those days are over now. And so, whether we like it or not, any real boost for the economy going forwards is not going to come from the Fed, and is going to end up having to come from Congress instead. I’m not holding my breath.