Bernanke on the defensive

By Felix Salmon
August 31, 2012
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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.

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Comments
10 comments so far

Well, you can forget about the current incumbents of Congress doing anything to boost the Economy of the US, they don’t care about that so long as Obama gets no credit and the GOP wins the next election. Beyond that, their all millionaires anyway so why bother about what happens to their constituents? The loss of the US’s AAA credit rating showed they are only in it for themselves and their even richer friends, not the country itself.

Posted by FifthDecade | Report as abusive

Well, you can forget about the current incumbents of Congress doing anything to boost the Economy of the US, they don’t care about that so long as Obama gets no credit and the GOP wins the next election. Beyond that, their all millionaires anyway so why bother about what happens to their constituents? The loss of the US’s AAA credit rating showed they are only in it for themselves and their even richer friends, not the country itself.

Posted by FifthDecade | Report as abusive

What is Bernanke worried about? Isn’t the Fed supposed to be independent? Is he worried about being reappointed when his term expires. If Obama loses and the R’s win control of the Senate that wont happen anyway. He should just do what he thinks is best for the economy, and let politics take care of itself.

Posted by booch221 | Report as abusive

When the various BoJ governors used these same arguments back in the 1990′s Bernanke sneered at them, and deservedly so.

Posted by johnhhaskell | Report as abusive

Felix, Welcome back. I don’t share his politics; but, I too thought Clint’s speech was entertaining, not a fiasco. ~AH

Posted by AdamHooks | Report as abusive

Bernanke should be defensive, as should the entire cadre of academic/government economists. They are the people who gave the policy green light to the practices that maneuvered the Western World into the financial tar pit in which it presently finds itself mired.

Creating bubbles via QE is all the academics can wrap their heads around. You too, FS, seem to swallow the notion that it is only the bursting of those bubbles that harms us, not their creation.

Oh well – good to have you back in the saddle.

Posted by MrRFox | Report as abusive

Bernanke and his bankster brethren need to be stopped before they’ve stolen all the wealth. Why are we so blind (or at least passive) to this robbery? It’s time to flip things on their head – http://theendisalwaysnear.blogspot.com/2 012/08/the-hazardous-morals-of-bankers.h tml

Posted by nahummer | Report as abusive

Bernanke should be defensive, as should the entire cadre of academic/government economists. No matter which school of econ-theory they espouse, they are the people who gave the ‘covering fire’ to the practices that maneuvered the Western World into the financial tar pit in which it presently finds itself mired.

Creating bubbles via QE is all the academics can wrap their heads around. You too, FS, seem to swallow the notion that it is only the bursting of those bubbles that harms us, not their creation. ‘Bubble without end – Amen.’ All-in-all, your apparent attitude stands in puzzling contrast to your nailing the matter dead-center here –

http://www.youtube.com/watch?v=Uz-mogsTP n4

Oh well – good to have you back in the saddle.

Posted by MrRFox | Report as abusive

Bernanke should be defensive, as should the entire cadre of academic/government economists. No matter which school of econ-theory they espouse, they are the people who gave the ‘covering fire’ to the practices that maneuvered the Western World into the financial tar pit in which it presently finds itself mired.

Creating bubbles via QE is all the academics can wrap their heads around. You too, FS, seem to swallow the notion that it is only the bursting of those bubbles that harms us, not their creation. ‘Bubble without end – Amen.’ All-in-all, your apparent attitude stands in puzzling contrast to your nailing the matter dead-center here –

http://www.youtube.com/watch?v=Uz-mogsTP n4

Oh well – good to have you back in the saddle.

Posted by MrRFox | Report as abusive

The problem with Bernanke is pretty much the same as the whole government/ergulatory apparatus. The American people were being fleeced, defrauded, scammed, robbed and made to endure FORGERY on a historic scale. The “naionally recognized statistical rating organizations” (I like the imprinteur that “statistical” gives – so government like), Fannie, Freddie, and how many regulatory agencies that just can’t see any fraud acitivty going on. Really, to make a speech about finance and ignore that 99.9999999 – oh hell, one hundred precent of the problem was FRAUD means that Bernanke is part of the fraud and CODONES it.
http://www.ritholtz.com/blog/2012/02/hol der-obama%e2%80%99s-propaganda-is-%e2%80 %9cbelied-by-a-troublesome-little-thing- called-facts%e2%80%9d/

Posted by fresnodan | Report as abusive
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