Bernanke's Memoir: Initial impressions confirmed
By Scott Sumner
Perhaps the most surprising thing about Ben Bernanke’s recent memoir is the lack of surprises, at least about what was going on inside the Fed in terms of the monetary policy debate. That’s probably a result of the high quality of Fed journalists; people like Jon Hilsenrath have good connections with Fed insiders, and do an excellent job reporting on the internal discussion and disputes. Here are some examples of non-surprises:
1. As expected, Bernanke was firmly on the dovish side, pushing the Fed to do more monetary stimulus. On some occasions, such as 2013, he even had to push back against Obama appointees who were reluctant to continue QE. Bernanke had views that were closely aligned with those of Frederic Mishkin. I frequently cite similarities in their views as academics. Both are New Keynesians, who lean slightly more in a monetarist direction than say Krugman or Summers. Both were dovish during 2008.
2. As I argued, the Fed erred in not easing policy in September 2008. Bernanke confirmed that was a mistake.
3. As I suspected, the Fed lost track of monetary policy during the financial crisis. It wasn’t just September 2008; the decisions in October and November 2008 were just as inexcusable. For some reason the Fed simply didn’t do enough monetary stimulus to keep forecasts of future growth in aggregate demand at an adequate level. And this failure occurred even before they hit the zero bound. They were off course, and they knew it. In the memoir, there is very little discussion of monetary policy during this period, and in one case Bernanke even mentions that they were so focused on the severe banking crisis that they hardly had time to focus on monetary policy.
4. Bernanke confirmed (p. 530) that the monetary stimulus of late 2012 was partly motivated by the looming fiscal cliff, an example of monetary offset. That’s what I thought.
5. I have always believed that if Bernanke were still an academic he would have favored NGDP targeting, as did many other academics with policy views that were fairly similar to those of Bernanke. At one point he says “I had been intrigued by the approach at first . . . ” which I take as an indication that an academic Bernanke probably would have supported the idea.
6. But what about the rest of the sentence, “but came to share my colleagues’ reservations about introducing it at that time”? Indeed on pages 516-18 Bernanke discusses one idea after another that he probably would have favored as an academic, but was talked out of by others at the Fed. For instance, regarding negative interest on reserves he says, “I had no strong objections to trying it; perhaps it would signal to the market that we were prepared to do whatever we could to aid the recovery.” But it was not implemented, for reasons that (in my view) would have been completely unpersuasive to an academic Bernanke. Something about drains from money market funds. A reason that didn’t stop many other countries from experimenting with negative IOR. Bernanke then says, “I also considered pegging interest rates on securities with two-year maturities or less.” Bernanke continues:
However, to make this work we might be forced to buy enormous amounts of securities. Our balance sheet might balloon out of control, a risk we were not willing to take – at least not yet.
Notice the shift in pronoun, from “I considered . . . ” to “a risk we were not willing to take . . .”
Bernanke was reluctant to engage in risky new policies that did not have significant institutional support within the Fed. Given the importance of policy credibility, this is understandable.
7. The Fed rejected NGDP targeting for unsound reasons, and indeed they did not seem aware of the market monetarist arguments in favor of the regime. Interestingly, on pages 517-18 he focuses on the “level targeting” aspect of NGDP targeting more than the NGDP aspect. I don’t recall Bernanke discussing price level targeting anywhere in the book, which is odd given that in the early 2000s he had recommended that the BOJ adopt the idea.
One of his observations is certainly defensible:
We considered the theoretical benefits of the approach, but also whether it was desirable, or even feasible, to switch to a new framework at a time of great economic uncertainty. After a lengthy discussion, the committee firmly rejected the idea.
“Firmly”, meaning he didn’t have a prayer even if he had personally supported the idea. That comes right before the “I had been intrigued” comment above. So he’s intrigued but “the committee” rejects the idea. And the other reasons offered would not have been persuasive to anyone well-informed about market monetarism. For instance, “Nominal GDP targeting is complicated and would be very difficult to communicate to the public . . . ” Nothing could be further from the truth. Tell the public that we have a healthy economy when total national income rises at about 4% or 5% per year. Instead here’s what Bernanke tried (and failed miserably) to “communicate” in 2010. (My imaginary version of course):
Dear public, we are trying to raise your cost of living, because it would actually be good for you. You see, core inflation is only 0.6%, which is too low. You think inflation lowers your living standards? Oh, I see, you are confusing supply-side and demand-side inflation. We are trying to raise demand-side inflation, which also causes real GDP (and hence real income) to rise. When supply-side inflation occurs we do not try to target inflation, but allow actual inflation to vary as long as core inflation is reasonably well behaved. Got that?
Sorry, but I’d prefer to communicate slow but steady growth in American incomes, consistent with low inflation over time, and a healthy job market. Later Bernanke discusses the issue of policy credibility and warns, “Then the Fed could eventually find itself in a 1970s-style predicament – without credibility and with the economy suffering from both low growth and too-high inflation.”
That’s not at all what went wrong in the 1970s. From 1971 to 1981 NGDP rose at 11%/year, and RGDP rose at 3%/year. Thus we had 8% inflation. If NGDP growth had been 5% during the “stagflation” of the 1970s, inflation would have averaged roughly 2%. In fact, far from being a cautionary tale for NGDP targeting, the 1970s provide a strong argument in favor.
At one point Bernanke asks:
Would people trust that future policymakers would have the courage and competence to quash inflation later, as the strategy dictated, even if doing so risked creating a recession?
This is in reference to the level targeting aspect of NGDP targeting, which would have called for a period of catch-up growth. But even starting from where we were, with no catch-up, a 5% NGDP growth target would have been far superior to actual Fed policy after 2011. And given that renowned policy dove Janet Yellen is apparently planning to tighten monetary policy in December, despite 5-year TIPS spreads of 1.3%, I very much doubt whether markets would be worried about any future Fed official letting inflation rip. Which future Fed chairman is likely to be more dovish than Yellen? Stanley Fischer? John Taylor? I just don’t find that fear to be plausible. But I do find it easy to believe that the Fed would reject a highly effective policy for reducing unemployment out of vague fears that the policy might force them to also behave responsibly in the future. Level targeting truly does ask more of a central bank than discretionary growth rate targeting. Nothing like the BOJ’s policy from 1994 to 2013 is possible under level targeting. Abenomics would have had to start much sooner, which is a good thing in my view.
And then on page 528 he suddenly makes an argument that discredits his previous point:
In the past, Fed officials had been reluctant to talk about that, preferring to emphasize that low inflation tends to promote a healthy economy and job market in the long run. The new policy statement acknowledged that the two objectives, while “generally complementary,” could sometimes conflict in the short run, requiring policymakers to make a trade-off. For example, if inflation was modestly above target but unemployment was very high, the Committee might choose to risk higher inflation as the price of bringing unemployment down.
That’s NGDP targeting! What happened to the fear that tolerating higher inflation when output was low would lead to a loss of credibility? The Fed was trying to move closer to NGDP targeting, without daring to mention its name.
Overall I’d say the memoir does not offer any great surprises. But that’s not necessarily a bad thing. Let me end on a positive note. After reading the book I have enormous respect for Bernanke as a person. He was an exceedingly conscientious public official. The fact that we knew most of this already shows that Bernanke has helped make the policymaking process more transparent. The lack of revelations is also partly due to his refusal to use the memoir to attack his opponents—I am certain he held back a number of embarrassing facts about people he didn’t like. I also share Bernanke’s preference for the “wisdom of crowds” over the dictatorial approach of one strong-willed leader. In this case we would have done better if Bernanke had had a free hand, but on average committees make better decisions, and it was a very selfless act for him to try to share power. Volcker or Greenspan would have been a complete disaster in 2008 (based on their public statements about the crisis.) I mean Trichet level disaster. Over at TheMoneyIllusion I argue that Bernanke did better than the Fed as a whole, as he was frequently trying to nudge it in a more stimulative direction. He obviously wasn’t in a position to single-handedly implement NGDP level targeting.
But there is no getting around the fact that Bernanke mostly defends the Fed’s actions (or inaction in some cases) and in contrast I think the Fed needed to be much more stimulative. The memoir did not provide a persuasive explanation for this passivity, mostly because he was so busy responding those who thought the Fed did too much, which were the Fed’s loudest critics. It goes without saying that I completely agree with Bernanke’s defense of programs like QE against conservative (and a few liberal) critics. But I believed 5 years ago, and I still strongly believe, that if Bernanke had never been a Fed chairman, and instead had remained an academic, he would have made many of the same criticisms of Fed policy that I made. Indeed his earlier criticism of the BOJ reads like almost pure market monetarism.