Bernanke's Speech to the AEA
Slide 4 shows that the version of the Taylor rule based on forecast inflation (in green dots) explains both the course of monetary policy earlier in the past decade as well as the decision not to respond aggressively to what did in fact turn out to be a temporary surge in inflation in 2008. This comparison suggests that the Taylor rule using forecast inflation is a more useful benchmark, both as a description of recent FOMC behavior and as a guide to appropriate policy.
By my count, he gives three reasons that the decision at the time to maintain low interest rates from 2002 through 2004 made sense. First, the recovery was weak. Second, inflation, as measured by the deflator for Personal Consumption Expenditures, was low (it was revised up later). Third, and most important, the Fed forecast for inflation was low relative to temporary blips in inflation.
As I recall, mainstream macroeconomists were not screaming from the rooftops that monetary policy was too loose at the time. I tend to agree with Bernanke that the criticism of monetary policy seems post hoc and largely unwarranted.
I agree with his view that the housing bubble was caused much more by regulatory failure than monetary policy failure. But he says,
The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.
In other words, we must not lose faith in technocratic control. We must execute technocratic control more effectively. At a fundamental level, this shows that he does not understand the discrepancy between knowledge and power that is the topic of Unchecked and Unbalanced. Unfortunately, the process for selecting Federal Reserve Board leaders selects only people who have an exaggerated view of the ability of expert technocrats to guide the economy.