Bernanke's memoir: First impressions
By Scott Sumner
Seminars at the University of Chicago were pretty intense. I recall times when the speaker was barely one sentence into his presentation, and was already being challenged by pointed questions. I hate to be “that guy”, but . . .
I’ve been reading Bernanke’s memoir, and am up to page 145. So far I love the book—it’s great. I agree with the vast majority of what I’ve been reading, although I have a few quibbles here or there. But today’s review is going to focus on the first page or two, indeed the first sentence or two. And that’s where I want to stick my hand up in the air like an impatient middle school student. The book begins with a one page “Author’s Note”, which explains the title. Here is the first sentence:
In all crises, there are those who act and those who fear to act.
But the narrative actually begins with a prologue on the next page. Here is the first sentence:
It was 8:00 p.m. Tuesday, September 16, 2008. I was exhausted, mentally and emotionally drained, but I could not sit.
I thought to myself, “Wait, September 16, 2008, is when the Fed showed a catastrophic passivity, a refusal to do anything to stimulate the economy. They focused on bailouts. By being passive, monetary policy became dramatically tighter. This is a horrible example to use as a lead-in to a book entitled ‘The Courage to Act’.”
Here is a passage from the next page:
Reacting to the Lehman failure, markets already were in the grip of a full-blown panic of an intensity not seen since the Depression. The Dow Jones industrial average had plunged 504 points on Monday—its steepest one-day point decline since September 17, 2001—the first day of trading after the September 11 terrorist attacks, and the selling wave had spread to markets worldwide.
I find it ironic that Bernanke’s book starts right off discussing September 16, 2008, the exact day I went from being an apathetic Bentley College professor to a fanatical market monetarist. The economy had been in recession for 9 months, and the recession was now getting dramatically worse. I was absolutely stunned by the Fed’s refusal to cut its fed funds target that day, leaving it at 2%. They cited a fear of high inflation, whereas the markets were very clearly signaling the exact opposite. Why was the Fed ignoring all this really scary market information? I couldn’t understand the decision. It was the helpless feeling you have watching a car accident develop in front of your eyes, unable to do anything.
After my previous post ThomasH left the following comment:
In a call-in program I heard Bernanke say that the Fed should have lowered interest rates to zero in September rather than December 2007.
(I presume that’s a typo, Thomas meant 2008.) I would be very grateful if someone could find a transcript of this interview.
Market monetarists claim that our policies would produce wiser decisions than the current policy regime. The current year is a good example. I’ve argued that markets are signaling that it’s too early to raise rates. The Fed intended to do so, but has now backed off. Maybe they need to pay more attention to markets. If Bernanke does now admit that the Fed should have been far more aggressive in September 2008, that provides an important piece of evidence in support of our claim to have a superior method of setting monetary policy.
PS. About the meeting—read it and weep.