What Bernanke was up against
David Levey directed me to a post by Douglas Campbell describing the climate of opinion within the Fed during the Great Recession:
Even as the economy was tanking in 2008 and 2009, Bell writes that “Warsh adopted a skeptical and increasingly oppositional posture. He doubted the Fed could do much good without creating much bigger problems.”
Much bigger problems? What could be a bigger problem than letting the economy burn in a financial crisis?
“In March 2009 he told his Fed colleagues that he was “quite uncomfortable with the idea of purchasing long-term Treasuries in size” because “if the Fed is perceived to be monetizing debt and serving as a buyer of last resort in the name of lowering risk-free rates, we could end up with higher rates and less credibility as a central bank.””
The Fed should hold off on more stimulus in the worst recession in 75 years because it might actually end up with higher rates and lose credibility? Why wouldn’t the Fed lose credibility if it was perceived as not fighting the recession? Warsh continued to warn about the dangers of both monetary and fiscal stimulus in 2010.
Warsh was also far and away not the only crazy one at the Fed at that time. In 2011, when I worked as a Staff Economist at the President’s Council of Economic Advisors, I had a conversation with Daniel Tarullo, who told me he believed that Jean-Claude Trichet’s interest rate hikes in 2010 — which are widely seen to have been premature and to have helped ignite the European Debt Crisis — were justified. These comments suggested to me that Tarullo was somewhere to the right of Genghis Khan on monetary policy. Then, there were also worthies like Richard Fisher, Often Wrong but Seldom Boring, who “warned throughout most of 2008 that inflation was the primary danger to the economy”.
Imagine you are Ben Bernanke, trying to prevent another Great Depression. In 2009, Obama picks Tarullo to fill one of the empty seats at the board. You expect an ally, and instead you get someone who supports the ultra-reactionary polices of Trichet, who tightened policy in 2011 (not 2010), driving the eurozone into a double-dip recession.
Even Fed chairs must, to some extent, go with the flow. The following is very revealing, as it tells us that the prevailing view back then was hawkish:
In 2011, I also had a conversation with Ben Bernanke. I saw as soon as I began talking to him that he figured I would criticize him for QE, or inciting hyperinflation with all this money printing. He was actually surprised when I asked him why he wasn’t doing more, given that core inflation at the time was running around 1.4%.
One person can only do so much, particularly when the prevailing opinion is going in the opposite direction.
Over the past 8 years I’ve been arguing that the economics profession as a whole caused the Great Recession. We let down the public, forgetting everything we have been teaching our students for decades—don’t let NGDP crash, and if it does do everything humanly possible to get it restored ASAP. It wasn’t just Tarullo, we as a profession failed the public.