Bernanke does “it” again…

…Forgets what he previously said and wrote.

There is his famous “apology” to Milton Friedman in 2002 while a Fed Governor on the occasion of Friedman´s 90th birthday:

 “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

He did “it”, albeit at a much reduced scale.

Then there is his 1999 article on Japanese monetary policy-a case of self induced paralysis where, among other things he recommended the adoption of a price level target. Despite several discussions that have recently taken place within the system about “level targeting” Bernanke has consistently refused to consider it.

With the Nobel award to Sims and Sargent, some were reminded that in the late 1990s Bernanke and co-authors Gertler and Watson used the VAR technique to ask the question:

Were the economic slowdowns that followed the oil price shocks the result of the shocks themselves, or consequences of the monetary policy reaction?

And the answer they found (which Jim Hamilton contests):

The conclusion is clear: it is the monetary policy response, not the oil price shocks themselves, which slowed growth and triggered recessions.

But just over ten years later he fell prey to the 2007-08oil shock and “passively tightened” monetary policy! The result was the “mild depression” that followed the steep fall in aggregate demand.

By “passively tightening” I mean he did not adequately offset the fall in velocity notwithstanding the “low” level (2% from April to October 2008) of the Fed Funds rate.

We must note that a little earlier under Greenspan, between 2003 and 2005, there was also an oil shock of equivalent magnitude, but nominal spending, which was at the time rising towards its target, was kept “on track”, allowing Greenspan to hand over to Bernanke in February 2006 an economy in which nominal spending was evolving along the “target path”. This is illustrated in the picture below.

On topic: This is Milton Friedman in 1958:

The extensive empirical work that I have done since that article [“A Monetary and Fiscal Framework for Economic Stability” (1948)] was written has given me no reason to doubt that the arrangements there suggested would produce a higher degree of stability; it has, however, led me to believe that much simpler arrangements would do so also; that something like the simple policy suggested above would produce a very tolerable amount of stability. This evidence has persuaded me that the major problem is to prevent monetary changes from themselves contributing to instability rather than to use monetary changes to offset other forces (Friedman, “The Supply of Money and Changes in Prices and Output,” 1958, p. 106, n. 19).

And Leland Yeager in 1989:

“Real”factors, such as the oil shocks of the 1970s, can play some role in macroeconomic fluctuations. Yet even such shocks have a monetary aspect.

2 thoughts on “Bernanke does “it” again…

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