Bernanke answers Krugman and comes out looking… well, like the real Bernanke

In this post I commented on Krugman´s critique of Bernanke. In his press conference today Bernanke tried to defend himself:

To clarify some more: As an Academic, Bernanke famously told Japan that they had to throw the whole kitchen sink and more at the problem. These days, Bernanke seems far more cautious.

Bernanke says that’s totally wrong. Specifically he says that’s “Absolutely incorrect.”

Why? Japan was in deflation. We’re not.

Here’s the full comment, via a livestreaming text service:

Yeah, let me tackle that second part first. So  there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s falling prices.

The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation.

Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target.
Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your
mandate, so to speak, are demanding additional deflation(!).

As an analyst I´m feeling good because several months ago I pinned Bernanke correctly saying:

Bernanke´s sole concern: DEFLATION!

We must reevaluate Bernanke´s supposed knowledge about the power of monetary policy. A reread of his (infamous) “A case of self-induced paralysis” on Japanese MP shows he´s almost exclusively concerned with deflation. “Deflation. Making sure “it” doesn´t happen here” in 2002 just after becoming Fed governor is another pointer to his “deflation phobia”.

Bottom line: At the 2% altar a lot is being sacrificed!

Update: David Beckworth has a much more “Bernanke friendly” post.

5 thoughts on “Bernanke answers Krugman and comes out looking… well, like the real Bernanke

  1. Someone should ask Bernanke a pointed question about what “flexible inflation targeting” means to him, and whether it applies to the Federal Reserve. Even better, ask him point blank whether he is satisfied with the level of aggregate demand/nominal spending in the economy right now.

      • So when he was endorsing fiscal stimulus earlier, that was to help him hit the inflation target, right? It had nothing to do with jobs? Bernanke was quoted as saying that he doesn’t believe either that all that unemployment out there is structural. So unless he believes they’re all taking a holiday…

    • One look at the “Paralysis” paper shows that this clearly wasn’t always the case. Krugman’s “Fedborg” theory looking more and more plausible.

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