Bernanke´s “amnesia” caused the depression

Here´s what Bernanke knew long before becoming Fed chairman:

Bernanke (with Gertler & Watson) 1997 (on oil shocks)

Substantively, our results suggest that an important part of the effect of oil price shocks on the economy results not from the change in oil prices, per se, but from the resulting tightening of monetary policy. This finding may help to explain the apparently large effects of oil price changes found by Hamilton and many others.

Bernanke 1999 (on Japan)

Needed: Rooseveltian  Resolve

Franklin D. Roosevelt was elected President of the United States in 1932 with the mandate to get the country out of the Depression. In the end, the most effective actions he took were the same that Japan needs to take—- namely, rehabilitation of the banking system and devaluation of the currency to promote monetary easing. But Roosevelt’s specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—-in short, to do whatever was necessary to get the country moving again. Many of his policies did not work as intended, but in the end FDR deserves great credit for having the courage to abandon failed paradigms and to do what needed to be done.

Bernanke 2003 (on Friedman)

As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well. The real short-term interest rate, another candidate measure of policy stance, is also imperfect, because it mixes monetary and real influences, such as the rate of productivity growth

The absence of a clear and straightforward measure of monetary ease or tightness is a major problem in practice. How can we know, for example, whether policy is “neutral” or excessively “activist”?

Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation

The charts show the facts he confronted and actions taken after becoming chairman.



In June 2008 he “forgot” about his views on interest rates as an indicator of monetary policy and thought monetary policy was easy because the FF rate was “only” 2%! At that time the FOMC let it be known that the next rate move would likely be UP!

He “forgot” that the impact of an oil shock in the real economy resulted from the tightening of monetary policy, the stance of which was better indicated by nominal spending growth rather than the interest rate.

When the crash materialized due to the errors above, he “forgot” to adopt the “Rooseveltian Resolve” he had suggested to the BoJ!

PS: Scott Sumner once again reminds us that “Inflation doesn´t matter (NGDP growth does)

7 thoughts on “Bernanke´s “amnesia” caused the depression

    • Marcus, Cole
      He certainly “knows” all this. I read a citation from him in one of Sumner’s posts and he seems to care about unemployment as an indicator of output gap more than any other indicator. By late 2006 unemployment was falling and reaching 4.5%. Let’s remember that the previous low in unemployment was 3.9%. He probably thought, 3.9% might be too low, so he decided to stop at 4.5%, or something like that. And tightened.

  1. During most of 2007 they were worried about resource utilization (e.g. labor). By early 2008 that disapeared from statements, and they kept looking at “inflation expectations”. Literally:

    “The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.”

    Energy was going through a negative supply shock: prices were going up, while production was going down (this time I agree with you 🙂 ). This event show in just one time all the shortcomings of inflation target: nobody knew ware the NAIRU was, financial conditions were deteriorating ( meaning velocity of money sharply going down) and people were looking to the wrong meter: inflation! People should be looking at NGDP.

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