Bernanke´s Baseball Metaphor?

His latest post:

Saturday’s game also reminded me of one of the reasons that I like baseball so much. No other sport provides such a detailed record of performance, covering thousands of games and players back to the nineteenth century. That means that every game takes place in a rich historical context. In that context, Max Scherzer wasn’t pitching against the Pittsburgh Pirates; he was pitching against a standard of achievement established over decades. Thus, a one-sided baseball game on a hot and humid Saturday afternoon in Washington became a game that I and the other 41,000 fans there will always remember.

Bernanke´s “monetary policy pitch” was also memorable, but for negative reasons! He´s the “post-war champion” in the “worst pitch in the Nominal Spending category”!

BBs MetaphorThe outcome: Little real growth, low employment and below target inflation. A “triple crown” achievement!

Ben Bernanke 2002: We Need You

A Benjamin Cole post

“In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices…A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money.” Ben Bernanke-2002

I have plugged for QE-offset or -financed tax cuts for a long time. I did not know that former Fed Chairman and now multi-millionaire consultant Ben Bernanke also explicitly believed in the same thing. (My favorite is a FICA tax holiday, offset by $80 billion a month of Fed bond buying, and the purchased bonds placed in the Social Security and Medicare trust funds).

Today in the U.S. we have a sluggish economy marked by weak hiring and below-target inflation (a target that is too low anyway). We are a recession away from stumbling deep into ZLB-land, from which no modern nation yet has ever returned.

Bernanke 2002, we need you.


The situation in Greece, of course, is far worse. There, unemployment is about 25%, married to deflation. Whoever deserves blame, the point is Europe and Greek leadership are wrecking a nation and promoting extremism.  (I salute the Greek people for eschewing most hate groups. But for how long?)

The ECB-IMF is screaming for a Greek balanced budget. The Greeks are evidently incapable of that (like Americans, btw).

Obviously, Greece should exit the EU-ECB, hold the line on spending as much as possible, and print money to balance their budget. In a sense, money-financed tax cuts, just of the sort Ben Bernanke has advised for deflations. Set taxes at 100% of outlays, and then grant a 10% tax cut.

The pinch-faced money ascetics are, in general, a comfortable lot eager for others to belt-tighten.

But the Greek people are one-quarter unemployed. They need a macroeconomic policy that gets them back to full employment, with robust economic growth.

If not my way, then what have you got?

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)

Bernanke takes on John Taylor and his (namesake) rule

I think Bernanke is still “taking it easy” in his blogging. I hope he´s “warming up” to what really matters, i.e. explaining why the Fed bungled in 2008!

Bashing the Taylor-rule is easy, even if, like me, you´ve never been a central banker. I did that in a number of posts (two examples, here and here).

In the following paragrah, BB disappoints, and indicates that the bad things that happened after 2008 were not the fault of the Fed. In fact, according to him, the Fed came out ahead of the pack!

As John points out, the US recovery has been disappointing. But attributing that to Fed policy is a stretch. The financial crisis of 2007-2009 was the worst at least since the Depression, and it left deep scars on the economy. The recovery faced other headwinds, such as tight fiscal policy from 2010 on and the resurgence of financial problems in Europe. Compared to other industrial countries, the US has enjoyed a relatively strong recovery from the Great Recession.

Ben (“Blade Runner”) Bernanke

The “Blade Runner” comes from his talk in the IMF´s “Monetary Policy in the Future” panel.

Scott Sumner wrote that

this is the post we’ve all been waiting for, isn’t it?  Ben Bernanke has a post discussing options for monetary reform. As you’d expect, it’s a really well thought out post—first rate.  And as you’d expect, I am still able to find a few points where I disagree. “

That was certainly not the post I was waiting for. I think Patrick Sullivan is more on “target” when he writes in Bernanke? … Bernanke?:

So, finally, the most authoritative scholar/policy expert on monetary policy–in a blogpost titled Monetary Policy for the Future–is going to get around to answering the Market Monetarists? No, that was just a feint;

Some of these approaches have the advantage of helping deal with the zero-lower-bound problem, at least in principle. My colleagues at the Fed and I spent a good deal of time during the period after the financial crisis considering these and other alternatives, and I think I am familiar with the relevant theoretical arguments.


 Although we did not adopt one of these alternatives, I will say that I don’t see anything magical about targeting two percent inflation.

What he thinks was (and is) magical is Inflation Targeting (2% is just the conventional point number or, in some cases the mid-point of a narrow band). A little over 15 years ago, long before becoming a Fed Governor and after editing the “Inflation Target Bible”, Bernanke (with Mishkin and Posen, his co-editors in the “Bible”) wrote an op-ed called “What Happens when Greenspan is Gone?”:

U .S. monetary policy has been remarkably successful during Alan Greenspan’s 121/2 years as Federal Reserve chairman. But although President Clinton yesterday reappointed the 73-year-old Mr. Greenspan to a new term ending in 2004, the chairman will not be around forever. To ensure that monetary policy stays on track after Mr. Greenspan, the Fed should be thinking through its approach to monetary policy now. The Fed needs an approach that consolidates the gains of the Greenspan years and ensures that those successful policies will continue; even if future Fed chairmen are less skillful or less committed to price stability than Mr. Greenspan has been.

We think the best bet lies in a framework known as inflation targeting, which has been employed with great success in recent years by most of the world’s biggest economies, except for Japan. Inflation targeting is a monetary-policy framework that commits the central bank to a forward-looking pursuit of low inflation; the source of the Fed’s current great performance; but also promotes a more open and accountable policy-making process. More transparency and accountability would help keep the Fed on track, and a more open Fed would be good for financial markets and more consistent with our democratic political system.

As our research on the use of this approach around the world documents, successful inflation targeting requires that the central bank and elected officials make a public commitment to an explicit numerical target level for inflation (usually around 2%), to be achieved over a specified horizon (usually two years). Equally important, the central bank must agree to provide the markets and the public with enough information to evaluate its performance, and to understand its reasoning when policy and inflation deviate from the long-run goal–as they inevitably will at times.

What I really want is for him to explain the reasoning behind, not the deviation of policy and inflation from the long-run goal, but the complete failure of policy in keeping inflation anywhere near close to the long-run goal, and the utter loss of the nominal stability that had characterized the previous 20 years!

Update: After accepting a position as adviser to Hedge Fund Citadel, it´s unlikely Bernanke will “explain” anything:

Former Federal Reserve Chairman Ben Bernanke, a key architect of the federal government’s rescue of the financial system, is joining Chicago hedge fund Citadel LLC as a senior adviser.

Mr. Bernanke will consult on developments in monetary policy, financial markets and the global economy, Citadel said in a release. “His insights on monetary policy and the capital markets will be extremely valuable to our team and to our investors,” said Citadel founder and chief executive Ken Griffin in the statement.


Ben is still in ‘easy blogging mode’

After a four-part series on low interest rates (GSG & SS), a detour on monetary policy and financial stability, Bernanke has two-part series series on Germany´s trade surplus and wages.

This last is not only obvious but what everyone who´s familiar with the Meade-Swan Diagram knows.

When will he get to the difficult part, which is explaining what led him and the FOMC to make so many costly mistakes in 2007/08?

Ben, we’re eager to learn!!

Ben brags and we´re easily duped!

After writing yesterday “Bernanke Brags”, today I felt that I was not exaggerating because the release of his memoirs later this year was announced. It´s the most self-serving title of a book that I´ve come across:

In THE COURAGE TO ACT, Ben Bernanke pulls back the curtain on the tireless and ultimately successful efforts to prevent a mass economic failure. Working with two U.S. presidents and two Treasury secretaries, Dr. Bernanke and his colleagues used every Fed capability, no matter how arcane, to keep the U.S. economy afloat. From his arrival in Washington in 2002 and his experiences before the crisis to the intense days and weeks of the crisis itself, and through the Great Recession that followed, Dr. Bernanke gives readers an unequaled perspective on the American economy. This narrative will reveal for the first time how the creativity and decisiveness of a few key leaders prevented an economic collapse of unimaginable scale.

Bernanke brags!

In his latest post Bernanke continues to “play safe” but begins to brag:

In response to the Great Recession, the Federal Reserve has kept the short-term interest rate (the federal funds rate) near zero since December 2008 and taken other steps (like purchasing longer-term Treasury securities) to strengthen the recovery and avoid deflation of wages and prices. Although the recovery has not been as fast as hoped—in part because of “headwinds” arising from fiscal policy, the after-effects of the financial crisis, and other factors—today the jobs situation in the United States is much better than a few years ago, and the risk of deflation is very low. Fed policies have had a lot to do with that.

1 He knows very well, because he has said so, that interest rates are a lousy indicator of the stance of monetary policy.

2 The recovery has not been “as fast as hoped” exactly because monetary policy has remained tighter than warranted (not because of fiscal and financial crisis headwinds)

3 “Fed policies have a lot to do with that”. Only the “that” should refer to the depth of the recession and the weakness of the recovery!

I wonder when he´s going to start blogging about important things, like when and why, despite 15 years of quiescent inflation, in 2007 they started to obsess about it. In particular why that of the headline variety?

The June 2008 FOMC Meeting, which takes place right at the “edge of the precipice”, is telling. In it, the standing of inflation comes through clearly:

Bernanke´s summary:

My bottom line is that I think the tail risks on the growth and financial side have moderated. I do think, however, that they remain significant. We cannot ignore themI’m also becoming concerned about the inflation side, and I think our rhetoric, our statement, and our body language at this point need to reflect that concern. We need to begin to prepare ourselves to respond through policy to the inflation risk; but we need to pick our moment, and we cannot be halfhearted. When the time comes, we need to make that decision and move that way because a halfhearted approach is going to give us the worst of both worlds. It’s going to give us financial stress without any benefits on inflation. So we have a very difficult problem here, and we are going to have to work together cooperatively to achieve what we want to achieve.

The last thing I’d like to say is on communications. Just talking about communications following this meeting, I’d like to advise everyone, including myself, to lean, not to lurch. That is, we are moving toward more concern about inflation, but we still have concerns about economic growth and financial markets. We should show that shift in emphasis as we talk to the public, but we should not give the impression that inflation is the entire story or that we have somehow decided that growth and financial problems are behind us, because they are not. So if we can convey that in a sufficiently subtle way, I think we will prepare the markets for the ultimate movements that we’re going to have to make.

“Bland” Ben

Bernanke´s blogging is still travelling along “side streets”, refusing to go on to the “main street”. What I think everyone is wants from him is a series of monetary policy posts covering his time as Governor and Chairman of the Fed.

Even so, he could have done something much more interesting with his (GSG offshoot) when talking about Germany´s Trade Surplus. It comes out as a boring “senior class lecture”:

Why is Germany’s trade surplus so large? Undoubtedly, Germany makes good products that foreigners want to buy. For that reason, many point to the trade surplus as a sign of economic success. But other countries make good products without running such large surpluses. There are two more important reasons for Germany’s trade surplus.

First, although the euro—the currency that Germany shares with 18 other countries—may (or may not) be at the right level for all 19 euro-zone countries as a group, it is too weak (given German wages and production costs) to be consistent with balanced German trade. In July 2014, the IMF estimated that Germany’s inflation-adjusted exchange rate was undervalued by 5-15 percent (see IMF, p. 20). Since then, the euro has fallen by an additional 20 percent relative to the dollar. The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the deutschemark, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.

Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending, including spending on imports.

For a theoretical underpinning of the argument see here.

For a more lively discussion of “The economic Consequences of Germany ”, see here.

Update? Scott Sumner says “Germany is balanced“. I don´t think that´s correct. “The Economic Consequences of Germany” within the euro system has many of the same implications of Keynes´”Economic Consequences of the Peace”, when Germany was on the “wrong end of the stick”!

Ben´s blogging has generated more heat than light so far

So far the former and wannabe Fed Chairmen crossed swords over the irrelevant and misguided concepts of GSG & SS. (I´ve given those things some thought here and here).

With big dogs growling at each other, Krugman simply could not help butting in (really to show he had been there before). And for very obvious reasons he ends up giving each a “bone”:

There’s been a really interesting back and forth between Ben Bernanke and Larry Summers over secular stagnation. I agree with most of what both have to say. But there’s a substantive difference in views, in which Bernanke correctly, I’d argue, criticizes Summers for insufficient attention to international capital flows – but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong.

As it happens, the role of capital flows in the logic of liquidity traps is an issue I tackled right at the beginning, back in 1998; and I’ve been trying to work out how it plays into the discussion of secular stagnation, which is basically the claim that countries can face very persistent, quasi-permanent liquidity traps. So I think I may have something useful to add here.

Start with Bernanke’s critique of Summers. The most persuasive evidence that the US may face secular stagnation comes from the lackluster recovery of 2001-2007. We experienced the mother of all housing bubbles, fueled by a huge, unsustainable rise in household debt – yet all we got was a fairly unimpressive expansion by historical standards, and little if any inflationary overheating. This would seem to point to fundamental weakness in private demand. But one reason for the sluggish growth in demand for U.S.-produced goods and services was a huge trade deficit, the counterpart of huge reserve accumulation in China and other emerging markets. So Bernanke argues that what Summers sees as evidence of secular stagnation actually reflects the global savings glut.

The 2001-2007 recovery is not evidence, let alone persuasive, of secular stagnation. Krugman is on the right track when he says this “would seem to point to fundamental weakness in private demand.” But at the last minute he veers off in the wrong direction by making the fundamental mistake of “reasoning from a (GDP) component change” (a close cousin of “reasoning from a price change”).

A huge trade deficit somewhere is always the counterpart of a huge reserve accumulation elsewhere. The important reasoning is to discover why this came about when it did and if it might be related to other stuff (such as the US housing boom). For an explanation, read here (below the fold).

If “movements in GDP components” had not distracted Krugman he would probably have found out that the post 2001 recession recovery was slow up to mid-2003, being due to the tightness of monetary policy, despite fast falling interest rates.

When the Fed made monetary policy more expansionary in mid-2003 by adopting forward guidance (FG), despite interest rates remaining put, the recovery took off, with nominal spending rising back to trend. Interestingly, many see this strong growth in nominal spending as reflecting a “loose/easy” monetary policy. Grave mistake. Faster NGDP growth was necessary to take nominal spending to trend. Monetary policy was “just right”!

At that point, unemployment begins to fall and core inflation rise towards the “target” level.

Bernanke had the bad luck to take over almost concomitantly with the peak in house prices. Initially house prices fell only a little, increasing the speed of fall after financial troubles erupted in some important mortgage finance companies.

Unfortunately, the Fed was exceedingly focused on headline inflation, fearful of the oil price rise. Interest rates remained elevated, only being reduced after August 2007, when three funds from Bank Paribas folded. However, the pace of interest rate reduction was deemed too slow by the market. In the December 11 2007 FOMC Meeting, for example, the markets were negatively surprised by the paltry 25 basis points reduction in the FF rate. On that day the S&P fell 2.5% and the 10 year TB yield dropped 17 basis points.

Rate reductions stopped in April 2008 (only resuming in October, after Lehman!). In the June 2008 FOMC, it came out that the next move in rates was likely up!

With all this monetary tightening, nominal spending decelerated and then fell at an increasing rate. One casualty was Lehman! The rest is history!

Give me a break and let´s stop talking “Gluts” and “Stagnations”. Bernanke would do much better if he starts shinning some light and blog about how monetary policy could really have been much better! Will he be daring?

The charts illustrate the story

Gluts & Stagnations_1

Gluts & Stagnations_2

Gluts & Stagnations_3


Matt O´Brien thinks it´s the opposite in “Larry Summers and Ben Bernanke are having the most important blog fight ever