“Shake, Rattle & Roll”

Scott Sumner throws the “supply-side curve ball”:

But some Keynesians keep pretending that demand is the only problem facing the world.  It’s not; the supply side has been gradually deteriorating for more than a decade.  Brexit will make this problem even worse.

Meanwhile, Bernanke prevaricates:

Political outsiders have had quite a good year in the United States (and elsewhere), and many pundits have attributed their success to voters’ profound dissatisfaction with the economy. Certainly there is plenty to be dissatisfied about, including growing inequality of income and wealth and stagnation in real wages. But there are positives as well, including an improving labor market, low inflation, and low gasoline prices. How do people really feel about the U.S. economy?

[Unfortunately, all the “positives” are a consequence of his monetary policy errors]

And concludes:

In a highly polarized environment, with echo-chamber media, political debates often become shrill, and commentators and advocates have strong incentives to argue that the country’s future is bleak unless their party gains control. In this environment, it seems plausible that people will respond more intensely and negatively to open-ended questions about the general state of the country, while questions in a survey focused narrowly on economic conditions elicit more moderate responses. Without doubt, the economic problems facing the country are real, and require serious and sustained responses. But while perceptions of economic stress are certainly roiling our national politics, it may also be that our roiled politics are worsening how we collectively perceive the economy.

[More likely, it is the way we collectively perceive the economy that is shaking our politics]

For many years (decades in the case of the US and UK) before the “crisis”, the big developed economies (ex-Japan) were doing well. There was no suggestion of “new normal”, “great stagnation” or “depression”. The “supply-side” seemed just fine. Suddenly, almost as if central bankers were perfectly “coordinating”, those economies were walloped!

The first panel shows how central banks were de facto targeting NGDP-LT. The result was nominal stability (that includes low/stable inflation). Maybe because they thought they were targeting inflation, when oil prices pressured headline inflation they simultaneously freaked.

Shake Rattle & Roll_1

When central banks pulled up the hand brakes with force, the real economy was squeezed. As I argued here, the Fed (and the other central banks) seem to be happy with where the economies are. And if they are happy, that´s where they will stay, mired in depression. Note that the EZ central bank even acted more destructively, bashing a weekend economy over the head after it had already fallen to its knees.

Shake Rattle & Roll_2

Shake Rattle & Roll

What would happen to a CEO that underperformed continuously for seven years?

That´s exactly the position the Fed is in. According to this excellent Wapo article – The economy never seems to be as good as the Fed thinks it will be:

Over the past seven years, the Fed has continually underestimated how much support the economy needs. Many times, the Fed has suggested that the stimulus, which has come in the form of near-zero rates and $4 trillion in bond purchases, would be fairly limited in scope. As a result, the Fed has almost always had to delay any move that could be seen as withdrawing that stimulus.

Leading others to claim that if the Fed doesn´t move now, it will be damned forever, as in The Fed Should Act Now:

Taking action now will once and for all dispel any doubt about its willingness to implement a policy completely in line with the US economic outlook. Before the international multilateral watchdogs stepped in, the Fed had the option to wait until December to tighten credit conditions. Now, the markets would regard any delay from the Fed as clear proof it lacks the stamina to perform its task. Nothing could prove more detrimental to global economic stability.

Bernanke´s blogging is trite!

Yesterday, Bernanke had another “the Fed did great” type post, “Monetary policy and inequality”:

Since the financial crisis the Federal Reserve has aggressively used monetary policy, including unconventional policies like quantitative easing, to promote job growth and keep inflation near the Fed’s 2 percent target. Progress has been made, even if it has been slower than we would have liked. Unemployment, which peaked at 10 percent in 2009, is now 5.4 percent and falling, and inflation appears gradually to be moving toward its target.

In this post I’ll look at another critique, that the Fed’s monetary policies have exacerbated inequality—a proposition that happens to be the subject of a June 1 symposium at the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.

And concludes:

Monetary policy is a blunt tool which certainly affects the distribution of income and wealth, although whether the net effect is to increase or reduce inequality is not clear. More research will be needed to untangle and measure the many channels through which these effects are transmitted. But the (uncertain) distributional impact of monetary policy should not prevent the Fed from pursuing its mandate to achieve maximum employment and price stability, thereby providing broad benefits to the economy. Other types of policies are better suited to addressing legitimate concerns about inequality.

When I wrote this post, I had Bernanke´s ‘platitudes’ in mind, so I was very pleased to read Steve Randy Waldman´s “reality check”:

The expansion of inequality since 1980 is a devil with many fathers. But it was not an inexorable fact of nature. It was the product of politics and policy and institutional arrangements that stripped US workers of bargaining power, and stripped US capital of tax obligations and ties to community. The Fed played a role in those arrangements, and not an unimportant role. Yes, post-crisis, post-TARP, in the context of a dysfunctional Congress, easy money has been the best available policy, even on distributional grounds. Yes, the Fed should continue to err on the side of monetary ease, despite the harm done by asset price inflation to social cohesion and to the information content of financial markets. If anything, the Fed’s policy ought to have been even easier, as it would have been under a wiser NGDP level target, for example.

But monetary policy prior to the crisis, and decisions made at the Fed during the event, are not remotely innocent of the catastrophic stratification we face today. Bernanke judges himself and his former institution too narrowly and too generously.

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 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.


Ruled by a “phantom rate”

That is implied by this Gavyn Davies piece “Who is right about the equilibrium interest rate?”:

The equilibrium real interest rate continues to lie at the heart of discussions about economic policy in the US and elsewhereBen Bernanke has written that the equilibrium rate, and not the FOMC, is the ultimate determinant of interest rates in the economy, and claims that it is discussed at every Fed meeting. The recent debate about secular stagnation between Mr Bernanke and Lawrence Summers centres on a difference about the future path for the equilibrium rate. And Cleveland Fed President Loretta Mester says that it is “the issue policy makers are grappling with” at the FOMC.


If, for example, the Fed sets short rates higher than equilibrium, the economy will respond by generating a rise in unemployment and inflation will fall below target. And vice versa. Mr Bernanke believes that the equilibrium real rate is currently abnormally low, but that it will rise gradually in the next few years as economic “headwinds” abate. This justifies a large part of the rate increase shown in the dots chart, a view also explicitly stated by Ms Yellen in her speech on policy normalisation.

Regarding the “telltale” signs from inflation and unemployment to guide the “appropriateness” (relative to the “phantom rate”) of the FF rate, what was happening in 2007-08? And what is happening now?

Phantom Rate_0

In 2007-08, Bernanke and the FOMC only had ears for the “siren” of headline inflation, all due to the oil price shock, and couldn´t hear the “muted sound” of core inflation. Plus, unemployment was almost imperceptibly rising, at least initially.

Although unemployment was slowly rising, so was headline inflation. That doesn´t help gauge the “phantom rate” because if the FF rate is above the “phantom rate”, unemployment should be rising but inflation should be falling.

Since headline inflation was rising but unemployment was more or less stuck initially, probably the Fed thought that the “phantom rate” was above the FF rate, which made the Fed reduce the FF rate (after the Bank Paribas affair in August 2007) very parsimoniously. In fact, from April to September 2008 the FF rate remained at 2% (with a bias to increase!)

For the past three years inflation has been falling and is below target, but unemployment insists in falling, “messing up” the signals that inform the Fed about the “phantom rate”, resulting in a “stand-off”  that brings forth a lot of “noise” from policymakers.

If the Fed were to stop trying to figure the “phantom rate” and instead observe the very visible behavior of nominal aggregate spending (or NGDP), it could have tried to save the “plane from dropping too low” in 2008.

Phantom Rate_1

Now that the “plane has dropped too low”, the previous height may not be attainable. But all signals are that there exists an attainable intermediate height that the “captain” could aim for. But that height NGDP level is for the “tower” Fed to specify. Given that the plane´s engines economy has taken a beating, the previous “cruise speed” may have to be lowered. No matter, both labor and capital will “rejoice”.

Phantom Rate_2

Update: The “Phantom” seekers like:

Phantom Rate_3

The NGDP Targeting crowd prefers:

Phantom Rate_4


“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”!

When “mumbling with great incoherence” beats “clarity”

Ben Bernanke inaugurated his blog. In the introductory post he writes:

When I was at the Federal Reserve, I occasionally observed that monetary policy is 98 percent talk and only two percent action. The ability to shape market expectations of future policy through public statements is one of the most powerful tools the Fed has. The downside for policymakers, of course, is that the cost of sending the wrong message can be high. Presumably, that’s why my predecessor Alan Greenspan once told a Senate committee that, as a central banker, he had “learned to mumble with great incoherence.”

And in the June 2008 FOMC meeting he spoke “clearly”:

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 them. I’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.

Unfortunately, and that was to be expected, the “public” gathered that inflation, if not the entire story, was the major part. In the Minutes, of that meeting, released 3 weeks later, we read that “likely the next move in interest rates will be up”!

Any wonder NGDP tanked after that?

Bernanke follows that introductory post with the first post, which is all about how the Fed has to pursue an “imaginary number”, the natural interest rate!