The Real Bernanke

Roger Lowenstein has a very revealing portrait of Ben Bernanke in The Atlantic:

But his restrained manner belies a forcefulness and a willingness to take political heat. Early in 2008, the Fed was mulling a small interest-rate cut to ease the escalating mortgage crisis; cutting rates was controversial because hawkish economists, of whom there were many, feared inflation. Bernanke decided to cut rates by three-quarters of a point—a very big move. As he told a colleague, he was going to be pilloried for whatever he did, so there was no sense holding back.

One of my very first blog post discussed that move.  The tone of the entire article suggests that Bernanke is rather dismissive of critics that claim he’s creating an inflationary time bomb (although you have to read between the lines to fully appreciate his attitude.)  Here’s a couple paragraph’s that show he leans in a dovish direction:

I pushed him, in one of our interviews, to elaborate, and he said, “There is a thesis that the only way to restore the economy is by a necessary purging of previous excesses. In disagreeing, I am not saying there are not imbalances that need to be fixed. That said, there is still scope for policy to ameliorate the effects of necessary rebalancing on the public, to help shorten the recession. A massive decline in employment slows the rebalancing and deleveraging processes rather than speeds them; people don’t have the income to pay their debts. So the argument is: where you can, you try to short-circuit the process by urging banks to take losses and modifications, and recapitalize. Obviously, you need to get bank balance sheets healthy, and individual consumers healthy—but subjecting the system to high unemployment and high rates of bankruptcy and foreclosure is a very inefficient way to get there.”

Bernanke is more conservative than his Republican critics imagine, but as he has stated publicly, he finds the prospect of millions remaining unemployed “unacceptable.” He is particularly worried about the many people who have been out of work for more than six months. Like FDR, he is willing to try what works, or what might work, and this puts him at odds with the economic originalists. He sees no evidence of inflation, but he does see economic distress, and so the latter is a greater concern. Though he recognizes the potential for inflation, he told 60 Minutes in December 2010 that he was “100 percent” certain of his ability to control it (a surprising, and troubling, certitude for a normally humble banker). When I brought up the argument that the purchase of mortgage-backed assets—inflationary impact aside—amounts to inappropriate “credit allocation,” Bernanke gave a tired frown, as if the fine points of monetary theory cannot hold water against the concrete fact of unemployment. “I would argue the mortgage-backed securities we purchased probably moved the market closer to an efficient state rather than away from it,” he told me.

When it comes to his critics on the left, his attitude seems quite different.  Here’s Bernanke responding to proposals to raise the inflation target:

Bernanke has given serious thought to the Krugman-Rogoff argument. One obstacle is practical. Fed policy works, in part, by getting the market to do the Fed’s work (if the Fed is buying bonds, traders who want to be on the same side of the markets as the central bank will buy bonds too). But any policy adopted by less than a 7-to-3 majority by the Fed’s Open Market Committee would not be viewed by markets as a credible policy, likely to endure, and Bernanke is not guaranteed to get this margin today. . . .

This might seem to support Krugman’s thesis that Bernanke would like to boost inflation but has chickened out. But after talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. . . .

My sense is that Bernanke is too much a sober central banker to want to risk the Fed’s credibility on inflation. His view represents a serious break from many of his fellow academics because, according to the world as left-leaning scholars depict it, raising inflation is the only thing that will work when the economy has hit dead air. Bernanke thinks he has other tools. One, of course, is quantitative easing.

My takeaway from the article is this:

1. Bernanke is strongly opposed to the idea that money needs to be tighter.
2. Bernanke is supportive of the notion that the Fed needs to do more, but is uncomfortable with the idea of arbitrarily changing the inflation target, for reason such as credibility.
3. Bernanke prefers to raise AD using other tools such as QE.

Now let’s contrast that with market monetarism:

1. MMs strongly oppose to the idea that money needs to be tighter.
2. MMs are supportive of the notion that the Fed needs to do more, but are uncomfortable with the idea of arbitrarily changing the inflation target, for reason such as credibility.  We prefer a steady 5% NGDP target, level targeting, under any and all conditions.
3. MMs prefer to raise AD using other tools such as QE and level targeting.  BTW, Bernanke once recommended the BOJ try level targeting.

Bernanke is certainly no market monetarist, but I see quite a few areas where our views overlap.  Go back to that first quotation.  Why did Bernanke insist on a 75 basis point cut in January 2008?  (A cut that occurred during an emergency Fed meeting, which is very unusual.)  After all, just a few weeks earlier the Fed had agonized between a 1/4% and 1/2% cut in the fed funds target, and opted for 1/4%.  What explains the dramatic turnabout?  The answer is that markets crashed minutes after the December 2007 meeting, signaling  the onset of recession.  Bernanke read the various market indicators and by early January realized that the Fed had made a mistake.  So he demanded a 3/4% cut, and about 10 days later another 1/2% cut.  That’s getting ahead of the curve.  That’s market monetarism.  Unfortunately, CPI inflation rose much higher in the first half of 2008 (for reasons unrelated to monetary policy–NGDP growth was slow), and this put the doves on the defensive.  They did not cut rates in the meeting after Lehman went bankrupt in mid-September.  They never recovered that aggressiveness, that ability to get ahead of the curve.  It’s been catch-up ever since.

PS.  Did you cringe like I did when Lowenstein called QE an alternative to creating more inflation?  In fairness, he might have meant an alternative to raising the official inflation target.  BTW, Bernanke arguably did raise the target slightly, from a range of 1.7% to 2.0%, up to simply 2.0%