What the Press Should Ask Bernanke

Tim Duy has a new post showing the shocking deterioration in the Fed’s forecast for 2012 and 2013, and asks why this wasn’t enough for QE3.  Evan Soltas points out that market inflation forecasts have fallen even faster.  And Paul Krugman expresses the appropriate moral outrage:

The intimidated Fed: The minimal action — extending Operation Twist — wasn’t just inadequate, it was shameful. The Fed has a dual mandate, employment and price stability. Its own projections show high unemployment persisting for years and years, inflation running below its target — and realistically its inflation projections are too high while its unemployment projections are too low. There is no rational argument I can see for not going all out with monetary stimulus.

But what we actually got was action that was pretty obviously calculated to be the absolute least the Fed could do without generating headlines saying “Fed ignores weak economy”.

I’m sorry, but this looks like pure concession to political intimidation — a Fed refusing to do anything that would let Republicans accuse it of helping Obama. And for the sake of its own political comfort, the Fed is essentially betraying the unemployed.

All in all, the degree of elite failure in this crisis is just stunning.

I’m not sure it’s all attributable to corruption or cowardice; there also seems to be a lot of cluelessness going around.  A reader sent me an email he received from a former Fed official:

Well, my view is that we don’t need more easing. I don’t think that is the problem at the moment. The role of the Fed (and any central bank) is to promote conditions that can lead to growth. They are there to be a lender of last resort, which they have done admirably. I think the easing talk is a disservice. I think it is important to calm the markets for sure. I mean…

[Then he provides some graphs showing near zero rates and a big monetary base—the sort of data that is consistent with ultra-tight monetary policy in 2008 driving NGDP sharply lower and thus leading to low nominal rates and a big demand for ERs.]

That quotation could have come almost word for word from a Fed official during the Great Depression, when lender of last resort really was their role.  In that case we were still under gold standard, and the Fed had limited ability to steer the nominal economy.  A fiat money regime doesn’t “take care of itself”.  The Fed has to steer some sort of nominal aggregate all the time.  Yes, the Fed can’t magically produce RGDP growth.  We have to hope that other policymakers adopt a regime that’s closer to that of South Korea than North Korea.  But as we saw in 1929-33, it can come close to destroying an otherwise relatively free market regime (and no, Hoover’s foolish interventionist policies don’t even come close to explaining the Great Depression, they were trivial compared to the intervention in a modern economy (such as the booming 1960s.)

Bernanke likes to say monetary policy is “not a panacea.”  In one sense that’s true, but it most certainly is a panacea for inadequate NGDP growth, and all the associated problems that flow from inadequate NGDP, such as above natural rate unemployment and that part of financial/banking distress that flows from falling nominal incomes.

Bernanke has become skilled at evading the question of why the Fed doesn’t do more, when their projections clearly call for additional stimulus.  So here’s what I’d ask him at the next press conference:

Mr. Bernanke:  In 2003 you said that neither the money supply nor interest rates were reliable indicators of the stance of monetary policy, and that only nominal GDP and inflation were good indicators of whether policy is easy or tight.  Given that both of these variables have grown at unusually low rates since 2008, would you say that monetary policy has actually been relatively contractionary over the past four years?  If not, what indicators would tell you that it has been highly accommodative?

[Predicted answer:  “Again, no one can deny the Fed has taken many extraordinary steps . . . ]

I’d also like to hear from researchers at the Fed (anonymously if you prefer) as to whether working there makes one gradually begin to see vague “costs and risks” of unconventional policy like QE as being more worrisome than the very real suffering of millions of unemployed.