People sometimes tell me that I’m too hard on Bernanke. Yes, he may secretly favor doing more, but the Fed faces strong opposition to additional steps toward monetary stimulus.
Actually I’m not very hard on Bernanke, I’m hard on the Fed. Bernanke is in the position of being almost forced to say things he doesn’t really believe—how else could he defend current Fed policy?
In any case, if it’s really true that Bernanke would like to do more but right now most of the political pressure is coming from the “inflation nutters,” then we need to redouble our efforts. Bernanke needs more economists demanding additional monetary stimulus, so that he can do the right thing.
When doing the right thing is not “realistic,” one has two options:
1. Try to change reality to make it more feasible.
2. Give up.
There is no such thing as “public opinion” on NGDP targeting, level targeting. All that matters is the consensus opinion of economists. Change that, and the Fed will eventually follow. We market monetarists haven’t yet convinced the median economist, but we have been far more influential than I would have expected back in late 2008. We’ll probably lose this battle, this business cycle, but win the war.
A few months back Tyler Cowen had this to say:
On this issue I feel Scott Sumner is insufficiently Sumnerian. He correctly stresses the role of expectations and credible commitments, but I still do not understand why he does not accept the implied pessimism in this, at least for May 2012. 2008-2009 was the time to act, in a Ludwig Erhard/Douglas MacArthur/Alexander Haig “I’m in charge now and we’re doing ngdp targeting try to challenge me in the chaos and confusion” sort of way.
5. The Fed already has failed to act, for whatever reasons. That makes it all the harder to achieve the credible commitment now. The market expectation has become “the Fed can/will only do so much.” It’s like a guy hemming and hawing on the marriage proposal for three or four years, and then trying to suddenly set it right and show real commitment to the woman.
I’m trying to get the Fed to spend $3 trillion on a diamond ring, I mean on QE. That’ll wake people up. Seriously, if every academic economist woke up tomorrow morning as a reborn market monetarist, including the academic economists at the Fed, then the Fed would do a lot of monetary stimulus, it would be believed, and it would help a lot. That’s who I’d like to convince. Tyler continues:
I still believe in a looser monetary policy, I just think that what we can get for that now is much much less (a fifth? a tenth?) of what we could have received in 2008-2009.
. . .
This will sound counterintuitive, but we should be debating real factors more and nominal factors less, all the more as time passes.
. . .
I also stress that I haven’t changed my views at all, not since 2008-2009, and not since my early column on Scott Sumner (someday I’ll do a post on why I wrote that column in terms of prices rather than ndgp). Same views, but I do see the clock ticking on the wall.
I take my cue form the markets. In 2006 they didn’t care much about monetary policy. Now they care a lot. That means two things; they think monetary policy is way off course, and they think it is possible that the Fed might still do a lot of good—at least in absolute terms, perhaps not realtive to the size of the problem. As long as they care, I care.
I do talk about “real factors” as well, but as this Austan Goolsbee quote (linked to by Tyler Cowen) points out, real factors are very marginal issues right now:
Of all the public reactions to last Thursday’s surprise ruling from the Supreme Court on the Affordable Care Act, one of the most interesting came from the markets: Nothing happened.
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