The Bernanke Disappointment

      Well at least he weighed in. A lot of hope has been generated based on the idea that the Fed can lead us to the economic promised land if only it would raise the inflation rate or do NGDP targeting or something.


        The real trouble with this argument is that the Fed won't in fact do this. It reportedly did discuss NGDP back in November but ultimately decided not to try it. Now Bernanke explicitly has answered Krugman's major piece about Bernanke-it's from his new book, "End This Depression Now!"

       This is one of the major problems with the claims of the Market Monetarists-ultimately the Fed refuses to act so all we can do is speculate about what might happen if they did. While Sumner always tells us that there's no need for fiscal stimulus when you have monetary stimulus what we have actually had is this. Both the monetary and fiscal authorities have acted since 2008 but no proponents of needed stimulus-either of fiscal or monetary, or both as I might argue for, feel like it was enough.

        Some argue that "fiscalists" like I guess I am-though I don't rule out monetary policy and think in general at least both have a role-should give up on fiscal policy-clearly Congress can't get it done.

        Clearly they are right about this,, unless Boehner's warning that the GOP could lose their majority comes true there's no chance of any more fiscal stimulus. So at least until November this is certainly right-and quite possibly after as the Democrats have an uphill climb in holding onto the Senate let alone talking the House.

        But for whatever reason the Fed won't either. You listen to Bernanke's answer to Krugman and your struck with how feeble it sounds. It's not just that he is ruling out raising the inflation rate-which he had advocated back in that 1999 Japan essay but his reasoning-that it's taken a long time to achieve the Fed's credibility on inflation fighting and this would somehow kill it.

      "I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do."

        http://krugman.blogs.nytimes.com/2012/04/25/bernanke-responds/

       The best Sumner can do for a defense of Berannke is this:

        "I think what Bernanke meant to say was that the Fed should not raise its long run inflation goal when unemployment is high. And that’s certainly a defensible proposition. But he didn’t express this view clearly, and hence got hammered by people like Paul Krugman and Brad DeLong. And I can’t blame them, because the Fed is acting as if they don’t care at all about the unemployed. It’s acting like the ECB. Inflation has averaged much less than 2% since mid-2008, which would be an excessively tight policy even if the Fed didn’t care at all about the suffering of the unemployed."

       http://www.themoneyillusion.com/?p=14065#comments

     "My hunch is that Bernanke does care about the unemployed, and wishes the Fed had done more. My hunch is that he doesn’t have the Fed with him, but feels forced to defend Fed policy for political reasons. This is very awkward, and he occasionally stumbles. (It’s also a very poor reflection on Obama’s leadership, as he appointed 80% of the Board of Governors, including Bernanke.)"

      For Bernanke's sake I want to believe this. I want to believe that Bernanke is only saying this for political reasons and doesn't really believe it. So we have an inadequate monetary policy and an inadequate fiscal policy but it could be worse we could be Europe-or Britain. If only the GOP had the White House we would be.