"So there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s [sic] falling prices."
"The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation."
"Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target. Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional deflation [sic]."
"Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative. You know all the things we’ve done to try to provide support to the economy. 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."
So that's his answer? Japan had deflation while we don't currently have deflation? So he's now claiming that the protecting the 2% inflation rate is so sacrosanct that it can't even in the short term be breached? What about trend inflation targeting? If he uses that he still would need to have a slightly higher inflation rate for the short term. Glasner does a good job of nailing him:
"over the past 30 years in which the Fed has built up so much credibility that the Fed has been able to do all the wonderful things that it has done to promote . . ., well, to promote the weakest recovery since World War II, nominal GDP growth after each recession during the past 30 years substantially exceeded 5% quarter after quarter. During this recovery, however, the annual rate of nominal GDP growth has not exceeded 5.5% in any quarter since the “recovery” began, while averaging less than 4%. And Mr. Bernanke has the nerve to tell us that he is unwilling to allow inflation to increase above 2% because it would squander the precious credibility achieved by the Fed over the past 30 years when nominal GDP during recoveries almost always grew at an annual rate greater, often substantially greater, than 5%? Remember the audacity of hope? This is the audacity of complacency and indifference."
A comment he made to Becky Hargrove in the comments section was particularly to the point:
"I also don’t understand why protecting creditors takes priority over every other consideration. Creditors understand that they are taking a risk, they have no reasonable expectation that they will receive full payment of principal and interest whatever happens to the economy."
I would say that in particular is what is least understandable-this feeling that creditors have to be fully whole no matter what happens to the economy. While a strong financial system is vital for an economy like ours to be healthy and grow the tail has been wagging the dog for too long. Indeed, I might go further than Glasner goes and question the Great Moderation itself. As Steve Waldman has argued during this 30 year period the Fed has been much more vigilant knocking down wages than other prices, especially debt prices.
We haven't even talked about school loan debt.
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