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Bernanke and "The Great Moderation" in Hindsight

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I just read Bernanke's 2004 piece on "The Great Moderation." It's written by the wise Bernanke I remember, not the embarassment he's become. In hindsight it's tempting to treat Bernanke's analysis as pure delusion. But in the end, I bet a lot of it will hold up, especially since he was careful to highlight his uncertainties. When the dust settles, it still seems plausible that output and inflation volatility will still on average be lower for the post-1984 era than it was for 1960-83. Remember that so far the decline in financial markets far exceeds the decline in the real economy.

Still, there's plenty in this piece that Bernanke might want to re-write. First and foremost:

Why has macroeconomic volatility declined? Three types of explanations have been suggested for this dramatic change; for brevity, I will refer to these classes of explanations as structural change, improved macroeconomic policies, and good luck.

[...]

...In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck, as some have argued, though I am sure good luck had its part to play as well.

In retrospect, luck looms large, no?

Oh, and don't forget the "Those who forget the past are condemned to repeat it," department:

Nevertheless, a number of economists have argued that monetary policy during the late 1960s and the 1970s was unusually prone to creating volatility, relative to both earlier and later periods (DeLong, 1997; Mayer, 1998; Romer and Romer, 2002). Economic historians have suggested that the relative inefficiency of policy during this period arose because monetary policymakers labored under some important misconceptions about policy and the economy.

I fear we'll be paying for Bernanke's under-estimation of the long-run dangers of bail-outs and massive intervention for decades to come. What happened to you, Ben?

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CATEGORIES: Macroeconomics , Monetary Policy
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COMMENTS (10 to date)

Latest Comment

Billy writes:

Robert Caro (via Russ Roberts via Tyler Cowen) may have part of the answer:

...I realized that power was like a sword, a very unusual sword, in which the hilt, as well as the blade, is as sharp as a razor. So it cuts into the man who’s wielding it and changes him, it alters him. But it also, of course, cuts into those on who it is swung.

Posted May 13, 2009 6:52 PM

RL writes:

Power corrupts, and the opportunity to wield great power corrupts absolutely for some, it seems.

Posted May 13, 2009 7:03 PM

Richard A. writes:

"What happened to you, Ben?"

He went to Washington.

Posted May 13, 2009 7:09 PM

Greg Ransom writes:

Anything in the article about the terror of threatening "deflation" in Bernanke's piece -- the looming phantom that haunted Bernanke's imagination and Fed policy in the early 2000's?

Posted May 13, 2009 7:21 PM

ed writes:

Are you guys suggesting that Bernanke is *corrupt* (rather than simply wrong?) I don't buy it. Nothing I know about his life or personality would lead me to believe he has become immoral or corrupt.

Bernanke is both much smarter and much better informed on these issues than any commenter here. I don't know if he made the right decisions or not, (and he'd probably admit as much), but he had to make the call.

Criticism is fine, but the arrogant certainty I see here is annoying. Be more like Arnold.

Posted May 13, 2009 8:29 PM

Snark writes:

Ed,

I could be mistaken, but I think the comments about corruption have less to do with his immorality than they do with his assimilation.

Bernanke has been Borged.

Posted May 13, 2009 9:24 PM

s writes:

I'm not sure a bar has ever been set lower than this:

"When the dust settles, it still seems plausible that output and inflation volatility will still on average be lower for the post-1984 era than it was for 1960-83."

Why, exactly, does this in any way count as a sort of laudable achievement?

Posted May 14, 2009 1:51 AM

J Cortez writes:

Why is anybody surprised? He is a government hack now. That means reality and ideology are not a concern so much as what political opinion is at the moment.

Posted May 14, 2009 8:45 AM

Ivan writes:

The inflation and output became less volatile after 1984, which is exactly when China, and followed by india/vietnam/USSA block, started their capitalism adventure. An unprecedented amount of labor started pouring into the global market, and bid down inflation, bid up capital's (including Human capital, especially those skilled HC) price. This historical movement may have played a role.

Posted May 14, 2009 9:02 AM

Kevin H writes:

Can we finally put to rest that the government would be good at running the economy if only the right "Vulcans" were in charge.

The clear and simple answer to why Ben "changed" is that his incentives changed. I believe his goal is to be the best Fed Reserve Chairman he can be which can be problematic if the whole concept of a government sponsored central bank is flawed.

Posted May 14, 2009 8:28 PM

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