Arnold Kling  

Bernanke's Speech to the AEA

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He says,


Slide 4 shows that the version of the Taylor rule based on forecast inflation (in green dots) explains both the course of monetary policy earlier in the past decade as well as the decision not to respond aggressively to what did in fact turn out to be a temporary surge in inflation in 2008. This comparison suggests that the Taylor rule using forecast inflation is a more useful benchmark, both as a description of recent FOMC behavior and as a guide to appropriate policy.

By my count, he gives three reasons that the decision at the time to maintain low interest rates from 2002 through 2004 made sense. First, the recovery was weak. Second, inflation, as measured by the deflator for Personal Consumption Expenditures, was low (it was revised up later). Third, and most important, the Fed forecast for inflation was low relative to temporary blips in inflation.

As I recall, mainstream macroeconomists were not screaming from the rooftops that monetary policy was too loose at the time. I tend to agree with Bernanke that the criticism of monetary policy seems post hoc and largely unwarranted.

I agree with his view that the housing bubble was caused much more by regulatory failure than monetary policy failure. But he says,


The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.

In other words, we must not lose faith in technocratic control. We must execute technocratic control more effectively. At a fundamental level, this shows that he does not understand the discrepancy between knowledge and power that is the topic of Unchecked and Unbalanced. Unfortunately, the process for selecting Federal Reserve Board leaders selects only people who have an exaggerated view of the ability of expert technocrats to guide the economy.


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COMMENTS (4 to date)
Doc Merlin writes:

Mainstream never scream from the rooftops that money is too lose now, they always scream that it USED to be too lose, and scream that it needs to be looser now.

Charles MCabe writes:

I have seen and studied what ninety-six years of technocratic control does.It shows that markets alone are able to understand in real time all the knowledge neccasary to control the money supply.That is why freebanking must be seriously debated in this country.Anyone who believes in the Fed's ability to be the great and powerful Oz and then thinks himself capable of leading it has by nature an exaggerated view of their and it's ability

fundamentalist writes:

“Third, and most important, the Fed forecast for inflation was low relative to temporary blips in inflation.”

And we all know what great forecasters the Feds are! But this was Hayek’s chief insight on the Great D, about which Bernanke is supposed to be the reigning authority. Apparently he has never read Hayek. CPI inflation was very low during the 1920’s, which is the main reason the Feds pumped massive amounts of money into the economy. And just as happened in the recent crisis, the money went into assets such as manufacturing, stocks and housing. But the CPI remained low because of huge productivity increases.

Bernanke: “The lesson I take from this experience is not that financial regulation and supervision are ineffective for controlling emerging risks, but that their execution must be better and smarter.”

Never, under any circumstances, lose faith in bureaucrats, no matter how many times they fail. Of course, no one is clamoring to lynch the pols or regulators who wrote the “failed” regulations. Does anyone really believe that pols and regulators intentionally write stupid regulations that they know beforehand will fail? Of course not! Every regulation ever written is written by the smartest guys money can buy and they sell them by claming they will save us from another crisis. Yet, every time they fail. And as Kling has written before, government failure does nothing but create greater demand for more government regulation.

Kling: “Unfortunately, the process for selecting Federal Reserve Board leaders selects only people who have an exaggerated view of the ability of expert technocrats to guide the economy.”

Brilliant! So expect nothing but more of the same from these Keystone Cops!

pat writes:

If one cannot forecast well, at least one should have the humility to not act as if they know the future. This was what I (and some of my colleagues in a regional fed) was arguing, against the reduction of ff rate in 2003, as well as BB's promise of keeping it at 1% for "considerable time". BB was instrumental in getting that phrase into FOMC statements -- and it took them 3 or 4 meetings just to get rid of that phrase before they could actually raise the rate ...

As for the "mainstream macroeconomists", my impression is many of them didn't pay much attention to real time monetary policy, let alone "screaming", and on a rooftop!

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