Scott Sumner  

Bernanke's memoir: First impressions

Meer vs. Galbraith on the $15 ... Where Superforecasters Start...

Seminars at the University of Chicago were pretty intense. I recall times when the speaker was barely one sentence into his presentation, and was already being challenged by pointed questions. I hate to be "that guy", but . . .

I've been reading Bernanke's memoir, and am up to page 145. So far I love the book---it's great. I agree with the vast majority of what I've been reading, although I have a few quibbles here or there. But today's review is going to focus on the first page or two, indeed the first sentence or two. And that's where I want to stick my hand up in the air like an impatient middle school student. The book begins with a one page "Author's Note", which explains the title. Here is the first sentence:

In all crises, there are those who act and those who fear to act.
But the narrative actually begins with a prologue on the next page. Here is the first sentence:
It was 8:00 p.m. Tuesday, September 16, 2008. I was exhausted, mentally and emotionally drained, but I could not sit.
I thought to myself, "Wait, September 16, 2008, is when the Fed showed a catastrophic passivity, a refusal to do anything to stimulate the economy. They focused on bailouts. By being passive, monetary policy became dramatically tighter. This is a horrible example to use as a lead-in to a book entitled 'The Courage to Act'."

Here is a passage from the next page:

Reacting to the Lehman failure, markets already were in the grip of a full-blown panic of an intensity not seen since the Depression. The Dow Jones industrial average had plunged 504 points on Monday---its steepest one-day point decline since September 17, 2001---the first day of trading after the September 11 terrorist attacks, and the selling wave had spread to markets worldwide.

I find it ironic that Bernanke's book starts right off discussing September 16, 2008, the exact day I went from being an apathetic Bentley College professor to a fanatical market monetarist. The economy had been in recession for 9 months, and the recession was now getting dramatically worse. I was absolutely stunned by the Fed's refusal to cut its fed funds target that day, leaving it at 2%. They cited a fear of high inflation, whereas the markets were very clearly signaling the exact opposite. Why was the Fed ignoring all this really scary market information? I couldn't understand the decision. It was the helpless feeling you have watching a car accident develop in front of your eyes, unable to do anything.

After my previous post ThomasH left the following comment:

In a call-in program I heard Bernanke say that the Fed should have lowered interest rates to zero in September rather than December 2007.
(I presume that's a typo, Thomas meant 2008.) I would be very grateful if someone could find a transcript of this interview.

Market monetarists claim that our policies would produce wiser decisions than the current policy regime. The current year is a good example. I've argued that markets are signaling that it's too early to raise rates. The Fed intended to do so, but has now backed off. Maybe they need to pay more attention to markets. If Bernanke does now admit that the Fed should have been far more aggressive in September 2008, that provides an important piece of evidence in support of our claim to have a superior method of setting monetary policy.

PS. About the meeting---read it and weep.

Comments and Sharing

COMMENTS (11 to date)
TravisV writes:

Kevin Erdmann created an excellent graph showing the reaction of major markets to various events in September 2008 and October 2008:

Kevin Erdmann writes:

The transcripts are even worse. William Dudley was the head of open market operations, and told the committee this at that meeting:

So I think the consensus view still in the marketplace is that the Fed probably will not cut rates today. That would be a disappointment to a degree because there’s some probability placed on the idea that the Fed might do 50, but that’s how I would interpret what’s priced into the markets today....

....I think on Friday the mood was basically that the funds rate was going to be flat for a long time. Probabilities placed on either easing or tightening were quite low, and since then the probability of easing has gone up fairly significantly. But I think it’s hard to interpret because it’s really not about 25 versus zero. It’s really about zero versus 50 or maybe even 100 as you look out longer term. Either the financial system is going to implode in a major way, which will lead to a significant further easing, or it is not.

Now he is the president of the New York fed, and recently said this:

With the benefit of hindsight, it seems that either monetary policy should have been tightened more aggressively or macroprudential measures should have been implemented in order to tighten credit conditions in the overheated housing sector.
Second, during the financial crisis, especially during the fall of 2008, financial market conditions tightened dramatically even as the FOMC was cutting its federal funds rate target to zero.  Monetary accommodation turned out to be insufficient to produce an easing of financial market conditions, and the economy fell into a deep recession.

Sprinkle on a little historical revisionism and, voila, the lesson is that we should have tightened more, and earlier.

marcus nunes writes:

Bernanke says it in the book: "In retrospect, the decision not to cut the federal funds rate from 2% in September 2008, immediately after the collapse of Lehman Brothers, was “certainly a mistake”, he writes."

TravisV writes:

Two posts where Prof. Sumner described Bernanke's misinterpretation of the Great Depression.

Bernanke's views, like Milton Friedman's, were too "credit-centric."

Jean writes:

What I can't understand is why the Fed authorized the swap lines to the European banks and failed to see the US was in a liquidity crisis. That 'strengthening dollar' was a clear warning that the european banks were abandoning the euro in favor of the dollar, and yet the Fed didn't act? That is the most important question that needs to be asked - what the hell were you people thinking?

bill writes:

With revised data, we now know that we lost 259,000 jobs in August alone. We should have had lower rates at each turn in 2008. So I think Bernanke is still wrong because the Fed Funds rate should have been zero by July or even March. On top of that, all the experts during 2007 were still saying the foreclosure crisis would start once rates ROSE. They never rose; they fell (just not fast enough). The "economy" (ie, the path of NGDP) drove the financial markets and housing into a ditch, not the other way around. And it's the Fed that steers NGDP.

bill writes:

The Fed also instituted IOR to be sure the banks would hold onto all the new cash. Baffling.
Why not print up a quadrillion dollars and store it in the Grand Canyon... and then be surprised that it had little impact on the economy.

B Cole writes:

Print more money. True in 2008 and true now.

Yes, most people have to diet to stay trim. But then, we also have anorexics...the US monetary diet ...

Scott Sumner writes:

Everyone, Excellent comments---and thanks for all that information.

Marcus, I have to read faster!

ThomasH writes:


The link to the transcript is here:

The question and reply was at 11:27:57

Scott Sumner writes:

Thanks Thomas!

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