Relevant and even prescient commentary on news, politics and the economy.

The End of an Era: Ben Bernanke Passes the Torch

Angry Bear will be posting writing by writers less well known and will usually be twenty and thirty years old as well.  Here is another one:

by David Parkman

The End of an Era: Ben Bernanke Passes the Torch

After an eight-year term, Ben Bernanke arrives at Brookings Institution for his first day of work and Janet Yellen was sworn in as the first woman to chair the Federal Reserve on Monday February 3, 2014. Succeeding a term of great upheaval, Yellen has the four decade background in monetary and economic affairs to take the reins, but is unlikely to make a repeat performance of Bernanke. However, his work to stimulate the economy and lower interest rates will most likely continue under her authority. Always a staunch ally of Bernanke, it remains to be seen how she will apply her unique skills and ideas for Americas Central Bank.

Bernanke’s legacy:

Ben Bernanke is leaving a legacy of unprecedented actions; he was the first chairman to use emergency lending powers to rescue businesses since the Great Depression. He devised a monetary policy that curbed longer-term interest rates by lowering credit costs after the short-term policy rate bottomed out. His goal to declare an inflation target was met in 2012 at 2% and he made the Federal Open Market Committee meetings more of an open floor forum encouraging a sharing of ideas and policy views.

Tags: , Comments (0) | |

About That, er, Monetary Expansion…

Brad DeLong has a spat with Scott Sumner:

The IS-LM model led economic historians to argue money was easy in 1929-30, because rates fell sharply. It led modern Keynesians to assume that money was easy in 2008, because rates fell sharply…

Well, I would say that not just “modern Keynesians” but a lot of people believed that monetary policy was expansionary in 2008.

They believed so not just because (safe) nominal (and real) interest rates were falling, but because the money supply was expanding. Indeed, since 2007 the Federal Reserve has tripled the monetary base

But there remains a reason I suggest that cutting off Tim Geithner’s (and/or Ben Bernanke’s) private parts, stuffing them into his mouth, and perp-walking him publicly down Dewy Square* would be a good re-election move for the Obama Administration, and it comes back to basic economics. Specifically, Brad DeLong’s favorite monetary equation


Now, most of the time, we derive V—Velocity. We kinda sorta hafta. The velocity of money is not something that you really observe directly; to solve the equation for V(i), we have to know Y, P, and M.

But then we’re making assumptions about them. Two of them are probably reasonable:

Y = GDP (or GNP if you add in XM, but let’s not). We shorthand this as “aggregate output.” Even if we weren’t pretending it’s constant in the short-term, we can fairly well define this and hold to the definition. GDP=GDP, as it were.

P = Price Level. This is slightly more difficult conceptually, because we aren’t going to include everything. But if we assume (short-term) that the “market basket” is constant (or at least fungible**), we can come up with a representative index level and just treat this as “inflation.”

The third, however, is more problematic:

M is the Base Money Supply, which is circulating.

Recall that V = Velocity, or, the number of times in a year that a dollar is spent, a definition that led to Keynes’s observation that V isn’t so much a constant (pace Fisher) as dependent on interest rates—V(i). This doesn’t (or, more accurately, shouldn’t) change much in the short-term, even at the zero-bound.

But “velocity” assumes money is circulating, which why it is multiplied by the Monetary Base from the start. If the monetary base has all the mobility of an overBotoxed actor’s face, we’re going to have a problem. I would call the following graphic “Where’s the Real Increase in the Monetary Base?”

The above graphic is Ben Bernanke’s fault. And even Brad DeLong knows this. The proof below the fold.

Or, at least, he strongly suggests he does, citing WSJ columnist David Wessel:

The Fed is not out of ammo, the economists at the Bank Credit Analyst insist…

The three:

Target a higher inflation rate or pre-specified level for the consumer price index or nominal gross domestic product. Problem: “could undermine the Fed’s long-standing commitment to price stability.”

Stimulate bank lending by putting a tax on excess reserves, hoping that banks will the lend out the money if the have to pay borrowers to take the loans. Problem: “could lead to the collapse of money market funds and the disintermediation of the financial system.”

Buy corporate debt, equities, real estate or foreign currency. Problem: Could require an act of Congress. “Given that the U.S. economy remains stuck in a liquidity trap,” Berezin concludes, “fiscal policy would be the most straightforward way to stimulate….However, the likelihood that the U.S. will receive major fiscal stimulus anytime soon is close to zero.”

I’m not sanguine about the latter. Even absent economic issues (which are minimal in the current environment), the political ones are problematic.*** That it makes more sense than telling people to put their money into a 401(k) that consists 90% of company stock is a low bar to jump. On the other hand, buying Yuan until it has to appreciate is worth exploring.

The first has been getting traction for years. And I admit I can’t decide who was stupider: the people who set a 2% target on no evidence (sorry, David, I held to this even after reading your cites) or the people who decided a “2% target” meant “<=." It now has enough traction that it will get out of the avalanche about the time the snow melts. So that leaves the second one. Which brings us back to the Monetary Equation problem. Recall that the definition of Velocity is "the number of times in a year that a dollar is spent." I buy something at the Dollar Store, they use that dollar to buy more products and pay employees, the suppliers and employees buy more supplies and other products, respectively, etc.**** So Brad DeLong ("I see no risks in attempting any of these three--and great risks in continuing to dither") agrees with Peter Berezin of Bank Credit Analyst (and me) that we don't want banks holding Excess Reserves as a matter of monetary policy at the zero bound. Fundamental principle of economics: you want to tax things you wish to discourage. You want to subsidize things you wish to encourage. As the Rabbi once said, "All else is commentary." So what did the Federal Reserve do in the face of a desperate attempt from the Fed to stimulate the Base Money Supply?

The Financial Services Regulatory Relief Act of 2006 originally authorized the Federal Reserve to begin paying interest on balances held by or on behalf of depository institutions beginning October 1, 2011. The recently enacted Emergency Economic Stabilization Act of 2008 accelerated the effective date to October 1, 2008.

Employing the accelerated authority, the Board has approved a rule to amend its Regulation D (Reserve Requirements of Depository Institutions) to direct the Federal Reserve Banks to pay interest on required reserve balances (that is, balances held to satisfy depository institutions’ reserve requirements) and on excess balances (balances held in excess of required reserve balances and clearing balances).

this lead to something that will surprise no economist of any caliber, let alone a Professor at Princeton:

By the time of the stimulus, roughly that amount had been taken out of circulation as the change in Excess Reserves. Even if every cent had been well-allocated, it was already out of circulation.

Ben Bernanke giveth, but Ben Bernanke taketh away even more, in spades.

What Monetary Stimulus?

*Again, I don’t encourage this action. But if you think I can’t create or find a suggestion for each of the Occupy locations, you haven’t read and seen enough Jacobean drama.

**Whether we replace my wife’s three-year old mobile with either a “free” Droid or a “free” iPhone 3GS probably doesn’t have a significant effect. Economists pretend that the “steak-chicken” model is similar.

***Short version: You think the tempest-in-a-teapot that is Solyndra is getting discussion? Try that times ten when three or four REITs and a few companies go under. (Amazingly, those who complain about the “low” return on Government securities also loudly complain when the Government invests in non-risk-free securities.)

****It is left as a side-note that increasing the Velocity of Money is yet another way to reduce tax rates, all else equal. It is also left as a side-note that people who talk about “double taxation” of (voluntarily disbursed) dividends are economic ignoramuses, and that there are many economists who talk in that manner in no way invalidates the first half of this sentence.

Tags: , , , , , Comments (3) | |

No One Else Is Happy with BarryO and Some Random Notes

Economists for Obama suddenly showed up in my RSS reader again. It’s not a pretty sight:

I suppose I might change my mind, but after watching the President give in to the Boehner-McConnell blackmail axis, I don’t imagine I’ll be spending much of my time advocating his re-election. Assuming he’s the Democratic nominee, which I do, I’ll vote for Obama, because the alternative will still–somehow–be worse. But I really can’t see how, in good conscience, I could defend the economic policies of a guy who has signed on to fiscal contraction in the midst of a major downturn. And that’s leaving aside the President’s apparent lack of understanding of the importance of bargaining from strength. So much for all that poker expertise he’s supposed to have.

What a shame.

See also The Rude Pundit, who is gracious:

I got into this relationship without any illusions about who you were. I never listened when others told me that you were perfect. I never listened when some told me you weren’t worth my time. I got together with you because I believed in us. You and me. Somewhere along the way, you stopped caring. Somewhere along the line, you started believing in others more than you believed in me.

I loved you as a smart, principled man. I worked at this relationship. Even when we fought, I still sought out the good in you. Now, finally, after watching you have affair after affair, saying each time that it was just a one-time thing, I have to allow myself to feel bitter and angry and more than a little foolish. And I have to do that by myself.

I’m sure many of my friends will be upset. “What are you going to do now?” they’ll say. “You’re not going to date Mitt or Michele, are you?” What that implies is that I should settle, that I should compromise myself and my dreams just to keep us together. No one deserves that kind of power. And they never considered a third option between staying with you and being with someone else. They never considered that I could just be alone.

So this is a separation, and I’m sure you’ll be dating again quickly. But I need a break. I need to remember why I loved you. I need to miss you. I need to see if I miss you. Sure, sure, you’ll say, I’m being a drama queen, that nothing has changed, that I don’t live in the real world, that everything you’ve done has been for me, that I just don’t understand what it’s like to live with the pressure that you have. No, but I have to live with the results of what you do. And after you’re done, in 2013 or 2017, you’ll still be a rich moderate conservative and I’ll still be a middle-class liberal trying his best to clean up all the messes.

I’m gonna pack up my stuff and head out now. I wish you well, truly, for everyone’s sake. But I think if there’s anything you can take away from this, it’s simple:

It’s not me. It’s you.

When even Larry Summers gives up on you, it’s time to pack your bags. Which is undoubtedly what several of the more politically-aware appointees started doing around twenty-four hours ago, making getting anything done all the more improbable.

Three notes:

  1. It’s not a repeat of 1937. It’s closer to 1882. Economists who know their history, speak up.
  2. Quick compilation of expected drag from the “deficit agreement”:
    1. J.P. Morgan: “we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012”
    2. Tim Duy’s “simple model”: “0.6 and 0.7 percent, respectively, for the final two quarters of [2011],” and getting worse in 2012.
    3. Macroadvisers (h/t Brad DeLong): “a modest 0.1 percentage point of GDP growth in FY 2012,” with the damage to be done by the Gang of 12 “No Revenooers” to cause death and destruction as Obama prepares to leave for Bachmann-Perry Overdrive (the MA graphic shows about 1/8th of 1%).
    4. Ryan Avent (on his Twitter feed yesterday): “Assuming no extension of the payroll tax cut or UI benefits, the US is looking at a 2% of GDP effective fiscal tightening over the next year.” (NOTE: Later details appear to be that this is basically 2.6% decline from tightening, 0.5% cyclical gain, netting to around 2%. Reference also made to JPMC survey above.)


    I can’t speak for anyone else, but I know which is the outlier in that set.

    And, finally:

  3. Dear Greg Mankiw (h/t Mark Thoma):

    If you claim the Federal Reserve Board is an independent entity, why do you argue that “a higher inflation target is a political nonstarter” (even while conceding that “economists have argued, with some logic, that the employment picture would be brighter if the Fed raised its target for inflation above 2 percent”)?

Tags: , , , , , , Comments (56) | |

Bernanke Part 2 of 2: Leaders Lead, or Just Say No

The world would be a much better place if people had listened to Tom last August:

Now some elite opinion favors Ben Bernanke’s reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late. [links in original]

Not a strong enough source for you? How about the Internet’s Chief Bernanke Apologist? Brad DeLong last August:

I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn’t stop the recession would together make him damaged and that Obama would want to bring in a fresh face–never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks.

Tom also dealt with that:

To which the obvious response is, duh, who says it has to be one or the other? A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence. (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it’s ultimately the greedy and incompetent who are marshalling it.) However, considering Team Obama’s political tone-deafness, it’ll be a pleasant but major surprise if they let Bernanke go back to Princeton for some R&R.

And DeLong himself (today) moves the goalpostsnotes where the problem is centered:

[Bernanke] is no longer the academic intellectual who advocates inflation targetting. He is, instead, the voice for the consensus of the Federal Open Market Committee–and a member of that committee who can, by his own internal arguments, move that consensus at the margin. So he is going to reflect that consensus….[A] Fed chair who doesn’t reflect the consensus in public has less power to move the consensus in private. From my perspective, I don’t think that there’s anything wrong with Ben Bernanke’s (private, intellectual, academic) analysis of the current situation. What is wrong is that the FOMC consensus is wrong—and Bernanke’s public statements reflect that wrong consensus. So here I tend to blame Obama more than I blame Bernanke for the recent character of Bernanke’s public statements–for the fact that Fed policy and rhetoric right now is not more Gagnonesque, because Obama could have done things over the past year to move the FOMC consensus that he has not done. [emphases mine]

This is a true statement—but it is no less true now than it was in August, and Ben Bernanke has been the ostensible leader of the FRB since then—and, indeed, since 2.5 years before then, as the crisis was unfolding.

In the past four years, Bernanke has “led” the Federal Reserve. And even those who are not sympathetic to Steve Keen’s interpretation of Bernanke’s flaws (h/t Yves and Naked Capitalism, who printed it themselves as well) would have to agree that the sounds coming from the Fishers* and Hoenigs, not to mention Bernanke himself, are more reminiscent of Morgenthau than Volcker.

Which should have been the death knell for his renomination. To turn Brad DeLong’s statement on its side: Ben Bernanke has been unable to lead and change the consensus of the Federal Reserve Board, even marginally, to be more in line with what Ben Bernanke, the skilled economist, knows would be a better policy.

Leaders lead. Ben Bernanke hasn’t and doesn’t.* For that alone, he should be replaced, and Janet Yellen nominated to replace him.

*This one was reprinted, without several of the cronyism acknowledgements, in the WSJ comics section today. I prefer the original.

**The similarity to the Canadian Liberal Party’s selection of Celine Stephane Dion as their leader should not be overlooked. That they had the good sense to replace him after one term is a sign of sanity the Obama Administration would have been wise to consider. (That they compounded the mistake by replacing him with a pro-torture American conservative is a mistake from which one would expect the Obama Administration could and presumably will learn.)

Tags: , , , , Comments (18) | |

Bernanke Interlude

Via David Wessel’s Twitter feed, the WSJ publishes a letter:

Ben Bernanke is a good person, a fine academic and a well-respected professor. But those traits have no bearing on whether he should be reconfirmed as Federal Reserve chairman….

Applying accountability principles, there’s no way Chairman Bernanke should be reconfirmed by the Senate, let alone reappointed by the Obama administration….He’s been at the helm from the very beginning of this Great Recession. That alone warrants a “no” vote on reconfirmation.

At this point, I feel obligated to note that if you’re going to declare this The Great Recession—i.e., if you are assuming the chance of having the third Depression is over*—then Bernanke deserves credit, not blame. (Even those of us who do not assume we’re out of the woods admit we aren’t quite sunk yet, though 17.3% unemployment is problematic at best.)

In addition, the Fed’s behavior over the past 15 months has put America on a very dangerous path. The Fed has increased the monetary base (high-powered or wholesale money) by the largest amount ever, from colonial times to the present, times 10. Without an exit strategy, inflation is a virtual certainty over the coming decade, while an effective exit strategy virtually assures a further weakening of the U.S. economy. [emphasis mine]

This is Gospel for the WSJ editorial page, and a logical confusion of the first order. Any “exit strategy” assumes that the conflict is primarily over, so any exit strategy would, by definition, not weaken—let alone “further weaken,” which suggests that the writer’s faith that “the Great Recession” is accurate is wavering—the economy. (We can, and will, discuss where All That Money Has Gone; suffice to say, it’s not exactly producing a Multiplier Effect.)

But the writer saves the best for last.

And lastly, on a more personal note, [Bernanke] doesn’t have the gravitas of a Paul Volcker, Alan Greenspan or William McChesney Martin. In this day and age of crisis management, gravitas is essential. Almost anyone would be better than Mr. Bernanke.

Well, at least Arthur Burns is conspicuously excluded. It’s nice to know that Arthur Laffer believes in gravitas, while his best-known disciple believes “deficits don’t matter.”

*Yes, I could 1873-77 as a Depression in the United States. Looking at the evidence, it would be difficult not to.

Tags: , , , , Comments (6) | |

Bernanke Apologist Watch

by Tom Bozzo

Shorter [1] Jim Hamilton (via [2] Brad DeLong):

Ben Bernanke’s record leaves nine links’ worth of things to be desired, but considering the zombie ex-Fed Chair alternatives (plus Brett Fav-Paul Volcker), he deserves to be confirmed for a second term.

I am almost not kidding. Here’s what Hamilton actually asks Bernanke’s critics:

I wonder which of [sic] previous Fed Chairs critics think would be better for the job than Bernanke. Surely you don’t think we’d have been better off bringing Alan Greenspan back? [touché] G. William Miller [deceased] fumbled badly with much simpler problems. Arthur Burns [also deceased] is a case study in how not to conduct monetary policy.

Would DeLong accept this sort of argument from a Berkeley undergrad seeking a decent grade? The question of far greater interest is why critics should have preferred Bernanke to prospective candidates who might have the combination of background and metabolic function to carry out the job — say, Janet Yellen or Alan Blinder — and might also do better than Bernanke in a pop quiz on the Fed’s dual mission.

Nor does Hamilton impress in reviewing the (admittedly odd) politics of Bernanke’s reappointment:

I shake my head when I look at the list of senators who say they’ll vote “no.” How could there possibly be an alternative whom Barbara Boxer (D-CA) and Jim DeMint (R-SC) would both prefer to Bernanke?

Obviously an alternative candidate need not be preferred by both Boxer and DeMint. An SDJ commenter rightly notes that DeMint’s opposition is in the nature of a political stunt, that is rejecting the rightmost potential nominee for Fed Chair to try to help along the development of the Obama political suicide machine. (They may not need the help.) As little as they act like it, the Democrats hold a sizeable majority of Senate seats, and a reasonable choice of a Democratic monetary policy technocrat ought to have little trouble lining up at least 59 votes. As for the sixtieth, I’d have liked to see the Republican Senate caucus hold ranks in preventing a Yellen nomination from receiving an up-or-down vote.

[1] ‘Shorter’ concept created by Daniel Davies and perfected by Elton Beard. We may not be aware of all Internet traditions™ but try to keep abreast of the popular ones.

[2] Econbrowser’s feed has a high-attention place in my feed reader, and it should be in yours; this piece, though, gets emphasis largely via DeLong’s apologist-in-chief blogging.

Tags: , Comments (3) | |

Not the Cheeriest Way to Start the Day: Bernanke Part 1 of 2

It’s bad enough to violate Brad DeLong’s first rule (which, I hasten to rationalize, was posted when DeLong himself was disagreeing).

It’s worse when the opposition to Krugman is coming from…the WSJ editorial page. (Or, as Barry Ritholtz correctly describes it, “the comics section.” Just less funny, and more likely to make the two-drink minimum unnecessary.)

This seems to be a direct violation of reality.

But compare the Krugman “endorsement”:

But — and here comes my defense of a Bernanke reappointment — any good alternative for the position would face a bruising fight in the Senate. And choosing a bad alternative would have truly dire consequences for the economy.

Furthermore, policy decisions at the Fed are made by committee vote. And while Mr. Bernanke seems insufficiently concerned about unemployment and too concerned about inflation, many of his colleagues are worse. Replacing him with someone less established, with less ability to sway the internal discussion, could end up strengthening the hands of the inflation hawks and doing even more damage to job creation.

with the WSJ:

No matter how it plays out, Ben Bernanke’s bruising confirmation battle has damaged the U.S. Federal Reserve’s clout and perceived independence.

Mr. Bernanke is more than the Fed’s chief decision maker. Fed officials see him as their brand, a smart, honest and stoic voice best able to defend decisions of the past two years to a skeptical Congress and public. Even if the Senate backs Mr. Bernanke this week, he won’t speak with the same authority, and the Fed will have a harder time casting itself as above partisan politics.

Fortunately for the Fed, the hard call about when to raise interest rates doesn’t need to be made now. Fortunately for Mr. Bernanke, his support inside the Obama administration, and even more so inside the Fed, is solid. But the longer the battle drags on, the more it could interfere with the Fed’s ability to communicate convincingly. And no matter what, the Fed will have less sway as Congress debates whether to rein in its powers.

Oh, wait. That’s a news article. The editorial page throws a few random facts:

Mr. Bernanke continues to deny any Fed monetary culpability for creating the mania. Shortly after the New Year, even with his nomination pending, Mr. Bernanke issued an apologia that was striking for its willingness to play to the Congressional theory of the meltdown by blaming bankers and lax regulators. [note: lax regulators includes the Fed itself.]

with semi-credible analysis:

Others argue that any alternative to Mr. Bernanke could be worse, and that is certainly a risk. Mr. Geithner and White House economic adviser Larry Summers couldn’t be confirmed, even in a Democratic Senate. In the short term if Mr. Bernanke is defeated, Vice Chairman Donald Kohn might run the Open Market Committee, and he shares Mr. Bernanke’s contempt for Fed critics. President Obama could also select San Francisco Fed President Janet Yellen, but she thinks the Fed should be even easier. [Oh, the evil of Ms. Yellen, who immediately replaces Laura D’Andrea Tyson as my pick to run the Fed.]

with sheer insanity:

We agree that the Fed needed to ease money precipitously when the financial markets suffered their heart attack in late 2008, and we praised Mr. Bernanke for that at the time and since. But the issue for the next four years is whether the Fed can extricate itself from its historic interventions before it creates a new round of boom and bust. We already see signs that it has waited too long to move.

Yes, because—along with more obvious indicators—Durable Goods orders have been down two months in a row. Anyone betting January will be up? I fear they have used “real” tea leaves to make their tea.

So the WSJ came to the right conclusion for all the wrong reasons, while Krugman comes to the wrong conclusion for the right reasons.

How did we get here? in the next post.

Tags: , , , Comments (23) | |

Those Low Rates

Via (what else?) Alea’s Twitter feed, John Taylor defends himself against Ben Bernanke:

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

It’s not actually that they’re not saying the same thing. Bernanke argued (and I agreed) that low rates did not cause the housing bubble. We have had low rates without producing housing bubbles before. (Other asset bubbles are another question.) Indeed, the last lasting housing bubble peaked just as the Federal Funds rate did:

More accurately (and also via ATF), Caroline Baum takes Bernanke to task for sleight-of-hand:

For example, Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule…suggested it should be following the 2001 recession. The Taylor Rule uses actual inflation versus target inflation and actual gross domestic product versus potential GDP to determine the appropriate level of the funds rate.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and — voila! — monetary policy looks far less accommodating, Bernanke said.

It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it.

Ouch. Is it a great day when the journalist is making more sense about the economist’s work than another economist is?

But more to the point, the argument that rates were kept unnaturally low from ca. 2002 through ca. 2005 depends very much on the idea that the Fed does not have two jobs. (Once again, h/t to Dean Baker.)

The other half below the break

As Baker notes at the link above, “the dual mandate [of the Fed] is full employment (defined as 4.0 percent unemployment) and price stability.”

Let’s be generous. I’ve plotted the Civilian Employment/Population Ratio and the Official Unemployment Rate below. The blue line at 4.5 applies only to the Unemployment Rate (red line). (I didn’t plot it at 4.0 because that would be cruel.)

So what we have is a situation where (1) the Employment/Population Ratio by the end of 2006 is barely back near the level it was at the end of the recession of 2001 and (2) it is only near the end of 2006 that the Official Unemployment Rates approaches the official target rate (which it hadn’t seen since before the 2001 recession).

It seems apparent that Taylor’s “Rule” (which considers inflation and GDP, but not employment per se) is not compatible with official Fed mandates. In such a context, Caroline Baum’s “gotcha” is more a case of her using inappropriate variables—and Bernanke substituting a more appropriate model, given the Fed’s mandates—than it is a case of Bernanke “retrofitting.”

No wonder John Taylor says we should worry about inflation; in his world, we never have to worry about unemployment, so long as there are enough bubbles to inflate GDP.

Tags: , , , , , , , Comments (4) | |

Bernanke: We Didn’t Do a Good job Regulating, so Let Us Regulate More

UPDATE: CR appears to agree with me, even as he raises another point:

Bernanke used data from other countries to suggest monetary policy was not a huge contributor to the bubble … however, Bernanke didn’t discuss if non-traditional mortgage products contributed to housing bubbles in other countries. This would seem like a key missing part of the speech.

I’m willing to believe that my interpretation of this speech is inaccurate, but here’s the evidence:

Some observers have assigned monetary policy a central role in the crisis. Specifically, they claim that excessively easy monetary policy by the Federal Reserve in the first half of the decade helped cause a bubble in house prices in the United States, a bubble whose inevitable collapse proved a major source of the financial and economic stresses of the past two years. Proponents of this view typically argue for a substantially greater role for monetary policy in preventing and controlling bubbles in the prices of housing and other assets. In contrast, others have taken the position that policy was appropriate for the macroeconomic conditions that prevailed, and that it was neither a principal cause of the housing bubble nor the right tool for controlling the increase in house prices. Obviously, in light of the economic damage inflicted by the collapses of two asset price bubbles over the past decade, a great deal more than historical accuracy rides on the resolution of this debate.

If I have to pick, I’ll take the latter group. Easy money alone doesn’t cause a crisis. So when he says:

Can accommodative monetary policies during this period reasonably account for the magnitude of the increase in house prices that we observed? If not, what does account for it?

The first answer is clearly “No.” And the second answer is important. Eventually, he answers it:

I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.

The Federal Reserve and other agencies did make efforts to address poor mortgage underwriting practices. In 2005, we worked with other banking regulators to develop guidance for banks on nontraditional mortgages, notably interest-only and option-ARM products. In March 2007, we issued interagency guidance on subprime lending, which was finalized in June. After a series of hearings that began in June 2006, we used authority granted us under the Truth in Lending Act to issue rules that apply to all high-cost mortgage lenders, not just banks. However, these efforts came too late or were insufficient to stop the decline in underwriting standards and effectively constrain the housing bubble. [emphases mine]

As Albert Brooks once noted, he “buried the lede.” Bernanke notes that the “nontraditional” products constituted around 1/3 of the market by 2003. (As many others have noted, those mortgages were not passed through/to FHA/Fannie/Freddie, either.) Two years later, guidelines were being developed.

An institution that did not attempt to regulate claiming that it should be given more regulatory power is an invitation to disaster. Or am I missing something?

Tags: , , , , Comments (4) | |

Not-So-Select Short Subjects

Now that I know we’re just members of the “Peanut Gallery,”* let this random links post work as a placeholder for longer posts as we prepare for the “holiday”:

Shorter Mark Thoma at Marketwatch: If you can’t build a better model, best to reappoint a man who doesn’t think he has to do half of his job. (UPDATE: Or even less than that. [h/t Linda Beale])

Shorter Mark Thoma at his own blog: All of our current models prefer people to starve and die.

A fun graphic (h/t Abnormal Returns)

Think the Health Insurance “Reform” Bill will “bend the cost curve”? Think again.

*That the “Periodic Table” pretends to be about Finance Bloggers and yet categorizes DeLong, Thoma, and Mankiw, to name three, as “Rocket Scien[tists]” instead of Economists should in no way be seen to impune the quality of the analysis, of course.

Tags: , , , , , , Comments (7) | |