The Internet's Chief Bernanke Apologist Officer Speaks!
The internet's Chief Bernanke Apologist Officer? That's me. And I guess I have to speak because Paul Krugman is "agonizing" over the Ben Bernanke question.
Paul writes:
The Bernanke Conundrum: I’m agonizing — which isn’t a place I ever expected to be, and not just because Bernanke hired me at Princeton...
And he issues the first count in his bill of indictment:
[Bernanke] completely failed to see the trouble building as the housing bubble inflated — and no, it wasn’t one of those things nobody could have predicted, since a lot of reputable economists were warning almost frantically about the bubble. True, Bernanke’s failure to see what was right in front of his nose was shared by almost everyone at the Fed — but as I’ll explain in a moment, that’s actually part of the problem...
In rebuttal, let me say that my conversations with senior Federal Reserve officials in 2004-2006 appear to have been very different than those Paul Krugman had. The points made in my conversations by Federal Reserve officials were roughly as follows:
Of course we can't say "there's a bubble" or be reported as saying "there's a bubble." For a central banker to say "there's a bubble" is for a central banker to say "SELL! SELL!! SELL!!!" And financial markets where people have to worry that central bankers may suddenly say "SELL! SELL!! SELL!!!" are unlikely to function well. So we are off the record, right?...
Is there a bubble? There's certainly a lot of froth, and there are certainly neighborhoods and regions where it would be surprising if there weren't a correction...
But there are reasons why house prices should be elevated right now above long-term trend--the global savings glut, the filling-up of America and thus the end of free residential land at the Ricardian margin, and limited transport capacity coupled with higher expected future oil prices should all push housing prices up...
Of course, if there weren't a plausible story that "this time it's different," there wouldn't be even a chance of a bubble...
Remember that Greenspan was confident there was a tech bubble in 1996--and was wrong: there was no tech bubble until 1999. It was just a rational boom...
And remember that when the tech bubble did crash, we had the tools to keep it from becoming a macroeconomic disaster...
And remember that the tech bubble gave us a lot of business model experimentation and a lot of cheap fiber--it was a social boom, a much better use of the money than if the rich people who bet heavily on tech in the 1990s had spent their money on their fourth houses or had given it to Harvard...
More to the point: If there is a bubble, what do you want us to do? Raise interest rates to discourage mortgage borrowing and so boost unemployment? You don't want us to do that...
More to the point: If there is a bubble, what do you want us to do? Use our regulatory authority to block transactions--to tell people "we don't care that you want to lend and you want to borrow at these terms, you can't"? If we try to do that, Congress destroys us as an independent agency in less than a year...
If there is a real estate bubble, we are ready to deal with the consequences of a crash to keep it from becoming a macroeconomic disaster...
All these points--except for the last--seem to me to be serious arguments, even with hindsight. I believe that the Fed should have followed the Gramlich rather than the Greenspan line and done much more on the regulatory side. But I cannot accept Paul Krugman's particular in his bill of indictment that the Federal Reserve was clueless.
Paul moves on:
The second [particular in the bill of indictment] is that since the acute phase of the crisis came to an end, and especially since his renomination, Bernanke has seemed out of touch with the severe problems that remain. He hasn’t engaged in any self-criticism.... He hasn’t been a strong voice for financial reform.... [H]e has seemed deeply worried about defending himself against the inflation hawks, not at all concerned with the question of whether the Fed is doing all it should to fight catastrophically high unemployment. (It isn’t).... Bernanke... to a greater degree than I had hoped, he has been assimilated by the banking Borg.... Bernanke, alas, has become too much of a respectable central banker...
In rebuttl, this seems to me to probably misread who and what Bernanke is right now. He is no longer the academic intellectual who advocates inflation targetting. He is, instead, the voice for the consensus of th 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.
So I am much more interested in moving the FOMC consensus in a constructive direction--in getting two extremely articulate and thoughtful sensible macroeconomists added to the FOMC via recess appointments by Obama to fill the vacant Fed governorships as soon as possible--than in demanding that Bernanke's public statements deviate from the FOMC 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.
Excuse me:
OBAMA!! GET ALAN BLINDER AND DAVID ROMER ON THE FED BOARD NOW!!!!
There.
Now I'm back.
Last July, when Bernanke's reappointment was discussed, my view was a very, very tepid judgment that it was slightly more likely than not to be a mistake. There were six considerations:
Bernanke's personal policy views were (probably) completely sound.
He would (everybody thought) readily be reconfirmed.
He was the Fed Chair likely to have the biggest influence moving the FOMC consensus toward sounder policies.
Reappointing Bernanke would reassure markets, lower interest rates, and help recovery by sustaining the flow-of-funds through financial markets because he represented continuity that would calm markets:
The continuity of reappointing Bernanke would depress recovery by eliminating expectations of additional major stimulative policy shifts.
Reappointing Bernanke would mean that Obama was taking complete ownership of the state of the economy--you cannot say "The economy is in bad shape because of the failed policies of the past carried out by people who I have no chosen to be my Treasury Secretary and my Federal Reserve Chair."
It seemed to me that it was more likely than not that (5) and (6) slightly outweighed (1) through (4)--but that I was not an expert on the politics, and thus on the size of (6).
Now, however, (6) is a sunk cost. Obama owns the state of the economy. And it seems to me that (1) through (4) on the positive side clearly outweigh (5).
As Paul Krugman writes:
Ben Bernanke is a great economist, whose work on monetary economics has been a crucial guide to action in this crisis, and he applied his academic insights forcefully in 2008 and early 2009, helping pull the world back from the brink.
