Must-Read: Martin Wolf: Lunch with Ben Bernanke

Martin Wolf: Lunch with the FT: Ben Bernanke: “Critics complain that the Fed… let ordinary people drown…

…How does he respond? ‘Rising inequality… is a long-term trend that goes back at least to the 1970s. And the notion that the Fed has somehow enriched the rich through increasing asset prices doesn’t really hold up… [because] the Fed basically has returned asset prices… to trend… [and] stock prices are high… because returns are low…. The same people who criticise the Fed for helping the rich also criticise the Fed for hurting savers…. Those two… are inconsistent. But what’s the alternative? Should the Fed not try to support a recovery?… If people are unhappy with the effects of low interest rates, they should pressure Congress to do more on the fiscal side, and so have a less unbalanced monetary-fiscal policy mix. This is the fourth or fifth argument against quantitative easing after all the other ones have been proven to be wrong. And this is certainly not an argument for the Fed to do nothing and let unemployment stay at 10 per cent.’

Other critics argue, I note, that the Fed’s intervention prevented the cathartic effects of a proper depression. He… respond[s]… that I have a remarkable ability to keep a straight face while recounting… crazy opinions. I add that many critics still expect hyperinflation any day now. ‘Well, we were quite confident from the beginning there would be no inflation problem. And, of course, the greater problem has been getting inflation up to target. As for allowing the economy to go into collapse, this is the Andrew Mellon [US Treasury secretary] argument from the 1930s. And I would think that, certainly among mainstream economists, it has no credibility. A Great Depression is not going to promote innovation, growth and prosperity.’ I cannot disagree, since I also consider such arguments mad….

Neither he nor the Fed expected the meltdown. Does the blame for these mistakes lie in pre-crisis monetary policy?… Had interest rates not been kept too low for too long in the early 2000s?… ‘[Was] monetary policy… in fact, a major contributor to the housing bubble[?]…. Serious studies that look at it don’t find that to be the case…. Shiller… who has a lot of credibility… says that: it wasn’t monetary policy at all…. The Fed had some complicity… in not constraining the bad mortgage lending and excessive risk-taking that was permeating the system. This, together with the structural vulnerabilities in the funding markets….’ Thus, lax regulation was to blame. Has the problem been fixed? ‘I think it’s an ongoing project,’ he replies. ‘You can’t hope to identify all the vulnerabilities in advance. And so anything you can do to make the system more resilient is going to be helpful.’…

Some argue that the financial sector is riddled with perverse incentives: limited liability; excessive leverage; ‘too-big-to-fail’ banks; and a range of explicit and implicit guarantees. How far does he agree? ‘I think that there was, for rational or irrational reasons, an upsurge in risk-taking. And if you’re taking risks, then I have to take the same risks, or else I get left behind. There’s two ways to get rid of ‘too-big-to-fail’. One is by having a lot of capital. And the other approach is via the liquidation authority in… Dodd-Frank….’ But, he adds, ‘if you break the firms down to the size of community banks, you lose a lot of functionality. At the same time, you don’t necessarily stop financial panics, because we had financial panics in the 1930s.’… I push a little harder on the costs of financial liberalisation. He agrees that, in light of the economic performance in the 1950s and 1960s, ‘I don’t think you could rule out the possibility that a more repressed financial system would give you a better trade-off of safety and dynamism.’

What about the idea that if the central banks are going to expand their balance sheets so much, it would be more effective just to hand the money directly over to the people rather than operate via asset markets?… A combination of tax cuts and quantitative easing is very close to being the same thing.’ This is theoretically correct, provided the QE is deemed permanent…

October 23, 2015


Brad DeLong
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