Must-Read: Martin Wolf: Lunch with the FT: Ben Bernanke

Must-Read: Martin Wolf: Lunch with the FT: Ben Bernanke: “‘The notion that the Fed has somehow enriched the rich…

…through increasing asset prices doesn’t really hold up…. 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….

‘Should the Fed not try to support a recovery?… If people are unhappy with the effects of low interest rates, they should pressure Congress… 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….’ 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…. ‘We were quite confident from the beginning there would be no inflation problem…. As for… the Andrew Mellon [US Treasury secretary] argument from the 1930s… 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….

Does… blame… lie in pre-crisis monetary policy… interest rates… too low… in the early 2000s?… ‘Serious studies that look at it don’t find that to be the case…. Shiller… has a lot of credibility…. The Fed had some complicity… in not constraining the bad mortgage lending… [and] the structural vulnerabilities in the funding markets….’ Thus, lax regulation…. Has the problem been fixed?… ‘It’s an ongoing project…. 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.’… 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 26, 2015


Brad DeLong
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