Sunday, February 21, 2010

Hoisted from the Comments: Commenter Ted

Ted said...

Bernanke deeply confuses me. Back in 1999 Ben Bernanke wrote a paper entitled "Japanese Monetary Policy: A Case of Self-Induced Paralysis?" where essentially he chided the Bank of Japan for incompetence. It's particularly interesting to see what Ben Bernanke recommended the BOJ do.

(i) He approvingly cites Krugman's 1999 article and calls on the BOJ to commit itself to 3-4% inflation "to be maintained for a number of years."

(ii) He argues that the most important policy that could be done would be rapid depreciation of the yen through large and substantial open-market sales of the yen.

(iii) Using large "money financed transfers", essentially what he calls a "helicopter drop of money on households." For example, he advocates that the government create a large tax cut and the BOJ then buy government securities equal to the tax cut.

(iv) And, if all else fails as a last resort get those open-market operations going and pump in some quantitative easing. He advocates substantial purchases of government and corporate bonds, asset-backed securities, and commercial paper. He even argued for indirect bank bailouts by removing non-performing loans off private banks balance sheets. He argues that Japan wouldn't need to do large quantitative easing if they enact the other three strategies, but he's fairly clear he would advocate more quantitative easing if they failed or were not as successful as desired.

The final section is the greatest irony of all:

"But Roosevelt's specific policy actions were, I think, less important than his willingness to be aggressive and to experiment - in short, to do whatever was necessary to get the country moving again."

"Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely going to work. Perhaps it's time for some Rooseveltian resolve in Japan."

The article is incredibly sad because if you didn't see the author you'd think this guy would make a decent Fed chairman.

But that author is our Fed chairman, is he seriously trying any of the four above? Is he showing Rooseveltian resolve and experimenting like crazy to get the economy going? Did he just become Fed chairman and say, "guess I can forget all that bullshit I pretended to believe in" ? I'm baffled, we are in our "Lost 2-Years" and he's not doing the very policies he advocated just a decade ago.

As I said, Bernanke deeply confuses me.

My thoughts are that Bernanke is a beta male, and there are more aggressive alpha-malish inflation hawks on the Fed, and they've been wearing the pants in that relationship for the past 14 months. That's why those two appointments the Administration isn't making to the Fed actually do matter. A lot.


  1. Number 4 was/is being done, it was TARP, PPIF, TALF, and the whole alphabet soup of Fed liquidity programs. The pushback on that shows the limits of Rooseveltian resolve: it's a lot harder when you don't have Rooseveltian popularity and dominance of the government.

  2. au contraire. The Fed's Balance sheet from 12/31/2008 to today has barely budged at all.

    You've been lied to.


  3. Yes, after increasing by 1.2 T in a few months. As James Hamilton put it, excess reserves currently exceeds the total amount of currency delivered by the Fed since its creation, and is 100 times what it was a few years ago. If the usual stories about how the money supply affects the economy were in effect, we should have seen something happen.

  4. two words: liquidity trap.

    It's time for a little Rooseveltian resolve.

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