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Friday, April 29, 2011

A Partial Defence of Ben Bernanke

Suddenly, I feel very lonely. Paul Krugman has ceased to defend Ben Bernanke. His partial defence of Bernanke is that Bernanke is lying because he is terrified of Ron Paul. I have the impression that everyone disagrees with me. Also I didn't watch Bernanke's press conference or read the transcript.

The problem is that Bernanke said four things. Unemployment is a terrible problem, inflation is not at all a problem, the Fed can cause higher inflation and lower unemployment, and the Fed should not do so. Which one here is not like the others ?

Krugman and Kash Mansouri agree that Bernanke is terrified of the inflationistas.

I have two slightly different theories. I'm afraid I am going to have to assume that Bernanke was lying (his statements are not logically consistent and he isn't an idiot to put it mildly). But I aim for a slightly more noble lie.

1) The false claim is on point three -- that the Fed can stimulate the economy. I'm not convinced that Bernanke believes that it is true. I'm not even sure that the Fed can stimulate the economy given current legal restrictions on its actions (I don't know the law but I'm sure that actual helicopter drops of money are not allowed).

Krugman's evidence is the following

He could have argued that he lacks the ability to do more, that he and his colleagues no longer have much traction over the economy. But he didn’t. On the contrary, he argued that the Fed’s recent policy of buying long-term bonds, generally referred to as “quantitative easing,” has been effective.

Yes you read that correctly. Krugman draws his inference from the fact that, in a press conference, a public official said that his recent policy had been effective. Oddly, Krugman and many others have recently tried to explain why that policy was disappointing. The claim that it worked fine was rejected without consideration. This is largely because there is no evidence that it worked at all.

But an unsupported claim that the Fed's performance has been good is accepted as sincere and, indeed, as proof that the Fed has the ability to do more.

What was Bernanke supposed to say ?

We have no idea what to do
We've tried and tried and have no clue
with no alternative we QE2ed
it didn't work, so now we're screwed

If his sole aim is to cause high expected inflation, he might rationally claim that the Fed can cause higher inflation any time it wants, and there are good reasons to chose higher inflation, but they won't for some incomprehensible politico-psychological neurosis. The hope that they will come to their senses (stranger things have happened) implies higher expected inflation than corresponds to the facts of the matter which is that they have tried everything they can think of and nothing worked.

Another noble lie. Bernanke is pretending that he is still a Republican (I'm not saying he left the party but the party sure left him). It may be that the Fed can do more (I think it can) but no possible monetary policy would make up for Treasury default or even a government shutdown. Bernanke's main useful role is to convince the Republicans in Congress to refrain from destroying the world economy.

This is close to the Kash Krugman story, but it isn't identical. I'd guess that Bernanke fears Ryan and Cantor and Pence not Paul.

I don't think QE3 would achieve much of anything, but even if I'm wrong, it just isn't important compared the the margin of hope that the last sane Republican has some influence on his party.


Anna Lee said...

Poor Robert. Don't feel lonely. Don't you know that the perception that something, anything is being done always moderates the perception that nothing is being achieved?

Robert said...

Dear Anna Lee

I am a blogger. I think this answers your question. I am very aware that the perception that I am doing someting moderates the perception that I am achieving nothing.

It helps if people read and comment. Thank you very much.