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October 26, 2005
Serious misunderstandings of Bernanke continue
It's going to seem like a broken record pretty soon. When Brad DeLong sees things like this, he says, "Why, oh why...?" But it just doesn't stop. Enter James Grant with a NY Times op-ed.
But there is one rub. The man with the gray beard and the perfect résumé - winner of the South Carolina state spelling bee, Ph.D. from the Massachusetts Institute of Technology, former chairman of the Princeton economics department - professes to believe the impossible. He insists that the Fed can keep the economy chugging and prices stable just by pushing a single interest rate (the so-called federal funds rate) up and down.
...
Wall Street, of course, has other ideas. Thus the rally in stock prices following word of Mr. Bernanke's nomination was no vote of confidence that the presumptive chairman would settle on the right, or true, federal funds rate. It was, rather, an expression of hope that he would do his all to ensure a speculatively appropriate (meaning very, very low) rate.
Balderdash. Absolute nonsense. But he goes on...
Perhaps. But Mr. Bernanke's history shows he is not so much a believer in easy money as in the capacity of the Fed to take the right anticipatory action. Is the rate of inflation too high? Not high enough? With a twist of the monetary-policy dial, the problem is on its way to being solved. Let the Fed announce its target for inflation - say, 2 percent a year - and juggle its interest rate to cause that desired inflation rate to materialize. In so many words, the nominee contends, policymakers control events, rather than the other way around.
Here's a quote from one of Bernanke's speeches. You tell me if Mr. Grant is characterizing Bernanke's position accurately.
The person in the street might tell you that the Fed "controls interest rates." That statement is not literally accurate. In fact, the Fed has little or no direct influence over the interest rates that matter most for the economy, such as mortgage rates, corporate bond rates, or the rates on Treasury securities. Instead, the Fed affects these key rates, as well as the prices of financial assets such as stocks, only indirectly.
For a speech to an audience of nonspecialists, that's pretty clear. There are nuances, of course. And the fact that Bernanke's research focuses so heavily on the transmission mechanism is in a way an admission that there is a lot we don't know about the indirect part. That's hardly a characteristic of someone who thinks we can simply "twist the monetary policy dial" and solve the problem.
Posted by William Polley at October 26, 2005 1:16 AM
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Comments
Thanks for rebutting this. I started to and all I could get out was "I don't even know where to start," and I didn't, just about every line was irksome. I think "absolute nonsense" says it far more diplomatically than what I decided not to write...
Posted by: Mark Thoma at October 26, 2005 2:35 AM
If the job of central bankers is to fox the investing and spending public, why would his speech reveal anything about his thoughts?
Posted by: dearieme at October 27, 2005 9:03 PM