Bernanke and the Symposium

I didn't think that in his speech at the Jackson Hole Symposium Bernanke would drop any hints about more aggressive monetary policy actions to come, and in that sense he did not disappoint. I am nonetheless awestruck that with the unemployment rate stuck above 9 percent for two years now, GDP at a standstill, financial markets in panic, and evidence of renewed contraction in manufacturing and housing, the Federal Reserve seems content to sit on its hands. People, if you believe that further monetary policy action would be ineffective, tell us so and maybe also tell us what nonmonetary policies might be helpful. If you believe that a more expansionary monetary policy would help spur the economy, and nevertheless do not plan on undertaking such policy, then tell us what freakin' objective function your policy is designed to maximize. What does the weight on the inflation parameter have to be to justify doing nothing when the unemployment rate is 9 percent and inflation is 2.5 percent? Is that weight consistent with the preferences of the typical American?



The program for the Symposium is similarly disheartening. Papers on long-run growth in emerging markets, managing natural resources, and so on. Nothing on the sputtering economy. Didn't someone think to organize the conference around questions like "what's next for monetary policy" or "can we have growth and fiscal contraction at the same time" or "the dangers of excessive sovereign debt" or "can Europe survive"? I get the sense that they're all just too exhausted from their efforts at putting out the fires of the last four years and have decided to pretend that the flames that are consuming the world economy just don't exist.

Better than nothing

Nothing is what Ben Bernanke is offering in terms of additional stimulus from the Federal Reserve. Joe Gagnon suggests three things the Fed could do:

- Lower the interest rate the Fed pays banks on reserves from 0.25 percent to zero
- Purchase three year Treasury securities in sufficient quantity to achieve a target rate of 0.25 percent (versus 0.90 percent now)
- Establish a facility to allow banks to borrow for terms up to 24 months at an interest rate of 0.25 percent

He claims that

These measures are all within the Federal Reserve's established powers. They pose essentially no risk to the Fed's balance sheet. They would reduce unemployment roughly as much as a 2-year $600 billion fiscal package and yet they would actually reduce the federal budget deficit. And they can be reversed quickly should the balance of risks shift from deflation to inflation.

I'd be interested to know where he got the $600 billion figure - it seems wildly optimistic. Nevertheless, if the Fed did those things it would be better than nothing. I'd add that the Fed could begin charging banks for holding reserves (does anything in the legislation authorizing the Fed to pay interest on reserves require that that interest rate be positive?) as a way of encouraging banks to lend rather than hold idle reserves.

But even so, I think the Fed's ability to influence the economy is very constrained at this point. The Fed's quantitative easing has brought long-term interest rates to historically low levels. Specific intervention in the mortgage and commercial paper markets has brought spreads in those markets down dramatically. Corporate bond spreads are also at normal recession (not normal recovery) levels, but unless the Fed starts buying up corporate bonds in massive quantities there's not much it can do there.

The biggest obstacles to strong recovery now are consumer spending, the housing sector, lack of availability of credit for small businesses, state and local government finances, and employment. This is the job for fiscal policy, not monetary policy.

First press conference

Ben Bernanke's press conference is repeatedly being described as the first press conference by a Federal Reserve Chairman in the 98-year history of the Federal Reserve. Yet I have before me the "Transcript of Press Conference with Paul A. Volcker, Chairman" on October 6, 1979. This was right after the historic meeting where the Fed changed its operating procedures to nonborrowed reserve targeting (I know, you want to know more - look it up). Is there some sense in which Bernanke's press conference is different in kind from Volcker's?

Circular firing squad department

So now Russ Feingold and Barbara Boxer have announced that they will not support Ben Bernanke's reappointment as chair of the Federal Reserve, putting his reappointment in jeopardy. No good can come out of this, none at all.

Bernanke screwed up during the bubble years but has since then performed heroically. He has ticked people off by being coy about the Fed's future stimulus efforts - maybe the Fed will keep rates low as the economy recovers, maybe it'll start raising rates this year when the economy heats up. The possibility that the Fed would tighten significantly before we get a meaningful recovery is a real concern. And maybe Bernanke has been too cozy with banks.

But Bernanke is not the problem here, it's the Fed as an institution and the hypersensitivity of financial markets to every utterance that comes from the Fed. Any plausible candidate for the job will be equally reticent about keeping the spigots open while the economy recovers. You simply cannot be taken seriously at the Fed or in the financial markets if you take a relaxed attitude toward inflation.

What are the upsides and downsides of appointment someone else to take Bernanke's place? On the upside, you might get a guy who is marginally more willing to keep interest rates low than Bernanke. Maybe he (more likely she - Sheila Bair at FDIC is probably on Democrats' short list) may take a slightly tougher line as bank regulator. But the upside seems pretty modest to me.

The downside, on the other hand -- hoo boy! I do not want to see the Dow fall 500 points on concerns about leadership at the Fed or the Fed's independence from Congress. I do not want to see bond yields jump a hundred basis points. I do not want to see the dollar plunge in foreign currency markets. I do not want everyone in the world wondering why the hell they put Democrats in charge of running the country.

Just confirm Bernanke, for God's sake.