What Hath Bernanke Wrought?

The advance estimate of GDP for the first quarter of 2012 published today provides little cause for celebration, and not much reason for hope.  Real GDP growth slowed to a 2.2% annual rate from the 3.0% rate in the previous quarter.  Nominal GDP growth remained at 3.8%, reflecting a spike in oil prices as a result of nervousness about disruptions in oil supplies from the Persian Gulf.  But despite the lackluster performance, Ben Bernanke no doubt feels well satisfied, as this answer, responding to criticism from Paul Krugman, from his press conference after this week’s FOMC meeting, demonstrates all too clearly.

So there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s [sic] falling prices.

The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation.

Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target.   Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional deflation [sic].

Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative.  You know all the things we’ve done to try to provide support to the economy. I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate?  The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do.

Paul Krugman responded on his blog to this not very edifying answer by Mr. Bernanke; Krugman pointed out that the sharp distinction between the situation in Japan and the situation in the US is not as clear cut as Bernanke makes it out to be.  Moreover, there is no basis for saying that there is a bright line between positive and negative inflation so that the economic effects change radically when you go from very low positive inflation to very low negative inflation.
I would make a further comment on Bernanke’s performance.  Since 1947, every single recovery has been associated with several quarters of nominal GDP growth in excess of 5% as the chart below demonstrates.  The only recovery in which nominal GDP growth did not initially exceed 5% for several quarters was the anemic recovery from the 2001 recession in which nominal GDP growth remained under 5% for several quarters before increasing above 5%, but only slightly above 5%.
With what passion does Mr. Bernanke invoke the experience of the past 30 years during which the Federal Reserve, has patiently “built up its credibility for low and stable inflation,” credibility that “proved extremely valuable” in enabling the Fed “to take strong accommodative actions in the last four or five years to support the economy without leading to . . . expectations or destabilization of inflation.”  Well, I am deeply moved by Mr. Bernanke’s deeply pious reverence for the lessons of the last 30 years, but let’s have a little closer look at the record of the last 30 years in the next chart.
And what does the chart show?  It shows over the past 30 years in which the Fed has built up so much credibility that the Fed has been able to do all the wonderful things that it has done to promote . . ., well, to promote the weakest recovery since World War II, nominal GDP growth after each recession during the past 30 years substantially exceeded 5% quarter after quarter.  During this recovery, however, the annual rate of nominal GDP growth has not exceeded 5.5% in any quarter since the “recovery” began, while averaging less than 4%.  And Mr. Bernanke has the nerve to tell us that he is unwilling to allow inflation to increase above 2% because it would squander the precious credibility achieved by the Fed over the past 30 years when nominal GDP during recoveries almost always grew at an annual rate greater, often substantially greater, than 5%?  Remember the audacity of hope?  This is the audacity of complacency and indifference.
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13 Responses to “What Hath Bernanke Wrought?”


  1. 2 Benjamin Cole April 27, 2012 at 3:56 pm

    Excellent blogging.
    The Fed now has earned a reputation for undecipherable dithering. I guess they have to protect that reputation.

    As an aside, I wonder if central bankers are aware they are hardly recognized by the lay public, and even most business-people.

    Central bankers are husbanding their cherished reputations before a public that just wants a robust economy, and barely know even what is a central bank. Businesses will raise prices when there is enough demand to allow it. They are not taking cues from opaque Fed policies.

    Maybe raw democracy, even at a central bank, is the best way to go.

  2. 3 mg April 27, 2012 at 5:45 pm

    What is the value of “credibility,” if you won’t actually use it.

  3. 4 Becky Hargrove April 28, 2012 at 5:39 am

    Until now I had given Bernanke the benefit of the doubt, even to the point of defending him when others would not. I am no longer able to do that. Plus, I honestly do not see the point in maintaining the strength of the debt contract, (housing) if there is no strength left on the part of the public to fulfill those contracts.

  4. 5 David Glasner April 28, 2012 at 8:34 pm

    Marcus, Indeed.

    Benjamin, Thanks. I don’t dismiss credibility, but, as mg observes, at some point you need to risk that credibility, or else it’s not worth having.

    mg, well said!

    Becky, I agree. I also don’t understand why protecting creditors takes priority over every other consideration. Creditors understand that they are taking a risk, they have no reasonable expectation that they will receive full payment of principal and interest whatever happens to the economy.

  5. 6 Tas von Gleichen April 29, 2012 at 3:15 am

    As a matter of fact, I just watched the FOMC meeting yesterday. I’m not surprised that the last 30 years reflect the fact that we have gone off the bretton woods system. This should be part of it why grow hasn’t been going up to 5% immediately after an recession. What we have today is nothing like post world war II.

  6. 7 Benjamin Cole April 29, 2012 at 12:50 pm

    David (and others): I have a guest-op over at Marcus Nunes’. The apathy of the Obama Administration vis-à-vis monetary policy vs the aggressive Fed-bashing conducted in the 1884 year if the Reagan Administration is amazing,

    The Reaganauts actually suggested stripping the Fed of its authority and moving monetary policy in the Oval Office. They hated Volcker and his tight money. A chapter of our history forgotten–but one the Obamanians need to take cues from.

  7. 8 Geoff May 1, 2012 at 7:05 am

    We need to get past the fatal conceit that any group of mortals can adequately guide monetary policy.

  8. 9 David Glasner May 1, 2012 at 6:32 pm

    Tas, Actually, growth in the US was not that great in the 1950s because the rest of the world undervalued their currencies relative to the dollar leaving the US with a chronic deficiency of nominal GDP. Under the Kennedy/Johnson administration, the Fed was “encouraged” to expand the money supply more rapidly bringing about a burst of growth in the early and mid-1960s. But the situation got out of hand in the late 1960s when inflation got out of control, causing the dollar to become less valuable than its gold equivalent. So Bretton Woods was not a viable model.

    Benjamin, Great job!

    Geoff, Sorry, but I think that you are simply invoking a cliché (“fatal conceit”) that is not applicable to the discussion. Hayek only turned against monetary policy when he discovered the theory of competition in currencies. He had an extraordinary insight into the theory of competition in banking, but, as I explained in my book on Free Banking, his analysis was marred by conceptual errors, so that his strong claims for the efficacy of competition independent of any role for the government in the supply of currency do not withstand scrutiny.


  1. 1 Links for 2012-04-28 | FavStocks Trackback on April 28, 2012 at 12:25 am
  2. 2 Links for 2012-04-28-Economic Issue | Coffee At Joe's Trackback on April 28, 2012 at 1:21 am
  3. 3 What Hath Bernanke Wrought? | George Street Review Trackback on May 14, 2012 at 9:14 pm
  4. 4 Inflation Expectations Are Falling; Run for Cover | George Street Review Trackback on May 14, 2012 at 9:21 pm

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About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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