Karl Msith on Life at the Zero Lower Bound
Karl:
Life at the Zero Lower Bound: Roger Lowenstein has a profile on Ben Bernanke. Some key takeaways:
Why the 4% Club Failed
But after talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. First is the fear that inflation, once raised, could not be contained…. “The notion that we can antiseptically raise the target and control it is highly questionable,” Bernanke told me.
This is something that will fascinating to hear about in the aftermath but it seems to fly in the face not only of what Bernanke himself has said but the history of modern central banking. Suppose worst came to worst and inflation expectation became unmoored. The Volker Fed tamed them in the 1980s with a recession far less damaging and far more easily recovered from than this one….
Law and Responsibility
According to Greg Mankiw, formerly President George W. Bush’s top economist and now an adviser to Mitt Romney, Bernanke earnestly believes in the democratic process; he thinks disclosure will lead to a more responsible electorate. Perhaps this is why the public vitriol so disturbs him….
From my vantage point the purpose of the democratic process is to check your actions as a public official. It is not your role to check yourself. It is your role to vigorously pursue policies that are in the best interest of your polity. If your polity choses to vote you out of office or send you to jail or send you to the gallows, then so be it. But, let them do it. “I followed the law” or “I respected the democratic process” is no shield against the consequences of action or inaction.
They Know Nothing!
In 2007, as the subprime-mortgage crisis leached into the financial markets, Bernanke’s training failed him. As a scholar, he had studied how bank failures worsened the Depression; as the Fed chair, he didn’t scrutinize the banks closely enough…. Speaking of government officials collectively, he added, “Everyone failed to appreciate that our sophisticated, hypermodern, highly hedged, derivatives-based financial system—how ultimately fragile it really was.”
What is still so shocking to me and I don’t completely understand was the ease at which leading policy officials dismissed those of us who were freaking out…. I wrote in late 2007 in response to someone who proposed that Citigroup could survive if it split-up:
The problem I see is this: we know that Citi will take more write downs on direct holdings of CDOs. I don’t think anyone on the outside knows for sure whats going to happen when all of Citis SIV rolls back on to the books. On top of that there are looming losses in Credit Card where Citi is heavily exposed as well as non-Agency prime mortgages and HELOCs. This is not even counting what kind of shit storm comes to fruition in CMBS….
It wasn’t like we had access to some private stash of information. This was all public and publically discussed on message boards, emails, blogs, the like. It seemed like this odd situation where financials were trading with positive valuations because of the Fed put and the Fed was saying “Look, no need for a put, the stocks are trading at positive valuations”….
I walked away feeling a bit more confident in the asymmetric response hypothesis. That the FOMC has a hard time doing more, but as things improve will not do less.
