Thursday, November 20, 2008


This has been covered widely elsewhere, but I'm posting it here for two reasons. One, it's very important and everyone should read it, and two, it proves what I've been saying since the bailout was announced. From Economist's View, by Professor Tim Duy:

Fed Watch: Policy Adrift

I understand the Federal Reserve Chairman Ben Bernanke is considered something of a sacred cow, our one point of light in an uncertain world. An academic who cannot be questioned by other academics. A smart person who has mastered the Great Depression and therefore “knows” what to do, and is providing the leadership to do it.

I am beginning to question all of these assumptions.

I am hoping Bernanke can step forward and clarify the direction of policy. At this moment, he has the best perch from which to guide policy between administrations. He has the opportunity to show leadership. But for now, I see a distinct lack of leadership from the Federal Reserve, and it suggests that Bernanke has used up his bag of tricks. And I don’t think that he knows what to do next...

First, policymakers appear uncertain about what to do with the Fed Funds target...

Considering the forest of trees killed in studying the Japanese experience with ZIRP, one would have imagined that the Fed had already answered the question of how low can they go with the target rate. The answer is zero, and they will head there because they need to look like they are doing something... Simply put, debates about the Fed Funds target are nothing more than academic masturbation.

With the Fed Funds target effectively a nonissue, policy needs to take a different direction. And here again I am supremely perturbed by Fedspeak as policymakers throw around the term "quantitative easing" as if it were candy on Halloween. The minutes seem to make clear that quantitative easing is not the current policy. There is no mention of the quantitative easing in the minutes themselves...

Apparently what Fed officials think is that they 1.) already engaged in quantitative easing, 2.) doing something like quantitative easing, or 3.) might be doing quantitative easing or interest rate targeting, but are not sure which. One can only conclude that Fed officials do not understand their own policies. Policy is adrift. Be afraid; be very afraid.

...Bernanke cannot elucidate a coherent policy strategy to his organization because no such strategy exists. What does exist is a potpourri of policy responses that amounts to providing liquidity at all costs, the outcome of Bernanke’s research on the Great Depression. Beyond this, the Fed is stuck in a netherworld of dual policy targets – not ready to admit the loss of the interest rate target, not ready to adopt a formal policy of quantitative easing...

In short, we need policy leadership. Bernanke is positioned to provide it. But will he? As of now, policy is adrift. FOMC members don’t seem to agree on the role of effectiveness of the Federal Funds target. Some think they are already engaged in a policy of quantitative easing. Some think they may be in something that looks sort of like quantitative easing. Kohn seems to think they are following two policies. Ex-FOMC member Poole is certain that they are hiding a policy change. In the meantime, while Fed officials publically debate the intent of their own policies, investor confidence is collapsing. Bernanke needs to step forward and define policy. We need to pressure him into providing that leadership - or to step aside for someone else to do it.
My only comment: Indecision from a guy like Bernanke can only derive from fear. Fear of making the wrong choice. Fear that there are no right choices, and any decision will result in failure that he will be blamed for. Someone needs to shake this guy up. Like it or not, he's part of history now, and he will be judged much more harshly for ignoring reality than facing it, regardless of outcome.

There is much more in the full article. I highly suggest you read it.


Anonymous said...

Too little, too late, too many directions.

Academics are advisers by profession, not decision makers.

I'd rather have 120 IQ in the chair with a sense of direction than 160 still evaluating the options.

BTW, my mother's housekeeper is a Mensan.


Max said...

Yeah, decisions without deliberation get us Iraq and TARP. Deliberation without decisions get us Great Depression II.

patient renter said...

smart person who has mastered the Great Depression

This whole premise is ridiculous. Just because you have a fancy title doesn't mean you know your head from a hole in the wall (think Greesnpan, the master of housing, denying the existence of a housing bubble).

Yes Bernanke wrote his dissertation on the great depression, but his view of the subject completely contradicts the conclusions of many superior economists, including Hayek, Rothbard, and even Friedman.