Two Cheers for The Bernank

Bernanke's days are numbered and Janet Yellen is primed and ready to take over the Fed.

People, she has big shoes to fill.

Bernanke did exactly what he told Milton Friedman the Fed would do in the next crisis. He remembered the lessons from the Great Depression and made sure the Fed would not make the same mistakes.

Bernanke threw the kitchen sink at the problem in 2008 and it worked. The money supply did not fall, the banking system did not fail, we made it through.

And the extraordinary/unconventional policy actions of the Fed did not unleash the inflationary genies we were warned would follow.

As the recovery "progressed" in its halting and unsatisfactory manner, Bernanke undertook additional unconventional policy actions. Three round of quantitative easing. Time based forward guidance. Outcome based forward guidance. And while these policies produced no great stimulative effects for GDP or employment, neither did they create inflation.

The worst we can say is that maybe all the QE has helped to spark bubbles in asset markets here and abroad, but really is anyone unhappy that the Dow is over 16,000? I for one am not. And if we were seriously worried about the developing world, our immigration, trade and farm policies would be diametrically different than they currently are.

I know that it is hard to think of Bernanke as even mediocre, let alone exceptional, because of the massive strident criticism he's faced from an array of monetary cranks all convinced that they have the magic bullet to achieve prosperity and only Bernanke's stupidity or cowardice kept him from firing it.

If only he'd target nominal GDP! If only he'd raise the inflation target to 4%, If only he'd promise to keep inflation above its 2% target for years after the economy has fully recovered.

It is true ladies and gentlemen that if the Bernank had wheels, he'd be a bicycle. But he's not a bike, he's an economist and the Fed is not so powerful as to be able to fix our economy with a new nominal target or a new promise.

People take as given that monetary policy can hit any output target it wants to and use the failure of the economy to perform satisfactorily as prima facie evidence of Fed incompetence.

But it's just not true. It's a bureaucracy, not a bicycle! The illusion that the Fed can finely control the economy was borne from the "great moderation" a tiny blip on the time scale that managed to validate the Fed's awesome powers at the expense of all the rest of its history.

The Fed can avoid screw ups. It can prevent rampant inflation and it can stand as a supplier of liquidity and a lender of last resort in a crisis. But the notion that monetary policy can hit any desired output target in normal times or abnormal times is a foolish and dangerous notion, sadly often promulgated by macroeconomists in the Fed's employ.

So as you leave Great Bernank, I salute you for a job well done. Your biggest mistake was allowing your minions to over-promise what the Fed can actually do.

Countdown to Excellence

The video...it will be out next week. John P is doing that voodoo that he do. And you will see the Ben Bernank as you have never seen him before....

In case you missed the Battle at Buttonwood, by the way. Worth watching.

The Cash Boat

When I hear Quantitative Easing 2, of course like many people I think "QE2." (Helicopter Ben will be giving a non-speech this afternoon, from Jackson Hole).

And like many people, QE2 sounds to me like the Queen Elizabeth 2, the Cunard Line cruise ship.

But that makes me think of the "Love Boat." (Only Angus and I would do this; we like to sing, badly and loudly).
So I sang "Cash....Exciting and new..." on the Takeaway radio show this morning.

KPC friend Mark Crain wrote and said he hoped that I had alternative employment lined up, since singing was not going to work out for me. And to warn him next time I was so moved, so that he could avoid that show. Thanks, Mark!

Poison Can Quench Your Thirst

That Ben B. He really is putting us in a bad spot.

Federal Reserve Chairman Ben S. Bernanke is prescribing “poison” to the U.S. economy by keeping interest rates near zero and fueling a wave of speculative capital that may cause the next global crisis, former Morgan Stanley chief Asian economist Andy Xie said.

Bernanke is making decisions based on “marginal considerations” that will help short-term growth and employment, instead of focusing on the “soundness of the system,” Xie wrote in an e-mailed note today. The next worldwide crisis will probably strike in 2012, driven by inflation as the low cost of borrowing spurs increases in asset prices, he said.

“There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”

ATSRTWT

My View on Angus' "Cheap Dollar" Post

Wow, there is quite a bit here to comment on. Angus said some things about the dollar....

1. There are some things I know more about than Angus. Not many things, and not much more, but some. Social choice theory, Hayek's later books, campaign finance law. But the intersection of monetary theory and trade? Please. Not only does Angus understand this better than I do, he understands it better than almost anyone. So, on the merits, and given that he is making quite a simple point, I would defer to him.

2. Besides, on the merits, I agree with him on the main point, completely. Who gives a crap about the dollar? Why should we care what currency the rest of the world uses? The dollar is big enough, and the U.S. is big enough, that the rest of the world can switch if it wants. Besides, money is by and large a veil, though "when the veil flutters, real output sputters." That just means that you need something stable, limit discretion of the Fed, and then go back to making stuff and selling it. Seignorage is basically theft, anyway. Let it go.

3. I'm not sure the actions of the Fed "helped avert catastrophe," as Angus claims. But in a comparative sense, compared to 1933-1936? You bet: catastrophe then, caused by Fed, no catastrophe now, possibly helped by Fed (though Fed did cause problem in first place; see below). Bernanke did NOT contract the money supply and force everyone with upside down balance sheets to liquidate. So, Angus said, "Unlike the Fed of the 1930s..." and he points out that the weakness of the dollar is at least partly because of "vanishingly low interest rates." I just don't see anything to disagree with there.

4. Now, one could easily criticize Angus for being a big Fed-lover, and wanting to have Greenspan's baby. After all, it was Greenspan who suppressed interest rates artificially, and inflated the housing and asset bubble. Yet Angus has consistently defended Greenspan, right. Oh...wait...that's not right, as even a casual reading of previous posts can show (commenters: Google is your friend. Read before you say stupid stuff). There's this, and then there's this, and (I could go on). Angus has hammered the Federizer Bunnies consistently for years.

5. Finally, BOTH of us have consistenly hammered Porkulus. That canard ("You support the stimulus?") is not even worth considering.