Four More Years ... For Ben Bernanke at the Fed?
Romney economic adviser Glenn Hubbard gives the Fed chairman a more positive assessment than many right-of-center folks would (via Reuters)
Glenn Hubbard, economic adviser to the Republican presidential candidate, said he would advise a possible President Romney that Bernanke should “get every consideration” to stay on beyond January 2014, when the chairman’s current term expires.
The comments may come as a surprise given Romney has said he would not reappoint Bernanke beyond 2014. Further, many top Republicans have blasted the Fed’s aggressive policies since the Great Recession as overreaching and reckless.
“Ben is a model technocrat. He gets paid nothing for getting kicked around all the time. I think they ought to pat him on the back,” Hubbard said in an interview, adding he has known Bernanke since they were “practically kids” and regularly speaks to him.
“I may or may not agree with him, but that’s very different from saying I question his motives. I wish politicians would stop doing that,” Hubbard told Reuters TV.
Here’s what makes Hubbard’s comments particularly interesting: When it comes to the central bank, the Ron Paul, End the Fed school of thought seems to be ascendant in the GOP right now, especially within the Tea Party wing. And they think not only should Bernanke go, but the Fed right along with him. Hubbard clearly believes in the necessity of a central bank. In fact, Hubbard was mentioned as a possible replacement for Alan Greenspan. (Here’s a video about it.) And if elected, Mitt Romney is not going to push to end the Fed. And I’ve heard that Bernanke doesn’t want four more years.
But, assuming Bernanke wanted to stick around, does he merit another term? Approaching this from a Milton Friedman perspective as opposed to a Ron Paul perspective, the biggest knocks you could make on Bernanke are that a) the Fed was too tight as the economy was rolling over in 2007 and 2008, b) the stop-and-go nature of quantitative easing limited its effectiveness, and c) he has failed to persuasively communicate that the Fed was “all in” in getting nominal GDP back on track.
Here is Vince Reinhart, chief U.S. economist at Morgan Stanley (via Bloomberg):
“The Federal Reserve should provide a conditional commitment that says as long as it is short of its goals it is willing to expand its balance sheet,” Reinhart, a former head of the Fed board’s Division of Monetary Affairs, said today. “What you want to be is conditional, you want to be able to say as long as the economy is not performing relative to what the Congress told you to do, you’ll continue to act.”
The Fed chief should say he recognizes that “the Federal Reserve is failing in both of its goals, maximum employment and stable prices, and that we’ll have an open-ended commitment to expand the balance sheet,” Reinhart said.
Both Hubbard and Romney suggest they disagree with this approach. More from Hubbard:
Hubbard was quick to note his opposition to some Fed policies, including the large-scale bond buying programs known as quantitative easing, or QE. He said a third round of buying (QE3) is unlikely to happen and would have little effect on either the economy or the bruising election campaign.
QE3 would probably only slightly lower Treasury yields, which are already very low, Hubbard said. “I don’t think that’s what the doctor ordered for the recovery,” he said at the Columbia Business School in New York, where he is dean.
And if Bernanke does agree with the Reinhart approach, he may feel politically constrained against pursuing it. That could change if a President Romney were to signal Bernanke that he wanted him to say at the Fed and would provide political cover for a pro-growth monetary policy.
My working assumption has always been that Romney would pick Hubbard to replace Bernanke. Who knows, maybe even starting him out at the White House or heading Treasury, then shifting him over to the Fed.
But the bigger question: What sort of monetary policy does Mitt Romney want, especially if he is serious about sharply cutting government spending?
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Comments:
Sep '10
Re: Four More Years ... For Ben Bernanke at the Fed?
What about John Taylor from Hoover?
Feb '11
Re: Four More Years ... For Ben Bernanke at the Fed?
"The Japanese bank has supposedly had, until very recently, a zero interest rate policy. Yet that zero interest rate policy was evidence of an extremely tight monetary policy. Essentially, you had deflation. The real interest rate was positive; it was not negative. What you needed in Japan was more liquidity."
That's from the pro-growth monetary policy link, btw.
What I take from that is that Japan-then-and-still and the US-now need currency devaluation via printing money. Liquidity, that is.
I find this odd. I think I recall Dr. Thomas Sowell stating on a podcast that currency valuations had no effect on the economy.
Odds are I'm garbling what he actually meant- but it stuck in my mind because I felt I had argued the opposite here this site.
Whatevs. But the bottom line here is that we're on the course for Weimar-style hyperinflation because every country seems intent on devaluing their currencies- to provide a "pro-growth" monetary policy- and everyone can't devalue against everyone else forever.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
Xennedy, inflationary currency wars do not produce hyperinflation, though of course they can produce miserably high inflation nonetheless.
I disagree that there is anything wrong the U.S. devaluing. Remember, government deficits artificially appreciate currencies and sustain trade deficits. The "capital boom" of foreign financial inflows from 2005-2007 is often said to have been sparked by Bush's deficits. When we start cutting government spending, that artificial boost to the dollar will disappear.
Reinforcing this with monetary policy makes sense.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
I agree; he'd be an excellent choice also.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
I'm sure Hubbard is a fine person and an excellent economist, but he seems to have strong ties to Wall Street firms. As long as we have a Fed that has discretion, I am not comfortable with a Fed Chairman that has strong ties to Wall Street. But maybe I am being unfair as to the extent of his ties.
Scott Sumner has me convinced, so I vote for him.
Edited on August 24, 2012 at 2:31pmDec '11
Re: Four More Years ... For Ben Bernanke at the Fed?
As a monetarist I think the gold bugs call me, I think the problem with the fed is that the secondary and tertiary purposes of the policy has supplanted the primary purpose of the policy. The idea that through marginal changes in policy one can either enhance or harm a trend already in progress is fairly reasonable. But the purpose to maintain a credible and stable money supply has been replaced by attempts to game the edges of the business cycle, to the point that they have lost all effectiveness. Its the primary symptom of the hubris of the technocracy.
Sep '10
Re: Four More Years ... For Ben Bernanke at the Fed?
Hubbard and Taylor are excellent economists and there are plenty inside the Fed as well like Richard Fisher and Jeffery Lacker who have argued for a change in the duel mandate away from unemployment and toward price stability. The point is not that they want high unemployment but that the Fed is simply not able to control it. In other words more limited government. My biggest beef with Bernanke is that he has not been more vocal in calling for progress on the fiscal issues, in other words, less spending.
Jun '12
Re: Four More Years ... For Ben Bernanke at the Fed?
"What sort of monetary policy does Mitt Romney want, especially if he is serious about sharply cutting government spending?"
I think we'll find out he's not serious about cutting government spending. That means it's irrelevant the sort of monetary policy he wants. We're screwed unless we end the Fed.
A recipe for cutting Government Spending:
End the Fed. Stop the flow of money to the big banks. Increase the money supply by sending checks to taxpayers indexed to a deflation in prices of a basket of commodities. Let the US taxpayers get the first use of new money, make the banks earn their money as banks, paying interest and making loans. Make the Government fund welfare and war by taxing, not borrowing, eventually eliminating the ability to fund debt with bonds, also.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
Abolishing the Fed and bringing back the gold standard are not going to solve our economic problems. In fact, it has nothing to do with our current problems. By the way, although the Fed has a dual mandate its policy doesn't actually pursue that goal. It has modified it so that (if I remember) it pursues price stability for a given level of employment, or something to that effect. That could probably be stated more clearly.
As Sumner points out, if we want GDP growth then we're going to have a higher inflation rate. That requires austere fiscal policy and expansionary monetary policy.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
Xennady:
Odds are I'm garbling what he actually meant- but it stuck in my mind because I felt I had argued the opposite here this site.
Here is a better link that explains Sumner's proposal in more depth. It's a long-ish article so you'll want to set aside some time for it but it will give you a more elaborate explanation of his idea.
One of the reasons he argues for NGDP targeting as opposed to inflation targeting is that the latter is difficult to do given that inflation is unpopular. It's unpopular because of the belief that inflation always increases your cost of living and so reduces quality of life. But when you're in a situation where you have low inflation, below your target, then you're going to have to see more inflation in the recovery. He's arguing for setting aggregate demand, or nominal spending, as the goal rather than inflation, which are two sides of the same coin.
Dec '10
Re: Four More Years ... For Ben Bernanke at the Fed?
James Pethokoukis:
... Approaching this from a Milton Friedman perspective as opposed to a Ron Paul perspective, the biggest knocks you could make on Bernanke are that a) the Fed was too tight as the economy was rolling over in 2007 and 2008, b) the stop-and-go nature of quantitative easing limited its effectiveness, and c) he has failed to persuasively communicate that the Fed was “all in” in getting nominal GDP back on track.
...
That is exactly right. In 2007 the Fed had the yield curve inverted and was withdrawing liquidity by Open Market Operations. What a lot of people don't understand about deflation is the meaning of the velocity component of money supply. In 2007 we were already experiencing deflation as the velocity was rapidly deteriorating.
Bernanke and the Fed were not just wrong in 2007/8 they were at the wrong end of wrong and the Fed was the immediate cause of the financial crisis. After the financial meltdown, the Fed has been providing the liquidity that the economy and markets desperately needed but it's not enough to overcome the other catastrophic macroeconomic policies put in place by Obama and the fedreal regulatory agencies.
Edited on August 24, 2012 at 9:04pmFeb '11
Re: Four More Years ... For Ben Bernanke at the Fed?
Plainly my comment was a miserable Joe Biden-esque failure to get my point across. I'm going to have harsh words with my editor.
Anyway, the United States is broke. As Mark Steyn famously noted we are the brokest nation in history.
So we have a solvency problem, not merely a liquidity problem. Targeting an inflation rate with the intent to meet an economic growth target may sound nice but it's just QE with a different name. While the Fed may have no realistic option to avoid money-printing I doubt very much that it has the ability to carefully calibrate the amount of inflation that results from it.
At some unknowable point people are simply going to lose faith in the US dollar as a store of value. Various nations are already turning to other currencies for international trade, which is an ominous sign.
I certainly hope Romney will win and be able to avoid the worst consequences of past mistakes but I have no faith at all that Obama can, or will understand the problem.
Feb '11
Re: Four More Years ... For Ben Bernanke at the Fed?
bereket kelile
Here is a better link that explains Sumner's proposal in more depth. It's a long-ish article so you'll want to set aside some time for it but it will give you a more elaborate explanation of his idea.
I just wanted to thank you for the link. I'll be reading it later, although I doubt it will change my mind about the policy.
Re: Four More Years ... For Ben Bernanke at the Fed?
Mitt Romney is not going to end the Fed. And I don't think John Taylor wants to end the Fed. What we should hope for is monetary policy that is rule rather than discretion based. I don't see America returning to a pre-Fed world. Time is better spent reforming the Fed so that it generates certainty rather than uncertainty -- and a more stable macro environment
Jun '12
Re: Four More Years ... For Ben Bernanke at the Fed?
So, if we have a rules-based monetary policy, what exactly is the point of having the Federal Reserve?
A monkey could follow the rules, even using the NGDP that Sumner talks about in the link above. Let's not go back to a Gold Standard, let's end the Fed, let the Treasury cut checks to taxpayers when the money supply needs to increase according to the NGDP.
The only point of the Fed is to Rape (yes, legimate rape :-) the US Taxpayer. End it, let the banks fight for taxpayer savings and capital. Make the Government stop borrowing for war and welfare, make them be honest by getting their money by taxation.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
I don't understand why libertarians think a Fed-less world would lead to more economic freedom. The gold standard required massive government intervention to work. Traditional Keynesian approaches to macroeconomic stability were designed for fixed regimes, which is why Milton Friedman favored flexible rates.
Under fixed exchange rates, the U.S. had capital controls, tariffs, a hyper-regulated banking sector, and a political culture that micromanaged demand with fiscal policy. Post-floating, we have no capital controls, fewer tariffs, a much less regulated economy, and a technocratic culture that manages demand with monetary policy.
Oct '10
Re: Four More Years ... For Ben Bernanke at the Fed?
Keith Bruzelius: So, if we have a rules-based monetary policy, what exactly is the point of having the Federal Reserve?
A monkey could follow the rules, even using the NGDP that Sumner talks about in the link above. Let's not go back to a Gold Standard, let's end the Fed, let the Treasury cut checks to taxpayers when the money supply needs to increase according to the NGDP.
The only point of the Fed is to Rape (yes, legimate rape :-) the US Taxpayer. End it, let the banks fight for taxpayer savings and capital. Make the Government stop borrowing for war and welfare, make them be honest by getting their money by taxation. · 8 minutes ago
The Fed does not "rape" the taxpayer. It targets (openly now) a 2% inflation rate, which is miserably low, and has a pretty good track record.