October 30, 2005
THEY ALREADY OVERSHOT:
The King of the Wonks comes to his throne: nothing can go wrong. Can it? (Niall Ferguson, 29/10/2005, Daily Telegraph)
This is not the first era in modern history when monetary policy has been entrusted to unelected technocrats. In the 1920s, the world's principal central banks were run by a group of wise men, some of whom made no secret of their impatience with democratic institutions. Montagu Norman at the Bank of England, Hjalmar Schacht at the German Reichsbank, and Benjamin Strong at the Federal Reserve managed the international monetary system in a state of blissful independence from political constraints.
Yet what happened? Disastrous blunders (admittedly after Strong's death and Schacht's resignation) turned a US recession into the global Great Depression. As one economy after another fell off a cliff, central bankers almost without exception urged that interest rates be raised rather than lowered. Only a handful of wonks - John Maynard Keynes among them - understood that the gold standard was a "barbarous relic" and that floating currencies were the only way to counter deflation. Alas, Keynes was a geek at the time. As a rule, he only wonked in wartime.
Happily, Ben Bernanke is an expert on the subject of what went wrong in the Great Depression, having co-written at least two learned articles on the subject. Back in 2002 he argued that the Fed should be prepared to do everything in its power to prevent a recurrence of deflation - if necessary dropping banknotes out of helicopters to encourage people to spend.
Deflation now seems less of a threat than a recurrence of inflation, with US consumer prices rising last month at an alarming annual rate of 4.7 per cent.
In fact, Mr. Bernanke takes over a deflationary economy. Is there anything you think will cost more a couple months from now than it does today? Thankfully, no one is likelt to understand deflation and the fact that interest rates are too high than Mr. Bernanke.
Betting on Ben: The likely new chairman of America’s Federal Reserve Board is a first-rate academic. Will he be a similarly good central banker? (The Economist, 10/27/05)
For all the superficial differences, the bearded academic has much in common with the owlish Washington insider he will probably succeed. Both believe in an activist Fed; both focus on the link between the pace of aggregate demand and inflation; and both prefer shifts in interest rates to be gradual and well-signalled.
Neither man believes the central bank should be in the business of puncturing asset-price bubbles. Mr Bernanke, if anything, is more committed to this view than Mr Greenspan. At the height of the stockmarket bubble in 1999, he co-authored an influential paper with Mark Gertler of New York University which argued that central banks should focus on asset prices only insofar as they are likely to influence consumer prices. Targeting asset prices directly, his paper claimed, would create more, not less, instability. This suggests that a Bernanke Fed might be even less inclined to fret about soaring house prices than Mr Greenspan, who has only recently worried aloud about them.
Mr Bernanke will be more than just a safe pair of hands. He comes to the job with a series of big ideas about monetary policy and scant fear of stating them. At the Fed, he quickly earned a reputation as its resident intellectual, attracting attention with unconventional ideas on how to beat deflation, the benefits of inflation targeting and the idea of a global saving glut.
This willingness to question conventional wisdom is also Greenspanesque. The maestro, after all, heralded America’s 1990s productivity boom long before anyone else. The difference is that Mr Greenspan couched his big ideas in caveats and conspicuous vagueness, while Mr Bernanke speaks in plain English.
That has advantages. Everyone knows that Mr Bernanke, unlike Mr Greenspan, is a long-standing supporter of the idea that the Fed should set a public target for inflation against which it can be held accountable, as many central banks do. He has written a book and endless papers advocating the practice.
Mr Bernanke will doubtless nudge the Fed towards inflation-targeting. But the change is likely to be evolutionary rather than radical. The central bank has already moved in his direction. It has become more transparent, releasing minutes of Fed meetings speedily as well as publishing two-year economic forecasts. While there is no explicit inflation target, the Fed’s “comfort zone”—of core inflation between 1% and 2%—comes pretty close to one. Equally, Mr Bernanke has become less dogmatic, and he is unlikely to go on an inflation-targeting crusade.
His initial task will be to prove his inflation-fighting credentials and shake off a lingering reputation for dovishness. Soon after Mr Bernanke went to the Fed in 2002, America saw a brief deflationary scare as the economy remained sluggish while core inflation kept falling. More than any other central banker, he made clear that the Fed had “non-traditional” tools to forestall deflation, such as buying long-term bonds or, metaphorically, throwing money from helicopters. The idea of “Helicopter Ben” stuck with traders, and with it the notion that he might be just a little softer on inflation than his predecessor.
Another big Bernanke idea that is widely misinterpreted is his contention that America’s current-account deficit is caused by a global saving glut rather than by profligacy at home. His thesis was more subtle than the sound-bite suggests, but he is now seen by some as a bit nonchalant about the scale and cause of America’s external imbalances. If the dollar were to crash on his watch, that reputation would not help to calm markets.
Core inflation is running at .3% Posted by Orrin Judd at October 30, 2005 6:46 AM