Tuesday, October 6, 2015

Sorry, But Maintaining the Status Quo is not "Courage"

Why so? I'm not the only one who would have preferred a different book title from Ben Bernanke: one which was less about "bragging rights" (huh?), and more about the fact his tasks at the Fed involved difficult decision making processes. Oh, to be a fly on the wall of the bookstores where customers see this latest publication spread across the table. What must they think?

His title also attributes a historical framing for the Fed which is not quite accurate. How much courage has really been involved in the Fed actions of recent years? If the Fed "saved" the banking system (in lieu of other things...) responsibility for doing so was already "built in", even if the public questioned the integrity of doing so this time. Had the Fed not bailed out the banks, the fallout would have extended well beyond the banking system. Why, then, should it be necessary to boast about doing what the Fed was expected to provide in the first place?

There would be little reason to question Bernanke's "job well done", if the Fed had not neglected other considerations - specifically, full monetary representation for the public as a whole. The greatest tragedy, is that few realize the full extent to which central bankers are still willing to neglect aggregate spending capacity, even after the damage of the Great Recession. Through the convenient language of inflation and interest rates, central bankers have been able to keep the focus on banking, finance and governmental obligations, instead of what has been lost in terms of job formation, business formation, and self employment since the Great Recession.

In spite of extensive media coverage which backs central bankers in terms of (imaginary) inflation and interest rates, economists and others are starting to recognize the fact that the Fed downplays what is actually at stake. This likely has bearing why onlookers were exceedingly cautious about the idea of a central bank, a century earlier. Sure enough, in the Great Depression and again in the Great Recession, central bankers would neglect to cover aggregate spending capacity (total spending or nominal GDP) in favor of other priorities.

The measure of GDP reflects how all individuals participate in the economy. But once policy makers decide that "enough" money has been generated, full economic participation could be neglected again, without a level nominal target. These are the times when policy makers use imaginary inflation as a cover, for the fact money is being shorted in the economy. Instead of innovation, some sectors simply increase costs - a process which appears as though inflationary. Yet policy makers panic about increased costs in aggregate. Unfortunately, that means punishing others through the loss of jobs, self employment and business formation, instead of taking overall obligations and existing monetary commitments into consideration.

At the very least, some at the Fed have recognized over the years, that it makes little sense to insist on arbitrary cutting off points in terms of monetary representation. The need to honor aggregate spending capacity, as Marcus Nunes notes in a recent post, has come up plenty of times in FOMC discussion. For instance, in minutes from 1982:
MORRIS. I think we need a proxy - an independent intermediate target - for nominal GDP, or the closest thing we can come to as a proxy for nominal GDP because that's what the name of the game is supposed to be...
What strikes me about this quote was that the speaker recognized just how central the concept of a nominal target is, to the actual task of the Fed - even though total spending has scarcely been emphasized to a degree that the public knows its importance. Total spending. Why does something as basic as this, get lost in translation?

Bernanke now dismisses what amounts to (faithful representation of) aggregate spending capacity by pretending it would be difficult to achieve, and that it could somehow lead to undue inflation. Perhaps I'm wrong - and indeed I would hope to be - but it's hard not to suspect that Bernanke would prefer to disregard aggregate spending capacity. Does he believe that income aggregates are not as important as either the activities of government or finance? The activities of the latter group do not an economy make, at least in most places I have ever visited.

And had the public known 100 years earlier that it would eventually come to this, who would have remained comfortable with highly centralized banking? One has to wonder. In a sense, Bernanke was not even able to maintain a full status quo, because Main Street never really fully recovered from the Great Recession. And yet somehow, saving the banks was supposed to be enough.


  1. It actually takes courage to admit mistakes and take responsibility for them. And though I haven't bought the book, on the principle that I choose not to line his pockets as he ventures to lower my IQ by 50 points, from what I've read about it, there doesn't seem to be a whole lot of the sort of courage I was looking for. Perhaps if there had been, I would have purchased three or four copies to give away in an effort to educate my friends. I suppose that would be considered the opportunity cost of mislabeling fiction as fact.

    1. I came across a couple of quotes this morning, the first attributed to Sophocles, "What people believe prevails over the truth." And I like this one, "Better to be slapped with the truth than kissed with a lie."

  2. Becky, great post! If you contrast BB´s title with the one of Greenspan´s Memoir, (The Age of Uncertainty) you would never guess that Greenspan presided over something called "The Great Moderation"!

    1. Thanks Marcus, and I'm glad you reminded me of Greenspan's title. What a difference!