Monetary Policy
Fed Chair Ben Bernanke kept monetary stimulus options open this afternoon in his semiannual monetary policy testimony and report before the Senate Banking Committee. Ranking Republican Richard Shelby (R-AL) put the question this way:
SHELBY: Thank you.
Mr. Chairman, the minutes of the June FOMC, the Federal Open Markets Committee, meeting stated, and I'll quote, "The committee would need to consider whether further policy stimulus might become appropriate if the Outlook were to worsen appreciably," end quote.
I've been saying for a while that, contrary to the GOP rhetoric that the sky is falling, the 2009 and 2010 deficits were and are the absolutely correct fiscal policies. Back in October I called the $1.4 trillion deficit "a triumph" and said it was clear that's what needed to be done given that businesses and consumers weren't spending and, most importantly, that monetary policy had done just about all it was going to be able to do.
Paul Krugman yesterday provided three paragraphs in an excellent longer piece that explained this further:
The Fed wasn’t to blame for the financial crisis Ben Bernanke told the American Economics Association in Atlanta yesterday. The Fed Chair’s address presented a lot of careful research by Fed economists showing that a simple Taylor Rule analysis using CPI headline inflation would indicate Fed monetary policy was much too easy from 2003 into 2006, but if real time forecast PCE inflation is used, Fed monetary policy was reasonable. This is an important point – many policy decisions look bad in hindsight, but if you examine them in terms of what information was available when they had to be made and in terms of what forecasts were used, they look much better. Bernanke didn’t use these words, but I will: if Monday morning quarterbacks are so smart, why aren’t they rich?
Remember the movie "Being There"? This 1979 film was Peter Sellers' last next to last. The role he played -- Chauncey Gardiner -- was also the one he said was among his hardest because the character had no real personality. He delivery had to be flat and virtually emotionless.
The key thing about Chauncey Gardiner was that everyone who talked with him heard him say what they wanted to hear. Although he spoke in broad generalities, people heard specifics about exactly what they were talking about.
Here's my column from today's Roll Call about what Lehman et al mean for the federal budget.
Lehman a Year Later: Some Budget Lessons Learned, Others Yet to Sink In
Sept. 15, 2009
It was just about a year ago that I returned from a blissful trip in Yosemite National Park to find that the financial world had completely changed. While my friends and I were primarily focused on breathing and blisters and I was doing everything possible to avoid the news (I even covered my eyes as I walked past the boxes that displayed front pages), Fannie Mae and Freddie Mac were seized, Lehman Brothers failed, and credit markets froze.
When you do well in grad school economics, you adhere to first principles, dig deep into well behaved data, and come up with some new result, but only one which reinforces current theory, particularly that of your adviser.
When you attempt public policy, you rarely find out until too long after that what you thought would work didn't work so well. Most professors and most policymakers prefer not to acknowledge that.
