Good News: Ben Bernanke knows how to fix this thing!

[Kurt_and_Hunter]

Bad News: He won't do it.

This is chilling stuff. Krugman discussing a paper Bernanke wrote about what the Bank of Japan needed to do when Japan was in the same position we are in today. Bernanke totally got the problem and proposed the needed solution.

Today he is Chairman of the Fed and could actually do what he proposed Japan do back in the day. But the thing is, when Bernanke was a Princeton professor he could think about what was best for the economy, rather than what is best for a handful of coupon-clipping parasites.

__________
August 9, 2010, 10:08 am
Self-induced Paralysis

Reading Jon Hilsenrath’s column today, I was initially a bit skeptical about this assertion: "When Japan fell into deflation in the 1990s, Mr. Bernanke, then a Princeton professor, urged the Bank of Japan to set an objective of 3% to 4% inflation. The reason: With interest rates pinned at zero, rising inflation would mean that the real cost of borrowing, which is nominal interest rates minus inflation, would be falling. In theory that would spur demand."

I knew that I had pushed that option (pdf); I was less sure that Bernanke had, since he often focused more on quantitative easing. But Hilsenrath is right: Bernanke did say that, in a paper poignantly titled Japanese Monetary Policy: A Case of Self-Induced Paralysis? (pdf). Here are some relevant passages:

A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase “until deflationary concerns
subside”? Krugman (1999) and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the “price-level gap” created by eight years of zero or negative inflation.

…

BOJ officials have strongly resisted the suggestion of installing an explicit inflation target. Their often-stated concern is that announcing a target that they are not sure they know how to achieve will endanger the Bank’s credibility; and they have expressed
skepticism that simple announcements can have any effects on expectations.

…

With respect to the issue of inflation targets and BOJ credibility, I do not see how credibility can be harmed by straightforward and honest dialogue of policymakers with the public. In stating an inflation target of, say, 3-4%, the BOJ would be giving the public information about its objectives, and hence the direction in which it will attempt to move the economy. (And, as I will argue, the Bank does have tools to move the economy.) But if BOJ officials feel that, for technical reasons, when and whether they will attain the announced target is uncertain, they could explain those points to the public as well. Better that the public knows that the BOJ is doing all it can to reflate the economy, and that it understands why the Bank is taking the actions it does. The alternative is that the private sector be left to its doubts about the willingness or competence of the BOJ to help the macroeconomic situation.

http://www.princeton.edu/~pkrugman/bernanke_paralysis.pdf

http://krugman.blogs.nytimes.com/2010/08/09/self-induced-paralysis/

[Kurt_and_Hunter]

1. ...

[Kurt_and_Hunter]

2. ..

[Kurt_and_Hunter]

3. .

[truedelphi]

4. one other thing to point out -

Geithner had been sent over to Asia from the IMF to oversee the Japanese recovery.

He had two models of recovery to choose from - and he choose the one that ended up forcing Japan into a very long L-shaped recovery.

[glitch]

5. The fact that these are the guys hired to fix our economy tells us what we need to know.

They are doubling down on Friedmania.

[truedelphi]

10. Doesn't it show us what they are really all about?

And Geithner happens to be someone Obama knew from his childhood.


I am now very much into "If everyone of you had voted for Nader in 2000, we wouldn't be in this mess."

Instead people voted for Gore, the Big Pesticide Manufactuers' Best Buddy. And he had almost zero interest in contesting the situation in Florida.

The notion that "We are not as crazy (yet) as the other guy" is not a decent recommendation, at least not when it comes to my vote.

[unblock]

6. i actually think bernanke is pushing for this; he simply knows better than to say it out loud

if he came out and said it, he would be drummed out of washington on a rail. he has to give lip service to fighting inflation.

but note that he has driven interest rates to effectively zero and further made money easy through quantitative easing. he's done WAY more than greenie would have done, certainly.

i think he's trying to pursue that policy of enough easy money and inflation to avoid the deflation quagmire, except that he's not a dictator; he has to carefully retain his position and influence others in that crazy washington way.

[Kurt_and_Hunter]

7. I think Bernanke has been heroic, but the inflation thing is a special point...

The point being discussed is that fighting inflation is very much part of the problem.

When the central bank rates hit 0% they can regain traction only by creating and maintaining inflation expectations. Simply expanding the monetary base is like pushing on a string.

The Fed wants to cut the real cost of borrowing. Usually they do this by cutting rates.

But with rates at zero they are powerless.

The real cost of borrowing is interest rate minus inflation. So they can cut rates further, in effect, by creating inflation and keeping the Fed rate at 0%.

The Krugman paper that Bernanke (once) agreed with is very cool.

At this point matters become difficult. The size of Japan's output gap is, as we have seen,
highly uncertain, although it is probably well over 5 percent. Worse yet, there is no consensus on
the stimulative effect of a given interest rate reduction. As in earlier discussions, it may be useful
to look not at the small number of estimates for Japan, but at the larger range of estimates for that
other large, relatively closed advanced economy, the United States. Table 8 shows estimates of
the reduction in long-term interest rates needed to expand real US GDP by 1 percent.
Given these uncertainties, any number is a matter of multiplicative guesswork.

At this point I
would suggest the following series of leaps of faith: although Japan's current output gap is
probably well over 5 percent, the combination of fiscal stimulus and - if all goes well - a
clarification of which banks will be taken over and which will not should reduce that gap by
several percentage points. So managed inflation would need to close a remaining gap of, say, 4-5
points. Given the median estimate in Table 8, this would require an inflation target of 3-3.75
48 percent. So to give a bit of extra room (one can always raise nominal interest rates if the economy
seems to be overheating - as long as the inflation target is met), how about 4 percent inflation for
15 years?

http://web.mit.edu/krugman/www/bpea_jp.pdf

[unblock]

9. that's what quantitative easing is for, right?

[Octafish]

8. The 'coupon-clipping parasites' let Bernanke enjoy a few crumbs...

The Mafia calls it giving them "a taste." It works wonders for government servants, elected and appointed alike. None want to be "left behind" when the spaghetti hits the fan.

Thanks for a great post, Kurt_and_Hunter.