Do we believe in Bernanke? | AIER

Reprinted from Law and Freedom

In our current era of inflation, the world’s central bankers are under scrutiny at their highest level because Alan Greenspan wanted to know why he did not see the financial crisis unfold when he saw himself face a congressional committee in 2008. That being said, central bankers এক once considered adults in the homes of older politicians বর্তমানে now have a significant credibility problem.

To put it bluntly for central bankers, part of the problem is that their reputation for counterfeit skills in the 1980s and 1990s meant that governments considered it convenient to allow central banks to lead when Western economies were in trouble in the late 2000s. Unfortunately, this has resulted in financial stability being repeatedly subjected to a perceived need for immediate response to the crisis. Now, however, the bill for such policies has come about due to the worst inflation outbreak since the early 1980s. Even the most common of economic and political commentators, EconomistConfirmed that the Federal Reserve failed to fulfill its initial task.

Personality, politics, mandate

But there is more to it than just the fact that central banks have created inefficiency to try to solve non-financial problems using monetary policy. When the role of central banking is understood in neo-Keynesian terms — that is, from a macroeconomic perspective that emphasizes top-to-bottom demand-management of the economy সহজ it is easy to understand why central bankers gradually surrender to the masters-of-the-universe. Can Mentality.

Former Fed Chair Ben S. Bernanke acknowledges in his new book that contemporary central banking operates within this conceptual framework. 21st Century Monetary Policy: From the Federal Reserve’s Great Inflation to COVID-19. “The so-called Keynesian economy,” he says, “remains the central precedent in the Fed and other central banks.” One hypothesis of this model is that a small team equipped with all the forecasting and management tools developed in the context of the Qinxian revolution could and should use monetary policy to smooth out the ups and downs of the business cycle. But what if this assumption leads central bankers to overestimate what they know and can do?

This question is not given in the book. This is a shame because the great strength of Bernanke’s text is that it was written by someone who was proficient in economic history and financial theory who was also the most important central banker in the world between 2006 and 2014. That rare combination of scholars, theorists and practitioners allows Bernanke to gain insight into how monetary policy is formed not only by the demands of the moment, but also by ideas.

Today’s Gold Standard for the Fed’s History History of the Federal Reserve. The final volume concludes with Meltzer’s remarks that “the Volker and Greenspan eras have restored independence….

Don’t look at Bernanke that way. His account of the Fed’s journey after the 1970s began in 1969 with Arthur F. Richard Nixon as Fed Chair. Through the appointment of Burns. Much of Bernanke’s subsequent story is presented from the perspective of successive Fed Chairs. He explained how their strengths and weaknesses shaped their tenure and how their intellectual commitment to certain points in financial theory influenced their leadership. But politics also emerges as a very part of the picture. Bernanke confirmed, for example, the assessment of Meltzer and economic historian Amity Schles that Burns proved to be very sensitive to political pressure from presidents. In contrast, Paul A. Volcar was much more resistant. “Consistency and perseverance,” Bernanke writes, “have become the hallmarks of Volcar.” Character, it turns out, matters for central bankers.

So do the specific things that are charged to the central banks Like many others, Bernanke believes that a bridge was crossed in 1977 when Congress amended the Federal Reserve Act to formalize what we now call the Fed’s dual mandate for stable prices and maximum employment. This calm, Bernanke notes, conservatives who prioritized anti-inflation goals but also progressives who are concerned about the monetary policy used to stimulate employment. Nevertheless, Bernanke notes, “the 1977 law did not specify how the two goals should be weighed in policy decisions.” It’s vague, in my opinion, that any law could potentially be designed to determine how such weights can occur. The effect, however, is to allow the Fed to insist on any part of the mandate to legitimize its decisions.

For example, when Volker raised interest rates to reduce inflation since 1979, he justified the Fed’s decision by appealing to the price stability of his order. As a result he was accused by legislators of neglecting the maximum employment portion. Volker’s response was to emphasize that employment problems cannot be properly addressed until inflation is brought under control. As it happens, I think Volker was dead-right. But his critics had a point when they said that Volcar, by all means and intentions, had bypassed the other half of the Fed’s order.

Much of Bernanke’s account of the Fed’s great inflation history is inherited by Fed chairs who try to pay more for the Fed’s dual orders than lip service. Nevertheless, it is difficult to notice that the Fed’s long-term outlook, by Bernanke’s account, has hardly surpassed that of the business cycle of the moment. The autonomy enjoyed by the Fed is thought to have prevented it from being overly influenced by such considerations. But Bernanke’s history indicates that such a cradle was more or less ideal. Even during Greenspan’s Great Moderation, the preference for an inflation-first approach comes as the best focus in the medium term.

Crisis normalization

The Fed is forced to engage in adequate scrutiny as a result of its continued response to the given business cycle or the economic downturn. This was a feature of the Bernanke Fed’s wrestling with the 2008 financial crisis and subsequent Great Depression. It has taken the form of quantitative easing (QE— to inject money into the economy by purchasing central bank bonds and other financial assets) as well as public expectations about policymakers’ efforts to improve management and possible direction of monetary policy.

“The bottom line,” Bernanke said, “is that most of the evidence confirms the effectiveness of alternative monetary policy instruments adopted since 2008. What’s more, Bernanke insists these measures have become a permanent addition to the monetary policy toolkit.” He added that they “are unlikely to be sufficient in all situations, especially in severe recessions or when neutral interest rates are too low.” What else can be done. “

For Bernanke, QE is part of the new normalization of central banking, and a possible move to add more tools to the Fed’s arsenal. Yet Bernanke devotes more than three-quarters of his book to defending QE’s effectiveness. This suggests that Bernanke knows that QE’s place in the financial toolbox is far from achieving universal acceptance. He also responds to claims that QE benefits a particular group (borrowers on savers, investors on non-investors, etc.), the risk of creating an asset bubble, and distorts capital market signals. In some cases, Bernanke’s response should pause his critics. Other answers are less credible.

Bernanke, for example, maintains that the QE helped keep the U.S. economy afloat during the epidemic and got it back on its feet. These policies, he added, “did not lead to sustainable excessive inflation.” I will interact, depending on what is “sustainable” and “extra”. It is safe to assume that Powell Fed’s decision to start accelerating its asset purchases in November 2021 came before it doubled in December 2021, as enough members of the Federal Open Markets Committee (FOMC) concluded that QE Was Accelerated and detrimental contributes to the rate of inflation that has been slowly engulfing the US economy since April 2021.

Freedom forever?

Bernanke’s account ends with a reflection of a question that bothers most central bankers: how they should deal with the world of politics. In the 1980s, strengthening central bank independence against political interference became a priority for some policymakers. However, no matter what the law says, no central bank is above politics. For Bernanke, of course, this is part of the reality of modern American politics. In addition, one can add that no government body with vested powers should be protected from any influence from the three central branches of government.

However, there is a difference between what the central banks want to navigate in politics to achieve their specific goals and what the central bankers choose to pursue other motives that reflect immediate political concerns. Although Bernanke believes that “the solution to our most pressing social problems lies beyond both the Fed’s capacity and its measure,” he added that “while there are opportunities, means and legal authority to contribute constructively, consistent with the Fed’s mandate, determined by political leaders and the people.” It should be done. “

I suspect that I am the only person who is concerned about this claim. Organizations usually lose focus when it comes to issues that are beyond their immediate reach. The central bank is no exception. In fact, the more central bankers become involved in issues such as climate change or economic inequality, the more they will find themselves embroiled in a question that Bernanke himself acknowledges as the responsibility of elected officials.

Such drift encourages politicians and activists to pressure central banks to promote their pet schemes (for example, progressives have argued for Fed funding for the Green New Deal). This opens the door for the central banks to push the monetary policy directly to advance the specific interests and concerns of any group in order to impose more political leverage at any given time. The problem is that monetary policy seeks to influence macroeconomic variables, such as interest rates. Central banks are thus remarkably unprepared to advance the economic well-being of a particular group.

This leads us to what I believe has become important in preserving the independence of the central bank: central banks, including the Fed, need to tighten their grip on order in order to maintain financial stability. Bernanke, in my opinion, would not agree. But revising the Fed’s mandate, giving minimal priority to financial stability over other goals ইচ্ছা as well as central bankers’ willingness to say “no” to politicians, populists, and interest groups in search of quick solutions or benefits – certainly Not right Today to improve his independence. In other words, meaningful autonomy for central banks depends on a limited summary – not extending it.

I would like to think that this is something that the Fed can learn from our current inflationary problems. Alas, I fear that the ongoing desire to believe that state institutions can micro-manage economies made up of millions of people and businesses as well as trillions of economic assets will thwart any such outcome. After all, there is an eminent master of the universe hidden in all of us, including the central banker.