Commentary on monetary policy in the spirit of R. G. Hawtrey
The advance estimate of GDP for the first quarter of 2012 published today provides little cause for celebration, and not much reason for hope. Real GDP growth slowed to a 2.2% annual rate from the 3.0% rate in the previous quarter. Nominal GDP growth remained at 3.8%, reflecting a spike in oil prices as a result of nervousness about disruptions in oil supplies from the Persian Gulf. But despite the lackluster performance, Ben Bernanke no doubt feels well satisfied, as this answer, responding to criticism from Paul Krugman, from his press conference after this week’s FOMC meeting, demonstrates all too clearly.
So there’s this, uh, view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies. That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time. I made two points at that time. To the Bank of Japan, the first was that I believe a determined central bank could, and should, work to eliminate deflation, that it’s [sic] falling prices.
The second point that I made was that, um, when short-term interest rates hit zero, the tools of a central bank are no longer, are not exhausted there, are still other things that, um, that the central bank can do to create additional accommodation.
Now looking at the current situation in the United States, we are not in deflation. When deflation became a significant risk in late 2010 or at least a moderate risk in late 2010, we used additional balance sheet tools to return inflation close to the 2% target. Likewise, we’ve been aggressive and creative in using nonfederal funds rate centered tools to achieve additional accommodation for the U.S. economy. So the, the very critical difference between the Japanese situation 15 years ago and the U.S. situation today is that, Japan was in deflation and clearly, when you’re in deflation and in recession, then both sides of your mandate, so to speak, are demanding additional deflation [sic].
Why don’t we do more? I would reiterate, we’re doing a great deal of policies extraordinarily accommodative. You know all the things we’ve done to try to provide support to the economy. I guess the, uh, the question is, um, does it make sense to actively seek a higher inflation rate in order to, uh, achieve a slightly increased pace of reduction in the unemployment rate? The view of the committee is that that would be very, uh, uh, reckless. We have, uh, we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable, in that we’ve been able to take strong accommodative actions in the last four or five years to support the economy without leading to a, [indiscernible] expectations or destabilization of inflation. To risk that asset, for, what I think would be quite tentative and, uh, perhaps doubtful gains, on the real side would be an unwise thing to do.
David Exactly my feelings: http://thefaintofheart.wordpress.com/2012/04/27/the-gdp-release-and-how-some-seem-to-be-content-with-what-we%C2%B4ve-got/
Excellent blogging. The Fed now has earned a reputation for undecipherable dithering. I guess they have to protect that reputation.
As an aside, I wonder if central bankers are aware they are hardly recognized by the lay public, and even most business-people.
Central bankers are husbanding their cherished reputations before a public that just wants a robust economy, and barely know even what is a central bank. Businesses will raise prices when there is enough demand to allow it. They are not taking cues from opaque Fed policies.
Maybe raw democracy, even at a central bank, is the best way to go.
What is the value of “credibility,” if you won’t actually use it.
Until now I had given Bernanke the benefit of the doubt, even to the point of defending him when others would not. I am no longer able to do that. Plus, I honestly do not see the point in maintaining the strength of the debt contract, (housing) if there is no strength left on the part of the public to fulfill those contracts.
Marcus, Indeed.
Benjamin, Thanks. I don't dismiss credibility, but, as mg observes, at some point you need to risk that credibility, or else it's not worth having.
mg, well said!
Becky, I agree. I also don't understand why protecting creditors takes priority over every other consideration. Creditors understand that they are taking a risk, they have no reasonable expectation that they will receive full payment of principal and interest whatever happens to the economy.
As a matter of fact, I just watched the FOMC meeting yesterday. I’m not surprised that the last 30 years reflect the fact that we have gone off the bretton woods system. This should be part of it why grow hasn’t been going up to 5% immediately after an recession. What we have today is nothing like post world war II.
David (and others): I have a guest-op over at Marcus Nunes’. The apathy of the Obama Administration vis-à-vis monetary policy vs the aggressive Fed-bashing conducted in the 1884 year if the Reagan Administration is amazing,
The Reaganauts actually suggested stripping the Fed of its authority and moving monetary policy in the Oval Office. They hated Volcker and his tight money. A chapter of our history forgotten–but one the Obamanians need to take cues from.
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David Glasner Washington, DC
I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.
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