Bernanke did try quantitative easing in 2008.
Why did he join Paulson and Bush's stampede?
I have no idea. But it's at least possible that Paulson and Bush had suggested far worse policies (say, bank nationalization) and Bernanke persuaded them to take a relatively more market friendly approach.
Iirc he did QE in 2008, nothing happened.
Yes, this is after all the SECOND round of QE after the first had no effect.
I'm rather astonished that both of you seem to think that the ideas came from Bush. I would think it was clear that Bush was following what advisers and economists were telling him, rather than the other way around (and that this was obvious even before his book came out.)
I am reminded of a story about the steel tariffs, where a junior economic adviser made an offhand comment about "well, we all know that the excuses for the steel tariffs about letting the industry restructure are bogus, but it's a political play to win support for other free trade agreements and politics forces us to do something," and everyone nodded along, only for Bush to stop him and get upset that "no one had told him" that the public excuses for the steel tariffs were untrue. It seems that everyone had internalized the idea that it was a grand political bargain with hidden motives without actually making sure that the boss knew that. (Something I've seen in business before.)
Blaming Paulson makes sense, sure, and there are others (Geithner?) who may have had a role.
But I think it's much more likely that Bush was simply told by economic advisers like Paulson that "if you don't do this, there will be another Great Depression" (and many of the New York banking-centric advisers sincerely believed this), and he listened to his advisers.
I don't see much difference in talking about how Bernanke didn't really want to do it than in talking about how Bush didn't really want to do it either (something that he also insists in his book.)
All those who think Bernanke did QE in 2008 to a degree consistent with his own theories should read Sumner. Lowering nominal interest rates is NOT EQUAL to easing if real rates are going up. Aside from not preserving nominal GDP he also did the utterly uncalled for: he agreed to pay interest on reserves at the very moment he was lowering interest rates, thus partially sterilizing his own monetary easing. Moreover it sent a signal to the banks that they could avoid lending just when more credit was needed. Markets tanked shortly after these moves.
Even using Bernanke's stated claims to keep inflation at 2% he obviously failed to ease enough when the TIPs markets were predicting deflation in late 2008. By any reasonable measure -- Bernanke's, Sumner's, or Milton Friedman's this was NOT easing. More important the FED showed itself less than credible in its commitment to inflation targeting. The markets dropped as expected.
Didn't you answer this in on of your own posts: "The Sumnerian Missonary"?
""My main quibble: I suspect that top-tier liberal economists favored fiscal stimulus because they saw a golden opportunity to push big government, not because they saw a technical problem with monetary policy. Uncharitable I know, but I see no other way to explain their sudden change of heart."
No, that's too conspiratorial, he just became intimidated and caved in.
I think you'll appreciate this Bryan:
Quantitative Easing Explained - http://www.youtube.com/watch?v=PTUY16CkS-k
This YouTube video contains some language not safe for some workplaces.
I think what you failed to take account of during your optimistic period is the massive amount of money that can be made during any kind of crisis if certain policies (monetary and fiscal) are taken.
Even if Bernanke was omniscient, and powerful enough to put the best possible policy into place, he alone cannot decide what policy should be taken, and there are people with much more to gain from other policies. Just consider the pockets lined by the bailouts, alone. This is basic common sense - no conspiracy theories and no public choice economics required.
Exactly correct Bryan.
Merlin:
While Bernanke did something they called quantitative easing in 2009 and at the time, I said--great, about time.
But in reality is was credit reallocation. They starting paying interest on reserves. They sold off their treasury portfolio. They instead developed a large set of lending programs, many aimed at promoting the recovery of the securitization markets. Banks could go back to making loans and then selling them (which means banks don't need as much capital as they would if they kept the loans on their balance sheets) and then people would buy the asset backed securities instead of holding short T-bills and bank deposits. This would raise the natural interest rate on T-bills so that the low target for the fed funds rate would be expansionary, it would lower the demand for money (bank deposits) and allow for an increase in money expenditures. It was aimed at fixing credit markets so everything would go back to normal rather than accomodating the increase in the demand for money so that money expenditures would be maintained during a period when there would be major reallocations of credit and reallocations of resources with that reallocation of credit.
If it had worked, then the some of the supply side disruption would have been avoided and money expenditures would have been maintained.
The alternative approach--buying government bonds in large enough quantitities so that the quantity of base money rises enough, and the quantity of money rises enough, to offset any decrease in the money multiplier or velocity--would do nothing for the supply side disruptions. That people no longer trusted securitiized assets means that conventional bank deposits and loans need to expand. Borrowers would have to borrow from banks. Banks would have to hold loans. Banks would need capital. More banks may have failed and FDIC would have had to spend money reorganizing them and bailing out their depositors. (Oh, that happened anyway.)
I didn't think Bernanke's approach of rebuidling the house of cards would work. It didn't work.
As mainstream econ continues to disappoint, Bryan will find himself becoming more and more Austrian and his arguments against the ABCT less compelling.
Now that you've revisited your views on the Fed, maybe it's time you also revisited your views on ABCT... ;) In many ways, Keynesianism was a theoretical justification for central banking. I know you're not a Keynesian, and now I know you're not much of a fan of central banking.
So, maybe it's time we all stopped describing macroeconomic events in Keynesian language.
"My first-hand acquaintance with high-ranking Fed officials like my teacher Ben Bernanke lulled me further into a false sense of security. I spent a semester in the front row of his class, and while he was no libertarian, he struck me as a reasonable, thoughtful, decent, market-oriented economist. With guys like him running the Fed, I figured, nothing outrageous is going to happen."
Could it really be--that even Bryan Caplan suffered from "Greenspanism"? Well, at least I can say that self-awareness is a virtue.
I think Bill Woolsey has is right. What I find outrages is the Fed purchase of Mortgage backed securities. To me the Fed purchase of these securities is a bail-out. Correct me if I am wrong but this was a large part of the original QE.
As far as I am concerned, this is no difference in this verses purchasing commodity futures or stocks other than supposedly the purposes was to increase banks reserves so they could loan more which have very little if any of thou type of assets on their books.
However, I think the smoking gun is the fact that by all measurements the banks did not need the cash to loan. There was not a material difference in the reserves they had to loan. It was fear and unknown risk is the reason they put the break's on. If there was not a shortage of funds, why would the fed need to purchase securities with unknown risk profiles with huge potential losses to tax payers? I don't buy it, this was a guise to improve the quality of banks balance sheets by moving the risk to the tax payers.
I know we had this discussion a few months ago base on one of Arnolds post. I did not buy the argument of the side which argued this was really no different from government security purchases.
fundamentalist and RPLong,
Bryan has praised Sumner repeatedly and states explicitly that "Bernanke's research prescribed a simple solution: Maintain nominal GDP, and let the other chips fall where they may." It seems to me that Bryan is endorsing nominal spending targeting as the least bad monetary policy given a central bank (and elsewhere he reminds us that his first best world includes the "privatization of money").
One could argue that Bryan's views are similar to some fringe Austrians, but the core of the Austrian school (especially its Rothbardian stalwarts) bitterly disagrees with Bryan's prescriptions. Perhaps Bryan will reconsider ABCT, but I do not see any evidence in this post that his views on the matter are changing.
Provides an illustration of why some things simply should never be accessible in the political arena. Once a thing is politicized the basis for decision making easily looses connection to reality.
Lee Kelly -
You're right about Sumner and Caplan. I guess the next step is to explode the NGDP myth like Mises exploded the monetary velocity myth... ;)
Bryan:
Robust political economy, fat tails, black swans. Twenty years is not bad, but trends change and black-swan events happen. Pete and Peter are right to talk about robust political economy, and the story you tell is a great illustration of its importance. The lineage of this idea goes back at least as far Hume and his famous maxim that we must suppose all political actors to be knaves. So the basic point is in the tradition from the start, I think.
I believe he is far more nefarious:
After going as far as he would in his studies of the Great Depression with historical data, he decided to create his own.
"Bernanke became a key accomplice for the disgraceful series of bailouts, fiscal stimulus, and obfuscation about the zero nominal bound. The latest round of quantitative easing makes Bernanke's doublethink plain; if he thinks it's going to work in 2010, why wouldn't it have worked in 2008? And if it would have worked in 2008, why did he join Paulson and Bush's stampede?" This is admirably succinct. In answer to your question: "My best guess is that he simply didn't have the backbone to tell people like Paulson and Bush that they didn't know what they were talking about." It does seem that the answer will have to appeal to some defect in Bernanke's character, a defect that had gone unnoticed in his career up to 2008.
Adequate performance as Fed Chairman requires not only academic competence of Bernanke's caliber, which is rare enough, but also near-heroic virtue (that even a generally good person may lack). Conclusion: we should replace the Fed with institutions that can function when operated by "men, not angels."
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Lee, Bryan seems like he is open to changing his views, though he is a little stubborn. It make take decades of ngdp targeting for him to realize that it does no better than inflation targeting or any other targeting mechanism. Sumner seems to think that Friedman didn't know what he was talking about when he warned about long and variable lags. And the mechanical assumptions about the quantity theory are almost humorous. Someday he will understand what Hayek meant when he talked about the fourth phase of monetary theory in which the effect of monetary policy on relative prices will be the guide.
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