23 March 2012

Ben Bernanke and Elvis Costello

"The Villain: The left hates him. The right hates him even more. But Ben Bernanke saved the economy—and has navigated masterfully through the most trying of times."

So begins an excellent article in The Atlantic about the Federal Reserve Chairman, Ben Bernanke. The distrust of bankers and politicians in today's America has been a double whammy for a banker appointed by George W Bush in 2006. Despite keeping inflation low he worries those on the right because of his perceived overreach into the private sector. And the left does not like him because he is a Republican.

He worries many--left and right--because of the large amount of quantitative easing he has sanctioned. Getting more money to the banks to loan when demand for loans is weak, together with practically zero interest rates (the price of money) means that if loan demand picks up suddenly there will be more money chasing the same volume of products (assuming productivity lags demand for money) and this, as we all know, will spark inflation.

Interestingly the Federal Reserve has a dual mandate to keep prices stable and to promote full employment. This is unlike most other central banks which just focus on stability of prices and hence are much tougher on inflation and feel freer to raise interest rates to temper demand.

I admire what Bernanke is doing, he is trying many different things to get the economy moving when he could just sit back and take very few economic or political risks. But then I have a soft spot for the man. Not that I have ever met him, but I learned quantitative mathematics and econometrics from handouts he had made--these were used by my TA at Stanford (in the almost pre-desktop era).

These handouts were fabulously clear (I still have them), but what really endeared me to him was that he quoted lines from punk songs of the time (early 80s) in the top right hand corner.

His favourite was Elvis Costello who he often quoted. I'm sure there are still many Elvis songs that he thinks about from time to time: Brilliant Mistake (not mine, Greenspan's), Less than Zero (on interest rates, if I could I would), Pump It Up (liquidity, that is), Pay It Back (they have, and I get no credit for it), Miracle Man (who me? aww shucks) and Waiting for the End of the World (not on my watch, dude).

But, given that the latest World Economic Situation and Prospects 2012 from the UN begins with "The world economy is on the brink of another major downturn" I would urge the Fed Chairman to focus mostly on the song High Fidelity: stay faithful to your training and your instincts and don't let the politics get you down.


Sam Roberts said...

After that praise you must surely now arrange for those handouts to be scanned and posted online for all to learn from...

Michael Lipton said...


By 2050 the debates between so-called neo-Keynesians (fiscal counter-cyclists) and pseudo-neo-monetarists (monetary counter-cyclists - the opposite of Friedman's rules, of course) will seem trivial. The main change between 1929-31 response and 2007-9 response is that this time almost everyone agreed that the public stance had to be massively reflationary. The balance between fiscal and monetary is a secondary issue, though important. In 1929-31+ the standard view was: do nothing; let markets sort it out; assets have a floor price (true enough ...). Almost nobody says that this time, except Ron Paul and a few Tea Party nuts. So we have the highest LEVEL of OECD public-sector deficits, relative to GDP, ever in "peacetime" (though by historic standards not very high public-debt/GDP ratios in most OECD countries) ... and, absent animal spirits, Euro-America's GDP roughly stagnates, instead of continuing to fall as it did last time.

European Central Bank indeed talks much tougher than the Fed but in practice also accepts "dual mandate to keep prices stable and to promote full employment" and, like our own dear BoE, does massive QE too - and advertises it as potentially unlimited. The central banks' STANCE is right, but its RATES cause moral hazard: they should be lenders of last resort to banks at penal rates, not givers-away of first resort at rates that just re-fatten the commercial banks, and stimulate them - in due course - to do more Floridas, Haughey loans, CDO-squareds, South Sea Bubbles, or whatever it is when "next time is different".

That's medium-term. For now, QE (= what we once called "open-market operations" on a vast scale) pushes a piece of string as few wish to borrow and invest. But such pushing stops the pushed object sliding back. Unfortunately, competitive deficit reduction by EU governments meanwhile does push it back, by forgetting the other lesson of the 1930s: don't beggar thy neighbour.

best wishes