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The Education of Ben Bernanke
Here is a long NYT piece on the Bernanke regime; here is Anna Schwartz complaining about Bernanke as Fed chair. In the comments, I am taking nominations for the following: given perfect hindsight, what should the Fed have done and when? Keep two things in mind: a) looser money sooner probably would not have helped the credit problems (and might have tied the Fed's hands later on), and b) your recommendations cannot refer to actions which predate the Bernanke regime.
Posted by Tyler Cowen on January 16, 2008 at 01:08 PM in Economics | Permalink
Comments
There wasn't a whole lot Bernanke could have done differently to prevent/help the situation, Greenspan set the stage quite well for this bubble. Playing hardball and letting the economy do what it would would have lead to a harder crash, but one that likely would have been recovered from faster. So the moral of the story is, remember your Austrians, we know what we're talking about.
Posted by: Larry Redden at Jan 16, 2008 1:15:43 PM
Bernanke should have brought gold down to $400 and kept it there. Housing would have been hit hard but far less subprime excess would have taken place.
Posted by: 8 at Jan 16, 2008 1:19:46 PM
I can't believe what I am about to say (must be my evil twin brother) but I agree that by the time Bernanke came on the scene it was too late, even supposing increased liquidity could address the problem of bad paper and lost confidence. Haircuts for everybody sooner rather then later.
Posted by: roland at Jan 16, 2008 1:28:52 PM
If Y is too low and P is too high (or increasing too rapidly), then manipulating AD is always and everywhere going to cause recession or inflation. The problem is one of AS. Congress should get rid of SOX and/or the corporate income tax to stimulate AS.
Posted by: Eli at Jan 16, 2008 1:36:11 PM
I'd be interested to hear how Bernanke could bring the price of gold down to $400.
I'm with Larry Redden, basically.
But I think Bernanke might have been more insistent that the elected branches of government become more active, rather than try to make the few instruments available to the fed do the heavy lifting.
Really, they've done squat. Paulsen tried to organize a fund to deal with the SIV issue, but that's gone nowhere. Paulsen also arranged for some personal loan relief (discussed extensively elsewhere on this blog), which also looks like window dressing. So Paulsen has done ineffective things; others have done little or nothing.
I console myself with the fact that having congress and the executive branch do nothing might, indeed, be better than what they'd do if they did something.
Posted by: ZBicyclist at Jan 16, 2008 1:36:19 PM
Wow, having people agree with you makes you feel smarter than you are...
I have to agree with ZBicyclist's last statement wholeheartedly but in a very general sense. The less involved the government is in the economy (and frankly I consider the Fed close enough to government to include them here) the better opportunity that economy has to thrive.
Posted by: Larry Redden at Jan 16, 2008 1:40:36 PM
I think most can agree that there was practically nothing Bernanke could have done to stop it. If anything, he could have raised rates quicker or told Greenspan to raise rates quicker during his nomination process and then around the beginning of 2007 he could have begun making the cuts that didn't actually come until July. I don't know if he should have raised them any higher than 5.25, but they weren't kept that high that long IRL. He might have taken them to 5.75 and in August or September of 2006 and then began cutting in March of 2007 when it began to become clear how big of a problem it was going to be.
Posted by: John at Jan 16, 2008 1:44:00 PM
Perhaps focusing on monetary policy itself, in hindsight, is not the answer. I would vote that he should have applied pressure on Congress and the appropriate regulatory agencies to demand an accounting of who holds all of this securitized debt. He could have applied pressure to institute a modern version of the RFC. And perhaps none of this would have unscrambled the egg. But going forward, he could have pushed for a change in the standards for placing structured products. Require than i-banks take a residual stake in each structured deal rather than be rewarded for simply placing product. And perhaps introducing a new structure altogether to help track who owns this stuff. For example, I am astonished that a simple solution to this whole thing has not be proposed sometime - require that a holding company be set up whose sole function is to hold these securitized assets. Investors who are interested in having access to these products must do so only by buying shares in this holding company. This holding company would be required, as a public company, to submit to all of the regulatory policies, including disclosure, that we expect public companies to abide by. This last proposal allows for the reality that there is a place for securitizations and that this crisis will not have to see the baby discarded with the bathwater.
Posted by: wintercow20 at Jan 16, 2008 1:54:05 PM
I have to disagree with wintercow20,
The best thing the country can do is get rid of the Fed entirely and this proposition creates yet another company who's accountability will be limited. Yes your proposal puts that last caveat for the ability to scrutinize them, but over time, just like the Fed has, they will report less and less and then all of a sudden, no one knows who really owns this property. To solve that crises, sweeping new reforms will take place and all of a sudden, say goodbye to public property. For those stunned by the statement on the existence of the Fed, yes I am in support of hard currency, and no I don't think we should revert to the gold standard. Competing currencies baby. The dollar's in its death throws. Let it die but legalize life boats.
Posted by: Larry Redden at Jan 16, 2008 2:06:25 PM
So I know the Fed, the i-banks, the idiots who took loans way too high for their income, and the mortgage brokers are taking the heat, but how come the Realtors are getting off scot-free? Is there anyone more responsible for the bubble than them? Who pushed buyers to buy these expensive houses? Who hooked buyers up with mortgage brokers? Who, *even now*, has nonstop radio ads with wholly misleading statistics about the past performance of housing (see the ridiculous housingmarketfacts.com, for instance)?
I know they've got good lobbyists, but honestly.
Posted by: cure at Jan 16, 2008 2:09:42 PM
For something different, the Greenspan Fed ought not have raised rates in 2004-5 on a stately 25bp
per meeting basis, but done so more precipitously and less predictably. Making policy too transparent
lowered risk premia and increased liquidity to an undue extent, creating a chase for yield and tolerance
of leverage. All this money seeking yield had to go somewhere, and the nonagency mortgage market was
ready to take it.
Posted by: mkl at Jan 16, 2008 2:18:13 PM
As a gold bug I think the proper Fed policy is no Fed. Failing that, the Fed should do nothing. Don't add money, don't subtract money, don't even have meetings. Just. STOP.
Posted by: Noah Yetter at Jan 16, 2008 2:19:30 PM
oops, that violated the rules of the game. Mea culpa.
Posted by: mkl at Jan 16, 2008 2:19:44 PM
The fed should have tightened 1999. I think that Greenspan feared y2k and so waited too long to tighten. This allowed the stock/asset bubble to run too long. He then tightened which lead to the recession. He then loosened too much leading to housing bubble which was especially dangerous because county slow growth policies restrict supply.
Posted by: Floccina at Jan 16, 2008 2:25:59 PM
I'm going to pile on the bandwagon and say Bernanke couldn't have done much differently. I do wish there had been a little more oversight of all the real estate lending over the last few years, although I know it doesn't exactly answer your question. There have clearly been lots of abuses on the parts of borrowers and lenders, not just the usual irrational exuberance.
At this point, I think the Jim Cramers of the US are going overboard in calling for a stronger Fed response. The government might want to push harder for an earlier and clearer disclosure by banks of how bad the damage is to restore trust in the system, but easing rates doesn't seem like it'll do much. A measured approach makes sense. People need to take their lumps to some extent after making stupid business decisions. The government might be able to cushion the blow on the rest of the economy with a stimulus package, but I think if too many people escape unscathed this time, we'll just be back here in another 3-5 years. Moral hazard, etc.
Posted by: Greg at Jan 16, 2008 2:27:16 PM
Pretty obviously, if you screw up information input, you get terrible output. By jerry-rigging inflation statistics, noticeably about the inflation of housing prices but also about the service sector in general, the Fed was able to justify a low interest regime that would have been unacceptable if they had to justify it in the face of clear inflationary signals, which were sounding years ago.
If you screw up the machinery, the machine isn't going to work.
Posted by: roger at Jan 16, 2008 2:42:26 PM
Pretty obviously, if you screw up information input, you get terrible output. By jerry-rigging inflation statistics, noticeably about the inflation of housing prices but also about the service sector in general, the Fed was able to justify a low interest regime that would have been unacceptable if they had to justify it in the face of clear inflationary signals, which were sounding years ago.
If you screw up the machinery, the machine isn't going to work.
Posted by: roger at Jan 16, 2008 2:43:35 PM
About the only thing I could see doing would be crack down on lending standards earlier (as there were calls by then that they were much too loose). Probably would have had little impact but might have cut off a portion of the really bad loans.
Aside from that the only other action would have been a steep increase in rates on approval, or setting up a government backed trust to wait it out limiting the network damage early in the default crisis.
Posted by: nelsonal at Jan 16, 2008 4:51:50 PM
Simple. It should have announced that we were in the midst of a Hayekian, Fed-induced artificial boom and bust cycle. It should have explained what a Hayekian boom bust cycle is (maybe hiring Roger Garrison at Auburn U. to help them with that). And it should have announced that it was returning to a non-inflationary, neutral money regime, and it was renouncing an understanding of "inflation" and "deflation" which fails to take into account productivity growth in its theoretical conception of these notions.
Simply put, it should have re-ordered Fed policy to comport with a micro-economically sound macroeconomics, as has been developed by Friedrich Hayek (and by no other contemporary "mainstream" economist).
Posted by: PrestoPundit at Jan 16, 2008 5:12:22 PM
ZBiccyclist:
"Paulsen tried to organize a fund to deal with the SIV issue, but that's gone nowhere. Paulsen also arranged for some personal loan relief (discussed extensively elsewhere on this blog), which also looks like window dressing"
Interesting that you advocate hands-off-market-approaches and "loan relief" in the same breath.
Posted by: Raul at Jan 16, 2008 6:40:19 PM
I wholeheartedly agree with Larry. Get rid of the Fed. Don't play with the money-supply. Period. If you want free-markets elsewhere; have money on the free-market too.
Whatever the economic wonks may tell us deep down nobody, not even Greeenspan, has any clue as to what works and what doesn't. These are only dangerous experiments with money. Earlier they stop the better.
Posted by: Raul at Jan 16, 2008 6:45:20 PM
Why are we even asking that the Fed ease these "credit problems". These are selectively the effect of the sub-prime debacle. Its only the participants who are facing the brunt of the drying credit.
If at all we should be asking what the SEC or a similar regulatory body was doing.
Posted by: anon at Jan 16, 2008 6:48:26 PM
He should have tried to dissolve the Fed and institute a free-banking regime.
:-)
Posted by: Caleb Rackliffe at Jan 16, 2008 8:45:17 PM
What is the problem with what Ben has done? Seems good to me. Human psychology forces us into recession-mentality from time to time, 100 years from now we will still have periodic expansion and recession. Ben has played the cards right to minimize the impact.
IMO controlling inflation is slightly more important than stimulus in the long term. You can't stimulate without paying some price later. Overreacting is the biggest risk.
Posted by: Paul N at Jan 16, 2008 9:07:29 PM
Long time fans of the Fed know that Bernanke played a good game. But we still have to listen to pontificators spout off about his vacation to Cabo with Jessica Simpson, as if that has anything to do with why the economy is in the tank. It'll pass...
Posted by: Brad Hutchings at Jan 16, 2008 10:15:35 PM
