I understand the conceptions very well, as the dominant economic theory is something like “no pain, no gain.” In the words of many central bankers, almost in unison of not just intention but tone and even exact phrasing, there are costs to getting the economy moving forward. In Bernanke’s version, savers are to sacrifice in favor of financial redistribution that equalizes everything toward the back end – an eventual outcome that everyone easily recognizes as a robust and sustained growth period.
This sounds very textbook-y, but failure to understand this point has led to some confused critiques of Fed policy. When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings.
I was concerned about those seniors as well. But if the goal was for retirees to enjoy sustainably higher real returns, then the Fed’s raising interest rates prematurely would have been exactly the wrong thing to do. In the weak (but recovering) economy of the past few years, all indications are that the equilibrium real interest rate has been exceptionally low, probably negative. A premature increase in interest rates engineered by the Fed would therefore have likely led after a short time to an economic slowdown and, consequently, lower returns on capital investments. The slowing economy in turn would have forced the Fed to capitulate and reduce market interest rates again. This is hardly a hypothetical scenario: In recent years, several major central banks have prematurely raised interest rates, only to be forced by a worsening economy to backpedal and retract the increases.
The point he was trying to defend was his view of an “equilibrium” interest rate. In his version of Wicksell, the Fed has limited influence almost all in the short run and must seek to harmonize “market” rates with the “natural” rate. Therefore, Bernanke was not necessarily “punishing” savers except as one avenue to accomplish why he believes his mechanical interest rate format is valid. Left totally unspoken is the “what if”; as in orthodox theory simply assumes this all works as directed. As you might surmise without much effort, nearly a decade following this formula hasn’t proved its usefulness as a real world tool so there has been far more of the “punishment” than of the eventual alleviation.
Under an “all pain, no gain” scenario, you might also easily imagine why there is a growing rush and backlash for central bankers to explain themselves. And they have, only to a degree that you wouldn’t normally expect of those who fail to deliver time and again (which leads to the usual reminder, that central bankers said this very situation was nigh impossible to begin with; and that even the crash that was a symptom of it was itself impossible given their assumed expertise in such matters). They have answered these charges in two distinct theories.
The first is “secular stagnation”, an idea which places blame upon the economy rather than the policies enacted to move it forward. The funny thing about secular stagnation, apart from how it takes economists off the hook, is that is actually quite old. According to Bernanke himself, and he would know having taken MIT courses from Larry Summers’ (the current secular stagnation champ) uncle Paul Samuelson, the term comes from 1938 and economist Alvin Hansen. Mr. Hansen posited, during the Great Depression no less, that growth was absent because of demographics and a noticeable slowdown in the pace of technological innovation. That produced a drag on the “supply side.”
There are, of course, quite remarkable and very striking similarities between the decade after 1929 and the almost-decade after 2007. That Hansen’s theory would feel so right at home in this period is illuminating, sharing as the current age does with the 1930’s the overbearing reach of central banks. It takes a truly closed mind to ignore how that has been repeated, including the monetary changes taking place just prior to the huge economic hole. To them, it must be universal that every recovery is financial and only financial – to which the world must wait years upon years for either them to get it right or the true worst case to be revealed.
For what it may be worth, Bernanke is not a believer in secular stagnation then or now. That isn’t really surprising because Keynes has no use for the supply side and modern Keynesianism is fully embraced within aggregate demand. It doesn’t matter that demand, especially the government attempt to control demand, was so thoroughly repudiated thirty-five years ago as to be completely abandoned at the political level by the Democrats that had so enthusiastically supported it when Larry Summer’s uncle (and Robert Solow) introduced the “exploitable Philips Curve” in 1960. By 1980, it was all “voodoo.”
Bernanke’s answer to secular stagnation is not humility but rather only a small change in degree. That seems to be the commonality on the side of aggregate demand, where minute theoretical issues are taken as full-blown academic debate when outside of economics it really amounts to splitting hairs against the gale of depression (again). As Bernanke sees it, it is also the economy itself to blame but more as a matter of temporary or “transitory” factors that are subsiding. The problem for central bankers and economists on that “side” is that this explanation seems now as perpetual as secular stagnation – the problems are always subsiding and transitory, just wait ‘til next year.
They argue that recent slow growth is likely due less to secular stagnation than to temporary “headwinds” that are already in the process of dissipating. During my time as Fed chairman I frequently cited the economic headwinds arising from the aftermath of the financial crisis on credit conditions; the slow recovery of housing; and restrictive fiscal policies at both the federal and the state and local levels.
And so we are really back in the same spot; “when” should we expect the call of recovery? To this view, Summers seems far more correct, at least in limited temporal direction, than Bernanke and his “transitory” weakness. It’s funny, in a tragic sort of way, that Bernanke and his “team” speak about the Fed and other central banks under these terms in hushed and muted manners; the central bank is but one minor institution in an economic sea of noise and competing interests. That is quite different from how they project monetary policies in discrete format; QE wasn’t some shot in the dark but rather the most powerful monetary element ever conceived. ZIRP is all at once a mighty force of redistribution (to take if only to give) and at the same time not really much effective on even interest rates beyond the very, very short run.
That orthodox theory is so at odds with itself is, again, quite revealing especially how, under so similar circumstances to its confusion of the 1930’s, it comes around full circle. It is at these times you can’t help but wonder if they actually believe it themselves or are simply producing the granularity and details of the illusion simply as a means to the status quo. There are times of acute strain when the latter comes to the fore, particularly in 2008 when reading every word of those transcripts you can almost feel the tangibility of doubt intercede but only in the runup; once the crash happened anyway it’s as if they all just went back to sleep in the dreamworld of generic money supply and generic aggregate demand.
There are also more outward expressions of the status quo, sometimes to the point of it being almost obvious, as the kids would say, trolling. In other words, central bankers know it is all an illusion, carefully crafted with some very deep ideas and loads of literature, but with almost no actual substance to any of it. In case you missed it, the ECB this weekend unveiled its centerpiece sculpture at its new(ish) headquarters. Given this eternal waiting for economic transitory to be something other than durable and semi-permanent, the Europeans, well:
As titles of artwork go, this is one to file under ‘you couldn’t make it up’. The European Central Bank is installing a giant metal tree outside its building, with the name “Gravity and Growth.”
Those who don’t count themselves among fans of the euro project could no doubt come up with a few things that have pinned the region’s growth rates to the ground in recent years, writes Katie Martin.
It is quite figuratively a “money tree” – at the headquarters of a leading global central bank! It is, perhaps unintentionally, but perhaps not, a giant middle finger to the rest of the world and especially the global economy, as if to say out loud they are all style devoid of any measurable and useful substance. That isn’t entirely true, however, as central banks do allow some substance but only in the service of redistribution:
This week some members of the European Central Bank Executive Board will decamp to Luxembourg to speak to participants in the world of high finance. The media aren’t invited.
The participation of ECB members at the Eurofi conference in Luxembourg, which takes place ahead of a meeting of European finance ministers in the Grand Duchy, comes just months after a controversy involving an ECB Board member speaking at a private event to hedge-fund managers and other investors, which put the ECB’s policies on communication and transparency under scrutiny.
In an academic world of so very many internal inconsistencies and conflicts, it cannot be anything but one singular external persistence – stagnation. They really don’t know what they are doing, but now they have, apparently, no qualms about displaying all their “magic beans.” The only question is not any longer “how long” for the economy but rather how many more lost years will everyone simply accept under this defiling status quo. We are already eight-tenths to one lost decade in more obvious ways, perhaps even closer to a third (labor participation certainly) stripped of the picture of serial asset bubbles.
Economists were somehow given the benefit of the doubt in and about 2008 when they had not in any way earned it. Perhaps another downturn will suffice to galvanize awakening. Central banks and central bankers apparently aren’t all that worried about it, to the point they don’t even pretend anymore to actually want to fix their economic involvement. It’s good enough to recycle old theories (and even the same clique of economists) whilst proclaiming monetarism is both omniscient and quite small all at once depending only upon which “truth” is more politically useful. Maybe the money tree is perfect.
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