Waiting For The Federal Reserve’s Next Apology

In November 2002, Ben Bernanke apologized – for the Fed’s role in causing the Great Depression of the 1930s.  “I would like to say to Milton [Friedman] and Anna [Schwartz]: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again” (conclusion of this speech).

Bernanke’s point, of course, is that the Fed tightened monetary policy inappropriately – and allowed banks to fail – in 1929-33.  And much has been made of his strong focus, over the past year, on avoiding a repeat of those or closely related mistakes (including here).

But today we need a different kind of apology, or at least a statement of responsibility, from Ben Bernanke and the Fed.

From the Federal Open Market Committee meeting transcript of August 2003, we know that Bernanke said, “Despite the good news, I think it’s premature to conclude that we should not consider further rate cuts, if not at this meeting then at some time in the near future depending on how the data play out” (p.63).

He was concerned not just to keep interest rates low for a prolonged period but also to signal this to financial markets, “To the extent that we can sharpen our message that economic growth no longer implies an immediate and automatic policy tightening, we should make every effort to do so” (p.65; see also his role in the broader discussion around p.93).

This was, of course, at a time that the speculative fever and outright malpractice in the housing market was really taking off.  The build-up of financial market risk was starting to head towards system-threatening dimensions.  And many consumers were being set up for a trampling of epic proportions.  It is striking there is barely a mention of these issues in the FOMC transcripts.

And that’s the issue.  We can argue for a long time about whether the Fed should have tightened earlier.  Defenders of the Fed will say the data were ambiguous – and will point to the serious discussion of these issues in the FOMC transcript.

We can also dispute whether or not the Fed should have said anything in public about the impending housing-financial-consumer-taxpayer doom, or tried to tighten regulation.  “It’s not our job” or “we don’t have the powers,” or “the politicians wouldn’t have supported us” is what senior Fed people now whisper around Washington.

But this and other FOMC transcripts make it clear that the senior Fed decision makers were not even thinking about the first order financial sector issues.  They weren’t aware of what the big investment banks were really doing – show me the intelligence reports before the FOMC or the analytical discussion that indicated any degree of worry.  No doubt someone somewhere in the Federal Reserve system was thinking critically about finance – feel free to send me any relevant details – but from the point of view of evaluating the institution, it only counts if the top decision-making body at least has the issues on the table.

We have transcripts so far through the end of 2003.  Others should be forthcoming soon; there is supposed to be only a 5 year lag in their publication.  But, given their likely content, it would not be a surprise if the appearance of these transcripts slows down. 

At this moment of potential regulatory reform, who within the Fed really wants us to know that their leadership in the Greenspan era completely framed the problem wrong, didn’t understand what was happening, and repeatedly, brazenly, and callously ignored the damage being done to consumers?

I fully understand that financial market considerations are not the established focus of central bank interest rate deliberations.  But the scope and nature of such deliberations has changed a great deal since the founding of the Fed almost 100 years ago.  As the economy changes, central banks have to adapt their conceptual frameworks and our broader regulatory frameworks need to change also.  We’ve done this many times before, and we need to do it again.

Huge problems were missed by people using anachronistic conceptual frameworks.  Those frameworks should change.  This was the assessment of Ben Bernanke, building on Friedman and Schwartz, for 1929-33, and this should be our assessment today.

Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late.  They should apologize for that and we can start work on redesigning the institution, its decision-making, and how financial markets operate, to make sure it won’t happen again.  And it would also be nice if the Fed could avoid adding insult to injury – and stop opposing the administration’s consumer protection proposals.

Hopefully, this time the Fed’s apology won’t take 70 years.

By Simon Johnson

69 thoughts on “Waiting For The Federal Reserve’s Next Apology

  1. one comment to another post objected to the almost exclusive use of consumer for “us” – after reading this one I agree it starts to niggle, even if it is meant to be all inclusive talking about the saver using/buying the service of a financial institutions als well as the loan/mortgage taker

    After all at least I take in as well as discard

    the proposal in the other comment was citizen, That’s fine, if you talk about health care but when you talk about finance whatever you do (being about 25 % of world economy) will affect me very personally most likely very deeply and therefore I’d appreciate it very much if I weren’t (verbally) excluded.

  2. I’ve always thought that altering one’s behavior is the best form of apology – the only sincere form, in fact.

    However, since the Fed is now participating in the current inflation of a new stock market bubble, I do not think an apology for the last bubble will soon be forthcoming.

  3. “financial market considerations are not the established focus of central bank deliberations”

    I assume you mean they are not the public focus, which takes its cue from the fraudulent inflation statistics which have eliminated from index consideration those goods which people actually buy. Today, the cheerleaders on CNBC are trumpeting the 2.1% year over year decline in CPI. Has anybody noticed the price of essential goods going down? Every monopolist is now raising prices to make up for shrinking volume, but the CPI is going down.

    Fifty-seven percent of economists now believe the recession is over. Over? The ‘recovery’ is nothing more than the transfer of taxpayer dollars to the auto industry, which is temporarily being enabled to dispose of new clunkers for old ones.

    The Fed’s only job is to enable the top tier banks, come hell or high water, to keep the usury game going.

  4. Part of me wonders if an aggressive interest rate would have really slowed down the risky behavior that has been identified. It seems that much of the product formulation in the finance industry was focused on beating/gaming the key risk formulas being used. Even though asset appreciation might have slowed, the focus of the risky behavior might have just moved rather than being exposed. I guess that would be better than the disaster without reform we have been left with for the moment, but I still have hope that reform will occur.

  5. Along with an apology, I think we are owed an explanation from Bernanke himself of why the banks are making record profits & paying out record bonuses while 6 million Americans have been unemployed for more than 26 weeks & several million more are under-employed.

    What ever happened to the Fed’s goal of full employment anyway? Have Bernanke tell America’s working men & women why that goal has apparently been discarded in favor of propping up some insolvent banks.

    And Bernanke is trying to sell himself for reappointment? You can’t be serious.

  6. Further –

    Also have Bernanke tell us where he got the trillions of dollars he’s giving to the insolvent banks to prop them up. And have him tell us whose money the banks are using to make record profits. Finally have him tell us how much money he has given to the 6 million plus unemployed Americans.

  7. Perhaps it takes painful learning for economic policymakers to absorb a new way of thinking. Discretionary fiscal policy as a normal means of managing the business cycle was eventually laid to rest after, what, 20 years of making things worse rather than better? The employment-inflation tradeoff as a key policy tool was laid to rest after the stagflation of the 70s. Maybe narrowly focused constrained discretion in inflation targeting will now be laid to rest. I don’t think we should be too hard on policymakers- the theory is not that well understood, IMO, and even if it is well understood it takes a while for things to soak through into the institutuions that are involved.

  8. I have one question about the fed’s lax policy pumping up the bubble: the fed affects nationwide lending, but the bubble was very geographically isolated – nearly all the bubble increase in CA, FL, NV, AZ. If a nationwide action is taken, how does it get filtered so that the primary damage is done in such a limited area? There seem to be a couple steps missing.

  9. Another excellent post, Simon. But it seems clear, doesn’t it, that your ideas and proposals are just not going to be taken seriously by our current rulers.

    Consumer protection will be defeated.

    There will be no real investigation into the TARP and AIG decision-making.

    Banks will continue to value their assets at whatever price they like.

    Banks will pay out massive year-end bonuses.

    Obama will reappoint Bernanke out of deference to Wall Street.

    I agree, basically, with a lot of what Lavrenti has to say. Strikes, protests and the like are needed. And so a continued deterioration of economic conditions is to be hoped for. Anyway all of this talk in the MSM about recovery is really quite laughable.

  10. chas,
    you sure do not get economics or whatever the d.. thing should be called ;-) – the money is given to those who can generate a trickle-down effect and they have proven they can. They have made a minor mistake and look how fast and in bulk that has trickled-down – we all share in it some small some bigbig
    – therefore as “they” have proven “they” know how to make trickle-down work therefore any money available at all is best directed at them

    My favourite example of trickle-down to date is still when the nobles of old had feasts and banquets in their castles, the villagers and probably the servants were waiting outside for the left-over and when the left-overs came early and were ample then they would be grateful and cheer.

  11. I, for one, hope the USA re-appoints Ben Bernanke and stays on the inflation-cures-all path.

    The actions of the people in the treasury (with Paulson it was the fox guarding the hens, and now this incompetent, tax-evading, Wall St suck-up) along with the federal reserve has greatly helped diminish the strength of the empire. While bankers and the financial sector is making out like a bandit, the rest of the US – the pawns – are left as slaves of the mountain of debt the government is creating.

    Debt is not freedom, just like increasing the credit limit on your AmEX does not make you wealthier or more powerful.

    The little pawns working in the US – you know – people who take things of little or no value, and assemble them into things of greater value and utility are compensated far less, than the guy who clicks a mouse all day in an office. Seems to me, it ought to be the other way around.

    But it’s a democracy. If the pawns want to keep people in office who will continue to chip away at the liberties, the freedom, intentionally or by accident, then so be it.

  12. I agree…

    I think the general issue was that we had deep structural issues in our economy/trade/energy policy/currency in 2003, and a government unwilling to engage this on the fiscal/policy side. In particular, deficits across the board and consumptive demand that was sustained by federal spending (even as Federal spending cut DoE, NSF, and other productive spending). That left the Fed with the task of ending the recession, and the housing bubble (e.g. debt expansion) provided the sustained consumer demand.

    On the regulatory side, I believe we saw gaming of the system at many levels – and the question remains open about whether the Fed was aware of these issues at higher levels (distortion of agency ratings, option ARMs, liar loans) or not. Honestly, I’m not sure which is more damning… They knew and did nothing, or they never even knew in the first place.

  13. The bubble was not geographically isolated. What about stocks, credit card debt, car loans, commercial real estate, junk bonds, the war machine? The housing bubble was worse in the enumerated states because more people were bidding to buy houses there. I wonder what happened to the value of Warren’s house in Omaha? Do you suppose he knows?

  14. Actually, it’s not a democracy. I think they call it a Republican form of government- the guys elected by the people can be stymied by the guys elected by the states two by two, and five guys on the Supreme Court can say no, I’m sorry, you can’t do that.

    But what clearly trumps even the Supreme Court seems to be the Fed, which can wake up one morning and bail out GE by swallowing its commercial paper, and nobody even seems to notice. Are there any legal limits on the size of the Fed balance sheet? If the Chinese stop buying Treasury bonds can the Fed just bail out the Treasury through open market ops?

    In Germany, 1923, it took four billion Papiermarks to buy a glass of beer. And you needed a lot of beer. History’s collectivists have understood that the easiest way to undermine a free society is to destroy the value of its money. I think it’s time we worried less about communists and more about the Fed.

  15. ” Those frameworks should change …. to make sure it won’t happen again.”

    Central Bankers, like Generals, are always stuck fighting the last war. I agree that frameworks, intellectual constructs, behaviors, and responses need to change. But all that can do is prevent _this_ catastrophe from happening again. Don’t think for a minute that there won’t be some _new_ financial Armageddon that neatly falls through the cracks in the revised framework.

  16. At least near term, I think it preferable to look for Bernacke’s detention, interrogation and public trial. His apology would follow-on the confession that could be expected to emerge from this process.

    Bernacke epitomises the kind of snake that has been allowed to run roughshod over American democracy in recent years, an appointee of the lice that have so enthusiastically whored themselves to the financial, drug, arms and Middle East foreign policy lobbies on K Street. Short of divine intervention, he should be considered constitutionally incapable of the sort of exercise of conscience required for any honest admission of error or wrongdoing. This same eel-like quality would almost guarantee a certain servile toadiness at trial, but the people are likely to regard any such grovelling as loathsome. Acknowledged or not, Bernacke’s abuses are widely felt and understood.

  17. I have a different Monetary View, so that does influence how I see things. But let me try a different view about The Fed. Here’s a new post on Vox:


    “The pattern is clear – the Fed repeatedly and systematically intervened to counter “negative bubbles”, while it remained passive when confronted with accelerating credit and asset prices. This policy approach, long established and clearly announced for over a decade, must have played an important role in bringing about convergent expectations of ever-rising asset prices, which eventually destabilised financial markets and the economy. Such an asymmetric monetary policy creates a gigantic moral hazard problem, whereby all agents expect to be rescued from their mistakes. This is where excessive leverage and excessive maturity transformation become relevant.”

    This is my view. But, notice, it isn’t the low Interest Rates that cause the Moral Hazard, it’s the pattern of Fed Intervention. But The Fed also intervened in this way during years in which the economy grew, unemployment was low, and more people were owning homes. In other words, much of this view of The Fed is looking back after the fact. Can you honestly say that people wanted a tougher Fed during these years?

    Also, the Moral Hazard included the Bailouts, such as the S & L Crisis Bailout, over these thirty years or so. As Jim Rogers said, the pattern was obvious that The Fed and Fed Govt were going to intervene in case of any Financial Crisis. Hence, that led to this:


    “The entire financial system was totally unprepared to deal with the inevitable collapse of the housing and credit bubbles. The system had reached a point where it had to be bailed out and restructured. ”

    In other words, there was no Plan B for a Financial Crisis other than The Fed & Fed Govt intervening. Investing was done on these Implicit Guarantees.

    Does that mean that Investors expected a Debt-Deflationary Spiral? No. They expected a less severe crisis that The Fed & Fed Govt could handle. They were wrong.

    So, in my opinion, it was firstly this system of Implicit Guarantees that caused this crisis. Another way of saying this is that, over the last 30 Years, we’ve had less Regulation with higher Guarantees/Insurance. That’s a very bad brew.

    However, the influence of Monetary Policy on this crisis is not as simple as low Interest Rates. But that’s another story.

  18. I, for one, prefer the moderate-inflation path to the debt-deflation path, which we could still be on (judging by today’s CPI reading and sentiment numbers).

    And here’s a wretchedly inflammatory statement for everyone to chew on:

    To the degree that public discourse over the Fed outside of financial circles is dominated by the radical “stop all printing of money!” crowd, I think I might very well prefer that monetary policy is governed by Wall Street.

    All in all, I’d rather live in a world of steady-state moderate growth. But given the choice, I think I prefer a constantly accelerating bubble to a constantly deflating anti-bubble.

  19. “Huge problems were missed by people using anachronistic conceptual frameworks.”

    Or, perhaps, huge problems were ignored so the recipients of the huge profits could continue collecting them as long as humanly possible.

  20. Ah,Friedman Economics, where there is no trickle down from on high to the masses, the lower classes are out of work and have nothing (Friedman’s principles recorde in Shock Doctrine, by Naomi Klein).

    1.Government must remove all rules that stand in the way of the accumulation of profits.
    2.Government should sell off all assets that corporations should be running at a profit.
    3.Government should dramatically cut back funding of social programs.
    4.“DeRegulate, Privatize, Cutbacks”
    5.Tax everyone at the same flat rate.
    6.Government makes no effort to protect local industries or local ownership.
    7.All prices are determined by the market.
    8.No minimum wage.
    9.Privatize… health care, post office, education, retirement pensions and national parks.
    10.Break the New Deal (the uneasy truce between state, corporations and labor)
    11.Destroy worker protections.
    12.Expropriate whatever workers and governments had built during decades of public works.
    13.Transfer shared wealth of America’s taxpayers to private hands.
    14.Cloak it in the language of math and sciences, as if it were a technocracy.

  21. Simon is being grossly misleading leaving out important background context. In reference to Bernanke’s loose monetary policy views in 8/2003, Simon Johnson points out that

    “This was, of course, at a time that the speculative fever and outright malpractice in the housing market was really taking off.” – Simon Johnson

    Here are some historical context that is left out.

    – 3 years earlier, we had the huge crash of the tech bubble (the tech sector still hasn’t recover)

    – 2 years earlier, we had 9/11 (did we already forgot what that event did to our economy and society?)

    – 5 months earlier, we invaded the Iraq war (in addition to the war in Afraganistan).

    – Unemployment in 2003 was near the peak of the previous 10 years. Many places had high single digit or double digit unemployment.

    I have the following questions for everyone:

    1. Does any intelligent reader really think Simon’s criticism of Bernanke’s view in 2003 is fair without the historical context?

    2. Is Simon Johnson’s expectation that Bernanke should be able to identify bubbles right at the “taking off” stage intellectually honest?

    3. Do we want the Fed governors to honestly and openly express their concerns and opinions during FOMC meetings? Or do we prefer Simon Johnson’s after the fact self righteous finger wagging and do we prefer that the Fed governors to bite their tongue?

    Intellectually honest and fair criticism is constructive. After the fact, self righteous finger wagging using cherry picked data out of context is deceptive and destructive.

  22. “are compensated far less, than the guy who clicks a mouse all day in an office.”

    even in my lifetime there was a period when it was the other way around – even today if you look at our union tariffs “technical” employees (everybody who is below university education) have a higher guaranteed salary in each category than the ones agreed upon for the “clerical”

    I think to have the fight between blue collar and white that would only serve the “higher ups” purposes it should be against incompetent big headed gamblers, fashion/Zeitgeist addicts and the like in positions were they can wreak havoc

    what happened more and more after the war in my view was a revival of class war. Maybe it is more obvious in Europe but I’m sure it is there over the Atlantic also – the cake gets smaller because so many want some and so the decision of who gets to the top comes to the foreground again.

    For us white and blue collars I would recommend a lesson that a cook gave to Tuppence, one of Agatha Christie’s heroines. When Tuppence a modern woman of the thirties tries to have a friendly woman to woman chat with cook, cook gets all stern and tells madam that that is very unappropriate behaviour.

    even when your boss wants nothing for free when he pats you on the shoulder and is a genuinely friendly guy – when two classes try to mingle as if there was no difference the lower one gets usually screwed – exception certain ritualised and thus sheltered events

  23. I agree silly things, with the further context you have presented, the patent error in loose monetary policy stance of Mr. Benrnanke is even more egregious.

    Yes we want FED members to be honest and open. And a further yes to your salient observation that is not the lack of recognition of the nascent bubble that is problematic – the issue is the attempt to blow a bubble in the first place.

  24. Yes, I think Simon is a bit harsh with this one. I feel pretty lucky to have Ben Bernanke perhaps the most preeminent Great Depression scholar living today, to be our Fed Chairman. He has played a large role in saving us from a repeat. What else are you going blame on Bernanke, Simon – that we should have a carbon tax, we need to bend the curve on healthcare costs,. . . Sure, I’d love him to get involved in these debates, but c’mon, do you think he’d ever get re-appointed if he started advocating these things?

  25. “Honestly, I’m not sure which is more damning… They knew and did nothing, or they never even knew in the first place.”

    I vote for the second because the first leaves the hope that they saw the situation clearly but a bit too late or dawdled a bit and then found themselves in a bind that whatever they did the outcome promised to be catastrophic i.e. got overwhelmed by complexity themselves

    the second means that they preferred to theorize in their academic Wolkenkucksheime=Cloud Cuckoo Homes and convinced themselves that the nitty-gritty of life out there would run like clockwork according to their theories. And they didn’t look outside because reality is so perfidious to insist again and again not to comply with even the most wonderful and intricate theories

  26. History will judge Bernanke negatively, not just because he badly missed the bubble, but also of the predicament he has left the country in. The negative consequences of his policies – especially, propping up insolvent banks and financial institutions, will haunt us for years to come. The country is structurally impaired because of his policies. He should have adminstered the bitter medicine so that the excesses were washed out, but he failed miserably at that. With his green shoots comment, he has subscribed to the theory that overt confidence will cure all ills – no need for tough actions. His implicit view (and that of Geithner & Obama) is that they need to buy enough time by propping up the confidence and the stock markets, so that the fundamentals will catch up sooner or later. This is a form of a ponzi scheme that is causing this unsustainable market rally. He is hoping he would be re-appointed before this current market bubble he helped create collapses.

  27. silly,

    Are you saying that with 6-30 million Americans un or under employed, depending on which numbers you look at, record foreclosures an impending commercial real estate crisis along with record profits & bonuses for the big banks, that fed policy from 2003 thru 2008 was correct?

  28. silly,

    Further to above –

    Are you also saying that there is nothing we can do about bubbles & therefore Bernanke was a good Fed Chairman during that period? Because there was nothing he could have done about the bubble? So he did a good job?

  29. The Fed apologists can’t seem to acknowledge how badly the Fed screwed up. Excuses don’t change the fact that they created the mother of all crises.

    What hope do we have that the Fed and their apologists will see how the Fed enables rent seeking by the financial industry and the corruption of the real economy? Only then we’d have a chance of fixing the problem. I won’t hold my breath.

  30. J.R.

    There are deep and complex issues in our economy and in our financial system that got us where we are today.

    – We can’t fix these problems by taking a holier than thou self righteous stance.
    – We can’t fix these problems by cherry picking data to support pet view points.

    By the way, below is another accepted view of the issues at the time that Simon Johnson left out of his presentation. If you think about it, this is where the real and the hard problems lie. Please see both Fred’s post and StatsGuy’s follow up.


    Simon Johnson’s superficial and self righteous views are deceptive and counter productive.

  31. I agree with Simon that Fed should apologize, but I think it’s premature to come to the conclusion that monetary policymakers need to bring more goals into their decision making. I think a bit more humility from the policymakers would have gone a long way: the housing bubble would have been much smaller had the Fed (especially Ben) were less arrogant and had some humility in their abilities.

    In the early summer of 2003, it was obvious that we were no longer in the recession, although the labor market continued to be disappointingly weak which made the recovery fragile. It was equally obvious that policy was very accommodative at 1.25 (or 1.75, as the debate started around fall 2002). Many people within the Federal Reserve argued for patience: keeping the rate unchanged and allowing the effect of the easy policy time to work through the economy. If the Federal Reserve had enough humility with their ability, this would be the prudent approach. After all, their ability to correctly read current economic conditions is limited, their ability to forecast is even less, and monetary policy is supposed to work with long and variable lags, typically between 6 to 18 months.

    But no, Ben and co arrogantly thought they could do better: they could add more monetary stimuli to the economy to get it jump start and they would know precisely when to take out all these additional stimuli such that there would be no unintended consequences. So they cut the fed funds rate further and tried hard to manipulate the long-term treasury rate lower — remember the “Bernanke put”? They ended up committing the FOMC to hold the low rate for a “considerable period” in their attempt to bring down the long term rates, and effectively tied their own hands. And their effort was a crucial ingredient in the housing bubble. The exceptionally low interest rates lead to higher asset prices, especially higher housing prices.

    Bubbles come and go. Local housing bubbles form and burst frequently. They only become a threat to the nation when they are engineered by a central governmental power. I always think it’s disingenuous for the Fed to say they couldn’t have done anything to identify, let alone to prick the housing bubble when they actively fueled the air to the bubble. Sadly, there is a high probability this whole farce (of generating asset bubbles in the name of saving the economy) will be repeated in the next few years.

  32. 1. Greenspan was the chairman of the Fed in 2003.

    2. Greenspan definitely could have done a better job. In fact, he admitted that his views on market regulation was wrong during a congressional hearing early this year.

    3. Greenspan keeping interest rate too low for too long contributed to the current crisis.

    4. Bernanke has stated publicly that Greenspan’s past regulatory views needs to be rethink.

    5. However, it is very important that we recognize there are larger economic forces at work. The following by Fred and StatsGuy touched on it.


    When Greenspan tried to raise the fed fund rate in 2004, the long term rate actually moved in opposite direction! Remember the term “inverted yield curve”? This is due to the much larger economic imbalance around the world. To focus on the Fed’s action is to miss the forest for the trees.

    Bernanke has done an excellent job as the Fed chairman. We are very fortunate to have him during this crisis.

  33. “”…”It’s not our job…”we don’t have the powers”…”the politicians wouldn’t have supported us”…is what senior Fed people now whisper around Washington”…” captures the mindset of Fed policymakers. The culture of see no evil, hear no evil, fit with the prevailing political climate, and is evidence that the Fed bends it’s independence and shades it’s policies to suit the administration of the day. Include the Fed as part of the “deep capture” problem.

    The derivatives issue clearly shows that “senior Fed decision makers were not even thinking about …first order financial sector issues”. The hands off approach to derivatives may have been a political decision, but the Fed has no such congressional mandate to be political. The Fed has a congressional mandate on employment and price stability. Who would argue that the derivatives problems did not greatly impact employment and prices. The Fed’s responsibility includes an awareness of all such risks. The Fed cannot reasonably argue that it was not their job.

    A Fed apology won’t fly either. The financial meltdown happened on Bernanke’s watch and his fate should follow that of former General Motors leader – Waggoner.

    The Fed problem is bigger than Bernanke. The Fed has little incentive to “lean against the wind”. Current Fed policy may be characterized as “not rocking the boat” and cleaning up with taxpayer money when problems develop.

    Perhaps, removing some of the Fed’s powers to spend taxpayer money would focus their attention on prevention.,

  34. StatsGuy: “All in all, I’d rather live in a world of steady-state moderate growth. But given the choice, I think I prefer a constantly accelerating bubble to a constantly deflating anti-bubble.”

    IIUC, the Fed’s target inflation rate is around 2%. However, since 1980 the socio-economic stratification of U. S. society has increased greatly. Do you think that the Fed would have done well to have targeted a higher rate of inflation, such as 5%? Or would a higher rate of inflation not have had much effect on stratification?

    Thanks. :)

  35. StatsGuy
    Do I really understand you to prefer Wall Street governing monetary policy and a constantly acclerating bubble?

    How would you see your preferred arrangements managed so as to avoid a bubble crash and monetary policy favoring the insiders? This seems like a recipe for disaster as a preferred norm

    Would you mind clarifying your post?

  36. The conventional argument is that inflation harms those who are least able to hedge against it (e.g. the poor). Data is conflicted, but generally supportive of this. Here’s the seminal paper:

    Click to access S98romer.pdf

    “The time-series evidence from the United States shows that a cyclical boom created by expansionary monetary policy is associated with improved conditions for the poor in the short run. The cross-section evidence from a large sample of countries, however, shows that low inflation and stable aggregate demand growth are associated with improved well-being of the poor in the long run.”

    And since Romer is now on Obama’s staff, you can bet what the policy direction is (especially since, after 8 plentiful years at the deficit-trough, the opposition party has inflation is bad when it is out of power).

    The paper is quite famous, but the data on which these strong conclusions are based is very inconclusive if you read it – even pulling out a few giant outliers, most of the regression relationship is driven by a handful of high-inflation countries. They have only 66 data points (not many), but in reality countries are highly correlated (so they’re not really independent observations, even though the regression treats them as such). Romers mention causality problems, but dismisses them as unimportant.

    If you look at the graphs without outliers, you can see that there are two or three distinct clusters of countries… In separate graphs, among developed countries the regressions have a negative slope, but they have only 19 data points, and the relationship is entirely driven by Portugal, Greece, Ireland… and Turkey. Ahem. All of them shining examples of political stability…

    Finally, the paper is on the poor, not the middle class.

  37. “Do I really understand you to prefer Wall Street governing monetary policy and a constantly acclerating bubble?”

    If the alternative is utter financial implosion, maybe. I’m growing weary of the rapid, paranoid, conspiracy-theory Fed-haters.

    Saying the Fed should not be put in charge of financial consumer regulation because it is an institution that is _designed_ to favor bank-stability (and hence profitability) at the expense of consumers is spot on. Jumping straight to “the Fed is corrupting the money supply!!” when we currently have NEGATIVE 2% year on year price changes and a MASSIVE debt to GDP ratio (with interest rates that are predicated on 3% nominal GDP growth and 2% inflation) is patently dangerous. Welcome to national bankruptcy.

    The result will be a double dip recession when the politics-sensitive Fed withdraws its monetary supply support over the next 2-4 months (which is scheduled to happen).

    1937 version 2.0

  38. Anybody seen this? Debt repudiation. Man, this took a lot of courage. Just think what’s going to happen when the banks, Bernanke, Geithner, Summers & Krugam, et al get a hold of this. They’re going to scream to high heaven. A lot of hot air & bluster coming up.

    But, does this include all loans or just mortgages? Seems like all we need is to get this around the blogosphere, then set a date. Could this be the beginning of the end of the plutocracy? Sounds like a good start.

    Wonder what Simon & James think about debt repudiation?


  39. Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late. … to make sure it won’t happen again.

    Do you mean like the legislation that was enacted after the last great depression to “make sure it won’t happen again” that Summers managed to have repealed in the 90s?

  40. Further to debt repudiation –

    Everybody (all the common people excluding fat cat plutocrats) default on the same day! How awesome is that? No more house payments. Just lower rent. No more under water. No more big banks!

    Think what that will do for the economy.

    Just pay rent until you can buy the house back at a cheaper price. The market price. Which will become the price on the banks books? Minutiae. Most states have nonrecourse debt laws anyway.

  41. Are those the prescription for reform? As far as I can tell, the current situation could be improved by following those things. For example, #5, tax all people at a flat rate. Now, the rich pay taxes at a lower rate.

  42. “Anachronistic conceptual frameworks” can come in very handy when you want an impersonal scapegoat.

  43. 1) It is certainly true that hindsight is 50/50 and that the “historical context” you point to may have influenced the judgments of the Fed regarding rates.

    The criticism seems to be that the Fed was clueless about the potential ramifications of signaling that interests rates could be cut again or at the very least that the status quo would be maintained.

    2) “Our top monetary policy makers completely missed the true nature of the Great Bubble and its consequences, until it was far too late.”

    While it is easy to be a Monday morning quarterback, it is hard for me to believe that anyone could dispute the truth value of the above statement written by Johnson.

    3) Accountability demands that Fed governors honestly and openly express their concerns during FOMC meetings. If criticism of concerns expressed during an FOMC meeting are verboten because of potentially negative consequences then we truly do need a new system.

    Finally, once a policy has been implemented ALL criticism of it is after the fact. That does not mean that “after the fact” criticism is necessarily dishonest, unfair or or self righteous. Sure tone is important, but the the validity of the criticism is independent of tone.

  44. My favorite example of the trickle down effect, Silke, is when some rich guy accidentally drops a $5 bill on the street and a poorer guy picks it up and buys some ice cream with it. Then the ice cream shop owner takes it, and uses it to make more ice cream. Soon from the $5 many people are eating lots and lots of ice cream.

  45. After the fact, self righteous finger wagging using cherry picked data out of context

    Everyone knows that this is the most satisfying kind of finger wagging.

    Who are we to deny an economist the simple pleasures of their profession?

  46. The criticism seems to be that the Fed was clueless about the potential ramifications of signaling that interests rates could be cut again or at the very least that the status quo would be maintained.

    It’s as if reading between the lines has become a lost art.

  47. You know, wouldn’t we all like stable growth, no poverty, stability and 2% inflation?

    I know I would.

    Is that what I will be getting with Ben Bernanke and Tim Geithner?

  48. This post is rather unfair to the Fed. The late Edward Gramlich, then a Fed governor, saw clearly the building storms and tried repeatedly to persuade Alan Greenspan to counteract them — entirely without success. Greenspan’s failure to recognize the problems, including both subprime loans and banks’ gambling, compounded by the Fed’s common institutional weakness of being totally dominated by a strong CEO, are far more the cause of its inaction than anything Bernanke said or did.

  49. The Fed was clearly aware of many upcoming problems and for instance with respect to the counter-party risk issue it suffices to read to of Greenspan´s speeches 2003 and 2005.


    And so the real problem is what stopped the Fed and others (like the IMF) from stop dancing or questioning the music while the music played.

    But, also, how are apologies going to serve us, if there is no real remorse and no real intention to rethink the regulatory framework. Regulators who could not even control a Madoff now want to tackle the task of controlling the systemic risks of which they are by the way one of the largest suppliers? Crazy indeed!

    One of the problems we have is that so many of the traditional discussants want and almost need to frame these discussions in the terms they handle such as monetary problem and interest rates, because that´s where they feel comfortable. But the real cause for the viciousness of this crisis lies in the incredibly naïve financial regulations that were never sufficiently questioned and that resulted from intellectual incest among a small group of regulators, cheered on of course by a small but very important part of the financial community. (Plus of course some major macroeconomic imbalances that are quite new to all of us and which will only be made worse by energy squeezing and climate change danger)

    And so if Simon Johnson can ask the Fed for apologies then why could I not ask Simon Johnson for his, he had his own sphere of influence, did he not?

    But, again, the world does not live on apologies; it lives on getting better… which by the way reminds me of a problem I wrote in a letter the Financial Times published in May 2006, before I was blacklisted by an ego there. The letter mentioned:

    “Let us not forget that inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

    This is just one of the so many pending problems… and so let´s get down to work, instead.

  50. That is patently unfair to Bernanke, and frankly a complete misunderstanding of monetary economics. I do not support him for a second term, primarily because he failed to recognize that monetary policy in spring/summer 08 was tight(even though it seemed loose to many observers), and he failed to act swiftly in stopping disaster (though it’s hard to say how much was him vs the rest of the Fed). But in spite of his mistakes, he wasn’t the monster you paint him as.

    I very much wish that all of those people who argue for the “bitter brew” of mass financial armageddon could experience it, without dragging the rest of us down into their self-imposed h3ll.

  51. You need to separate structural/policy issues (lousy infrastructure, insufficient R&D investment, bad tax policy, high deficits, poor regulation, obscenely dumb prison policy, multiple military quagmires, failure to reduce social transfer program expenses, lack of energy policy, lack of cohesive trade policy) from monetary policy issues.

    All the monetary component of policy can do is keep steady-state inflation and/or nominal GDP growth. Since we did not experience massive inflation (or even long term inflationary expectations) through the 2005 bubble, it’s arguable this wasn’t a _monetary_ problem. But rather a structural problem, and the failure of the Fed wasn’t its monetary policy, but it’s refusal to regulate banks (and strong opposition before Congress of bank regulation).

    Raising interest rates (which suppresses investment across the entire economy) is a phenomenally bad way to target a bubble in a single sector (especially when that bubble is directly caused by bad regulation).

    On the monetary side, the Fed’s failure was actually an excessively TIGHT monetary policy for most of the last year, leading to actual price deflation, and long term projections of sub-optimal inflation. And, quite possibly, triggering the financial panic.

    Perhaps the best reason to separate bank-regulation and monetary policy is so that ideological Fed-Haters are forced to be more disciplined in their arguments.

  52. Now, the rich pay taxes at a lower rate.

    that’s because of them having to do all that trickling down

  53. in my example people sport the more interesting fashion

    on film powdered wigs next to artistically designed rags add just the right kind of flavour – there you can squeal with asthetic delight while shivers of horror run down your spine at the same time

  54. of course the ice cream example is much better suited to be drilled into the brain of a soon to become McKinsey consultant and or financial wizard guy
    – the imagery it invokes in the brain does claim very little storage capacities and can be lot easier used as a standard for a lot of other useful explanations for the concepts the world is functioning on

  55. “the increase in the price of houses is not inflation”

    was it Churchill who is quoted with

    I never believe in a statistic I haven’t fiddled with myself

    (if it wasn’t him it would be befitting for a guy who asked to guess on how history would regard him with “I intend to write it”)

    would it be good or bad if we’d get another adventurer AND gentleman in high office insted of all those super-virtuousness proclaiming saints?

  56. “I very much wish that all of those people who argue for the “bitter brew” of mass financial armageddon could experience it, without dragging the rest of us down into their self-imposed h3ll.”

    thank you –
    the binds, the Catch 22s, the quirks of human nature’s limited choice of actions still need a lot of telling (and analyzing?)

  57. UnRulley,

    To your point #3, the key issue is rather the criticism is fair. Simon Johnson has grossly misrepresent the context by cherry picking the data.

    Obviously our goal is to prevent a repeat of this crisis. However, Simon’s disingenuousness will not lead to better decision making next time around. Those that simplistically accepts Simon’s disingenousness on face value will only add to the disinformation.

    By theway, to your point #2, I predict our top experts will completely miss all future crisis until it is too later.

  58. To the whatever degree Bernanke deserves rebuke, doesn’t Geithner deserve similar scrutiny? Late 2003 he assumed the Vice Chair of the Federal Open Market Committee… and later obviously had a key role during the AIG, Lehman, and Bear Stearns decisions.

    While appreciating the apologists (above) that have helpfully put the original 2003 quote into a proper context, it naturally appears to the common man that the same folks running the machine when it broke are now the experts bravely accepting the call to save us.

  59. I agree that it is generally a good idea to restrict the responsibility and power to simply control inflation. But I am surprised you do not see that the exceptionally accommodative monetary policy (much lower than a simple Taylor rule would have called for) was one of the major causes (if not THE major cause) of the housing bubble.

  60. Thank goodness that we have Bernanke as the Fed chairman, the man single handedly saved the financial system when Paulson aka mr. moral hazard almost destroyed when he let Lehman fail. Bernanke and Geithner saved us from the Great Depression II.

    Having said that, the appointment of Paulson was probably the best appointment that Bush ever made. Even though the guy made a huge blunder in letting Lehman fail, he tried his best to save the system. One can only shudder to think of what might have happened if outsiders like Paul O’ Neill or the incredibly ineffectual John Snow had been in charge during the crisis we probably would have ended up a banana republic by now.

  61. (the thread clearly aging now)… But what did Bernanke do to save us from GDII and what did Geithner do to save us from GDII? The blunders from last fall aside, everyone on the team was facing something never previously witnessed. Krugman says that Bernanke is the right guy for the job because of his resume… because he devoted so might energy to studying the GD and Japanese stagnation. If resumes were the key, GHW Bush would have been a great President.
    This may not be a corollary… but do you feel that Bernanke sees Fed as an independent entity or a pawn to serve Obama/Geithner?

  62. “But what did Bernanke do to save us from GDII and what did Geithner do to save us from GDII?”

    They did everything in there power to stop the financial sector from collapsing. They stopped Bear from failing, they prevented the bankruptcy of Merril and did not let AIG go under, these and several other moves is why we still have an economy.

    “Krugman says that Bernanke is the right guy for the job because of his resume… because he devoted so might energy to studying the GD and Japanese stagnation. If resumes were the key, GHW Bush would have been a great President.”

    Ben Bernanke used some lessons from the great depression to avert GDII. For example, the fed was not active in preventing a depression after the crash of ’29 but bernanke was not going to be the guy who stood back and watched it happen, he was going to do whatever it took to save the system even if it meant forcing JP Morgan to buy Bear or going to beg congress for TARP.
    Another example of how studying the depression helped Bernanke avert another GD can be found in his thesis as a Ph.D student where he studied the impact of deflation in on the depression. This helped shape up his decision to risk future inflation by injecting liquidity into the system, so as to stave of deflation.
    In ’37 the fed decided to tighten monetary supply which ended up being one of the worst economic decisions ever made, Bernanke has obviously learnt from this by not being froward and overly optimistic yet and jumping on the bandwagon that the economy is on a rebound, he is still more cautious than ever.

    Let’s not forget that some of the best ideas during the crisis came from Bernanke who was able to use some of his knowledge to make good decisions, even if they were swimming in uncharted waters.

    “This may not be a corollary… but do you feel that Bernanke sees Fed as an independent entity or a pawn to serve Obama/Geithner?”

    Bernanke has always stated that the fed should always remain as an independent entity and should only be involved in monetary policy and not fiscal policy, infact, he said this on the day of his confirmation and he still holds on to it. He has objected to this treasury’s massive spending because he is trying to prevent inflation.

  63. in everyday life the experience is quite commong that if avoid all the mistakes of the past you might end up in exactly the same mess
    Has anybody looked at it that way? that parts of what turned out wrong might be right for today?
    I have no way to know how much this constant talk about avoiding the mistakes of the past describes Bernanke’s actions correctly but it would be nice to know, if he has enough clout and independance of mind to initiate something which would be decried by everybody as having been tested and failed

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