Farewell To Ben Bernanke

by: Scott Sumner

Morgan sent me this WSJ piece by Austan Goolsbee:

Bravo for Bernanke and the QE Era

Admit it: The Fed's loose money policy worked. Now the challenge is how to manage the tapering.

. . .

Think back to the days before the 2008 crisis or recession. If confronted with the scenario that would follow-five years of GDP growth of only around 2% a year, five years of unemployment rates around or above 7%, core inflation consistently below 2%-the near-universal response of economists would have been for the Fed to cut interest rates.

So Goolsbee views this as success, but never tells us why. He never explains what the Fed should be targeting, or by what criterion he judged the policy a success.

I believe Goolsbee is representative of the economics profession circa 2014.

His speech's audience at the nation's largest gathering of economists looked even more comical than normal with their snow boots and hat-head, but they gave his remarks a standing ovation. It was quite different from the icy reception he has grown accustomed to from his critics (including several on this page) over the past 3½ years during what could be called the QE Era.

The Fed did poorly over the past 5 1/2 years. But perhaps Bernanke does deserve a standing ovation. Everything's relative. As far as I can tell Bernanke outperformed the profession, which is all we can really ask of a policy leader. Here is some evidence:

1. Polls show the profession was generally either equally hawkish or more hawkish than Bernanke. Before QE3 and the forward guidance decisions of late 2012 hardly any economists thought policy was too tight. Many thought it too easy.

2. However, Ben Bernanke thought it was too tight. In mid-2012, he didn't even have the rest of the Fed behind him even though it was mostly Obama appointees. During the summer of 2012, he had to twist arms and schmooze Fed officials to persuade them to sign on to a policy that successfully prevented the austerity of 2013 from driving the US into a double-dip recession.

3. He outperformed the most comparable other large central banks, in the eurozone and Japan. And not by a small amount, he massively outperformed.

4. Based on their recent public statements, either Greenspan or Volcker would have been complete disasters. Trichet clones. And remember that Greenspan and Volcker are two of the most successful Fed chairmen in history. Thank God we had Bernanke and not either of those two. Don't know if age was a factor, but they had clearly lost it.

[Last time I made that comment I got accused of ageism. What nonsense! How do you think Lebron James will be doing at age 85? Bernanke served from age 52 to 60, peak years for a monetary economist. By the way, I started blogging at age 53, and am currently 58. If I live to be 85, I'll be rambling incoherently about income, inflation, and interest rates all being completely meaningless. Oh wait, I do that already.]

5. Bernanke had studied both the Great Depression and the Japanese "liquidity trap" and hence was better prepared than almost any other economist to deal with the crisis of 2008. From a market monetarist perspective he did poorly. But market monetarism is a tiny fringe group that's completely out of the mainstream. There was absolutely no way that Bernanke could have implemented the MM agenda even if he had wanted to. Judging the Fed chairman by this criterion would be like judging a President of the US on the assumption that he was a dictator freely able to enact the preferred agenda of a Bryan Caplan or Matt Yglesias. You judge people according to their marginal product. Bernanke did better than most would have done in his shoes. And for that he deserves thanks, and an enjoyable retirement.

If the economics profession had been solidly market monetarist in 2008, then I'm confident that Ben Bernanke would have gladly implemented NGDPLT. The economics profession never gave him the support he needed to be more aggressive. The profession failed us, the Fed was just a symptom.

OK, start hammering me in the comment section for being soft on Bernanke. I don't care.