Bernanke's Muddy Message - What Is Monetary Policy Good For, Anyway?

by: Scott Sumner

Monetary policy is a panacea for demand shortfalls, for low NGDP.

That’s my view and that’s Mr. Bernanke’s view. At least I think it’s Mr. Bernanke’s view. See what you think:

WASHINGTON, Oct. 4 (Xinhua) — U.S. Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday that monetary policy is not “panacea” for curing the U.S. economic problems, while calling for the Congress and all economic policymakers to act together to boost the recovery.

“Monetary policy can be a powerful tool, but it is not a panacea for the problems currently faced by the U.S. economy,” Bernanke said in his testimony before the Joint Economic Committee of U.S. Congress. “Fostering healthy growth and job creation is a shared responsibility of all economic policymakers, in close cooperation with the private sector.”

The central banker said that “fiscal policy is of critical importance,” adding that a wide range of other policies– pertaining to labor markets, housing, trade, taxation, and regulation, for example– also have important roles to play.

If I knew nothing about Bernanke, I’d almost think he’s saying monetary stimulus won’t necessarily boost demand. But we know he thinks it will, that the Fed’s never out of ammo. So he must mean that more demand won’t necessarily boost RGDP.

But every time I read that quotation I start to wonder. And that makes me really angry. I presume Bernanke is doing this unintentionally, but he’s leaving the message very unclear, and I find that intolerable. We need to know exactly where the Fed stands. If there are any reporters reading this blog, I beg you to pin him down at the next press conference. Does he believe monetary policy has unlimited ability to boost nominal spending, or not? What does he mean by no panacea? More money doesn’t boost AD, or more AD doesn’t boost RGDP? Is he trying to disavow earlier comments that the Fed is not out of ammo, and never will be?

I have this dream where I’m at a fancy Washington DC cocktail party. I grab Bernanke by the arm and drag him over to President Obama. I say; “Ben, tell the President what you just told me, that the Fed can easily boost nominal spending in the US economy, but doesn’t think we need any more demand.” Then I wake up, and realize that the world isn’t like that. There is no imaginary cocktail party where views can be reconciled. People will keep talking right past each other, not understanding each others views on the most important issue facing the world today. What a shame.