“I think in retrospect, yes, it was a mistake,” Ben Bernanke told Andrew Ross Sorkin, during an interview that aired during CNBC’s Monday morning programming.
He wasn’t talking about the Fed’s initial response to the financial crisis, which even the institution’s sharpest critics generally admit was necessary. Nor was he talking about the persistence of emergency monetary settings years after the crisis abated, a policy bent critics have variously blamed for everything from worsening inequality in developed markets to bubbles in financial assets to social unrest in the developing world.
Rather, Bernanke was talking about the Fed’s belated response to the highest US inflation since Jerome Powell was a young man (figure below).
Bernanke told Sorkin that Powell was attempting to avoid a repeat of the Taper Tantrum, which he (Bernanke) described as “a very unpleasant experience.”
Of course, there were a number of other factors in play, including and especially the Fed’s ill-timed shift to flexible average inflation targeting, which explicitly permitted overshoots in the interest of fostering full employment and guarding against the kind of deflationary mindset that bedevils the Japanese economy, among other objectives.
Additionally, Powell’s first year as Chair included both the VIX ETN extinction event and a communications faux pas which contributed to a mini-bear market. The annotated figure (below) plots one-month realized volatility on the S&P 500 with rolling one-month stock returns for 2018.
Those experiences are psychological scar tissue, and it’s worth noting that Powell endured nearly two years of incessant public criticism from the White House.
Whatever the case — whatever the rationale for gradualism — the Fed fell behind the curve. “I think they agree it was a mistake,” Bernanke went on to tell Sorkin who, in conjunction with the CNBC interview, published a lengthy article in The New York Times, under a flashy headline.
“Even under the benign scenario, we should have a slowing economy,” Bernanke said, for that linked piece. “And inflation’s still too high but coming down. So there should be a period in the next year or two where growth is low, unemployment is at least up a little bit and inflation is still high.” “You could call that stagflation,” he added.
Yes, you could. As it turns out, a lot of people are calling it that!
But Bernanke might not be aware of just how pervasive that characterization is these days, because as Sorkin went on to explain, “Bernanke has been in a self-imposed quarantine of sorts writing a book.”
That book, called “21st Century Monetary Policy: The Federal Reserve From the Great Inflation to COVID-19,” will be published on Tuesday.
And that’s where my coverage of this stops, because to some, Sorkin’s CNBC interview and companion article in the Times might be viewed as little more than promotional material for the 500-page tome, which can be yours in hardcover this week for just $35.00.
Get it now, though. Because given inflation realities, it might be $45.00 next month.
Let’s see, Bernanke helps create a housing bubble, (over?) responds to a commodity inflationary shock that probably wasn’t sustainable, then creates the greatest financial crisis in generations………………………….
Yes, he is correct the Fed is late here but I personally (surely) would not recommend following his path he took in 07/08. In fact, I might even hear his advice and do the opposite………………………………….
Today Bernanke is the voice of experience, hence the book. I tend to ridicule Jerome Powell because he is awkward, at best, in executing this very important role. Bernanke was better than Powell in selling the story behind his actions and communicating his rationale for action. But Powell is less sophisticated in his use of language.
Janet Yellen also could tell the story. And Greenspan was the ultimate spinner of tales. But the truth is that Fed Chair is a difficult role, to say the least. Too many interests hinge upon the effectiveness of Fed Chair leadership. I can’t imagine anyone would want the implied complexity and magnitude of the role. Powell has managed. But I reckon being good with words and telling a good story is a necessary job requirement.
IMO, Bernanke is the father of the “lost decade” due to letting the housing bubble and bank issues to grow and then his response to the issues creating the greatest financial crisis in our lifetimes (but probably not the only because of the response to it). SO therefore he is the father to the issues we have today via QE. Once on it it is hard to get off (obviously as we have seen).
Imagine if Bernanke had not allowed a housing bubble, to allow banks to overextend and reach, to not react to a hedge fund created (exacerbating the China demand) commodity inflation and then fathered the response (QE) to his “issues”. WOuld we have had a “lost decade”? Had we had 12 years of extremely easy money? Now we could go back to Greenspan as well but Bernanke could have handled it better imo. Yes, it is hard but it is easier to deal with problems early rather than letting them grow………………………………..