Saturday, February 22, 2014

Some Comments on the Fed Transcripts

Joao Marcus Nunes has provided a wonderful reading of the Fed transcripts, replete with his customary graphs that tell a thousand words. Please read the linked post. I find it impossible to deny his charge that the Fed was overly focused on inflation.

I just want to make a few additional points, which he may not agree with:

1) The oil price shock in Greenspan's time is an excellent point that I did not know about. Rather than an oil price shock, the 2008 Fed was responding (incorrectly) to the threat of an oil price shock to inflation expectations. I think crossing the $100/bbl barrier for WTI crude (and the concomitant China demand story) had a serious psychological effect on policymakers. Thankfully, Bernanke did not make that mistake again when the Arab Spring occurred. His critics (see next point) suggested that QE was leading to inflation, but he held firm.  Again, I can't prove it, but I think we should be grateful for the development of shale resources in the US. Not only was there the promise of future oil production, but there was a HUGE difference in natural gas prices in '08 and '11 (crossed $13/mmBtu in '08 but sub $5 in early '11).

2) I said that we shouldn't abuse the transcripts to play "gotcha" with those who got it wrong, or said things that were slightly wrong. However, I do want to say something about Richard Fisher. Not only was he completely wrong in 2008, he refuses to hold his hands up and admit the mistakes, and continues to peddle the same line. He says some quite sensible things on TBTF regulation, but his record on monetary policy is frankly dreadful. It is actually quite scary that so many people still hold him up as a monetary expert.

3) Joao Marcus is absolutely right that the level of inflation expectations was lower than in the Greenspan era, and it therefore seems strange that Bernanke reacted by "leaning" against inflation. That said, I think we have to realize that (in human fashion), they were paying attention to the change, rather than the absolute level. As his graph shows, the Fed could conceivably have been concerned about the run-up from sub 2%. This does not absolve them of the mistake, but it's a charitable interpretation of the complex issue they were dealing with.

4) People often play the "what if" game, which is nothing but a pleasant parlour game. In the monetary history I've read, the biggest "what if" is how Benjamin Strong would have responded to the onset of the Great Depression. Many argue that he would not have allowed the monetary tightening that worsened the downturn. Totally unprovable but fun to think about it. So here's my little addition to the game (probably premature since I haven't read all the transcripts yet). I think Rick Mishkin's departure from the FOMC weakened the Board of Governors at a crucial time. He submitted his resignation on May 28, his departure was effective on Aug 31, and 15 days later, the Lehman bankruptcy occurred. This is important because he was one of the members who was incredibly concerned about a severe recession, and was calling it a financial crisis by mid-March. Mishkin's reputation has taken a bit of a battering thanks to the Inside Job, but there's no doubt that he had a lot of foresight as to what was developing. Would he have been able to convince Bernanke to focus on the brewing storm? We'll never know.

1 comment:

  1. Ravi, I don´t disagree with your comments at all. I just wanted to focus on the narrow "inflation obsession" reason for the "monetary malpractice". And comming while Bernanke was at the helm makes me pessimistic. That´s because if you read some of his papers from 15 years ago, including the famous "self-inflicted" on Japan, you would expect much better guidance from him (which makes me suggest candidates should have proven leadership qualities!
    See this paper with Getler that deal directly with oil shocks: