Federal Reserve


What if Bernanke Was Always Less Aggressive Than We Thought?

One of the biggest questions in the economics blogosphere has been: "Why is the Federal Reserve repeating the same mistakes that Japan did even though its Chairman has blasted Japan for its own inaction in response to its economic crisis?"

Paul Krugman takes a stab at an answer in the New York Times Magazine. It contains a lot of analysis that will be familiar to those who have been following these debates since the Fed's second round of quantitative easing, but I want to focus on the part of the piece which really highlights how doomed we all were.

I had long assumed that the main problem facing the Federal Reserve and Ben Bernanke was the political pressures being arrayed against him: a Conservative movement and Congress that was prematurely calling for tighter money and a President who showed no interest in fighting aggressively for FOMC board members.

Yet Krugman cites a new study which suggests that Bernanke had moderated his stance long before the crisis even began:





I had thought that the obstacles to effective Fed policy began with the "Open Letter to Ben Bernanke" issued in November of 2010. It turns out that Bernanke was already moving towards a more limited role of what the Fed could do even earlier.

This is pretty remarkable stuff and raises a frightening question: if this is what happens to someone who used to espouse aggressive monetary policy, what will happen to someone more timid? It is highly unlike that a President Romney will reappoint Bernanke and its not clear Obama would either. How likely is it that the next Fed Chairman will be more likely to prematurely raise interest rates, no matter who controls the White House?