Resistance is Futile

Paul Krugman criticized Fed Chairman Ben Bernanke on ABC’s “This Week” saying he  has “been assimilated by the Borg,” building on criticisms he made in a Times Magazine piece last week titled “Earth to Ben Bernanke.”

“I think what’s happened to Bernanke, as they say, he’s been assimilated by the Borg,” he said. “He’s become more concerned, probably unconsciously, with defending the Fed’s institutional safety, because it’s the apostle of price stability, than with doing whatever he can to get this economy moving. Which if he’d listened to Professor Bernanke, himself 10 years ago, he would know that he was supposed to be doing more.”

Krugman accused Bernanke of ignoring the economic advice he championed when he was a professor at Princeton and blamed the nation’s continuing economic issues on Bernanke’s failure to take actions he was expected to take, such as buying a bigger portion of the government’s debt.  He urged Bernanke to focus more on the growing unemployment rate.

“Allowing unemployment to stay near 9 percent, allowing the number of long-term unemployed to be 4 million, which it hasn’t been since the 1930s, which is destroying skills, destroying the attachment of workers to the workforce,” he said.

Earth to Bernanke

In his Time Magazine piece, Earth to Bernanke, Krugman acknowledges that Bernanke is a fine economist, noting that he is a a leading scholar of the Great Depression and modern Japan, and “the exact problems he would confront at the end of 2008.” Since he argued forcefully for an aggressive response, castigating the Bank of Japan for its passivity, it is odd that he acted differently as head of the Fed. The divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done is something he calls “the Bernanke Conundrum:”

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation…the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.”

“The Bernanke Conundrum”

According to Krugman, the Federal Reserve has a dual mandate: 1) price stability and 2) maximum employment; and it normally tries to meet these goals by moving short-term interest rates via adding to or subtracting from bank reserves. If the economy is weak and inflation is low, the Fed cuts rates, making borrowing attractive, stimulating private spending and potentially leading to economic recovery. Contrarily, the Fed raises rates if the economy is strong and inflation is a threat to discourages borrowing and spending, and cool the economy off.

However, while the current economic picture shows both a weak economy and subdued inflation,  rates can’t be cut further. Since the onset of the recession in 2007 until November 2008, , the Fed continued to cut short-term interest rates to nearly zero, hitting the “zero lower bound.” Has the Fed reached the limits of its usefulness?

Professor Bernanke and a number of economists, took notice of a similar situation in Japan in the 1990s, — when their huge real estate bubble burst, causing high private-sector debt and a central bank up against the zero lower bound. While the situation in the United States today isn’t identical to those faced by Japan, Japan’s slump was never as bad as the one we face today, and unemployment never as bad.

In a  2000 paper titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Bernanke argued that the Bank of Japan could still improve the situation if it would “abandon its excessive caution and its defensive response to criticism.” He stated that Japan should act like F.D.R. and do whatever it takes. Some of the actions he laid out included:

  • Quantitative easing —While short-term interest rates may be zero, and the Fed typically buys only short-term U.S. government debt, it could take a larger role in financial markets by buying long-term government debt, and mortgage-backed bonds to drive down the interest rates on these assets.
  • Change expectations about future Fed policy — Investors’ expectations that the economy will eventually recover enough for the Fed to start raising rates again can impact on the economy now. Investors assume the Fed will raise rates enough to keep inflation from rising much above 2 percent. But a wide range of economists, including the IMF’s chief economist argue that if the Fed were to raise its target for inflation for the next decade, this would aid an economy up against the zero lower bound, by persuading investors and businesses that it is not a good idea to sit on cash. Bernanke suggested that the Bank of Japan declare “a target in the 3-to-4-percent range for inflation, to be maintained for a number of years.”

Chairman Bernanke vs. Professor Bernanke

Chairman Bernanke has been much more passive than Professor Bernanke’s writings recommended. The Fed has bought over $2 trillion of long-term government debt and bonds of government-backed housing agencies, but this is much less than most analysts think is required to spur economic recovery. The Fed has only tried to influence market expectations about future policy for the  near term, announcing that it doesn’t expect to raise short-term rates until late 2014. And Bernanke in 2010 ruled out the notion of a higher inflation target saying it would undermine the Fed’s “hard-won inflation credibility.”

Don’t Worry Be Happy?

Krugman examines a minority view among some economists that high unemployment is structural and can’t be brought down by stimulating people to increase spending. What is structural unemployment?

“Structural unemployment stresses a perceived mismatch between the work force and employment opportunities: workers, so the story goes, either have the wrong skills or are in the wrong place. But as Bernanke pointed out in a recent speech, employment looks bad across the board: “The fact that labor demand appears weak in most industries and locations is suggestive of a general shortfall of aggregate demand rather than a worsening mismatch of skills and jobs.” As a result, he declared, the data ‘do not support the view that structural factors are a major cause of the increase in unemployment during the most recent recession.’ “

Regarding inflation, the Consumer Price Index has fluctuated wildly, driven mainly by fluctuations in the prices of raw materials, which are poor indicators of underlying inflationary pressures. Witness recent speculation-driven fluctuations in the price of gasoline, for instance. Core inflation, which excludes volatile energy and food prices, has remained fairly level.   Yet, the Fed, instead of  helping to improve and employment remains unwilling to take any further action to boost the economy.

Assimilated by the Borg?

Laurence Ball of Johns Hopkins University, who examined the Fed minutes to determine how and when Ben Bernanke’s views changed, found that the loss of resolve began shortly after he arrived at the Fed in 2003 when a Fed staff report rejected many of the ideas Bernanke previously supported.  Since that time, Bernanke’s comments and policy have been muted. What happened? Krugman points out that since 2008, the Fed has faced constant attacks over supposed inflationary actions. Right-wing bullying can’t be discounted: “he might well have returned to his earlier views if the political climate hadn’t been so hostile…As for his insistence that it’s not about politics — could he really get away with saying, or even hinting, that pressure from the likes of Paul Ryan is keeping him from pursuing full employment?”

Ball emphasizes both the pressures of groupthink and Bernanke’s shy personality. Krugman suggests that Chairman Bernanke’s reticence to take risks is to guard the Fed from blame for embarrassing failures by retreating to a narrow definition of the Fed’s role. For instance, it would be place the Fed in an embarrassing position if a higher inflation target were ignored by the markets as not credible.

“Back in 2000, Professor Bernanke warned against exactly this kind of retreat, harshly criticizing the Bank of Japan’s unwillingness to “try anything that isn’t absolutely guaranteed to work.” But within a year of his arrival at the Fed, he seemed to have been assimilated by the Fed Borg, like Capt. Jean-Luc Picard in a famous “Star Trek” episode, converted into a half-robot servant of a hive-mind.”

Time to Pull the Plug on the Borg

Krugman concludes that the Fed’s disappointing response given the scale of our economic catastrophe “represents the effects of both bullies and the Borg, a combination of political intimidation and the desire to make life easy for the Fed as an institution,” and the Fed’s unwillingness to provide that help makes the Fed part of a broader problem.

Consider, if you will, the current state of our nation. Despite hints of economic progress, we’re still in the midst of an immense disaster, in which unemployment and underemployment are devastating millions of American lives. And none of this need be happening! There has been no plague of locusts; we have not lost our technological know-how. Americans should be richer, not poorer, than they were five years ago. Yet economic policy across the board has become almost passive, has essentially accepted this disaster instead of trying to end it.

Krugman makes a compelling case. While he believes that Ben Bernanke has done a better job than others might have, he has not done enough.  At this point, it is necessary to acknowledge Bernanke’s role in rescuing the banking industry from the brink of disaster at the end of the Bush Administration.  It is fair to say that no one denies — with the possible exception of Ron Paul, who appears to be “living in the world that was 150 years ago”— that government is an integral part of the equation of the economic problem, and the Fed, as the Central Bank of the U.S., is an important part of this equation. So it stands to reason that if the Fed can play an integral role in effecting a recovery from the worst recession since the Great Depression, Chairman Bernanke’s reticence to do so, in direct contradiction to his former recommendations, should be questioned.

Snap! principle of the political “Collective”:

Whomever is elected or appointed to serve in the “Collective” is already as good as assimilated.