Bernanke battles on

Creative Commons (CCO 1.0)

Scott Pelley interviewing Ben Bernanke in Washington, DC, March 2, 2012

Article Highlights

  • The “tapering not tightening” claim is a semantic game that has confused markets.

    Tweet This

  • Bernanke concedes that tapering’s timing depends on the path of the economy. That implies that he does see tapering’s timing as important.

    Tweet This

  • When the dust settles, we shall probably see that the QE-ZIRP, double-barreled monetary boost continues, at least until growth gets back above 2%.

    Tweet This

Chairman Bernanke’s dovish written testimony for the Humphrey-Hawkins hearings on the economy and Fed policy aims to make three points: tapering (less bond purchases/QE by the Fed) is not tightening; when tapering occurs depends on the economy; and zero interest rate policy, ZIRP, will continue for an extended period, probably until late 2015.

The “tapering not tightening” claim is a semantic game that has confused markets. Tapering is less easing, the “lifting off the accelerator” analogy used by Bernanke. Eventually, QE will end. When it ends is what matters. If, as is currently the case, the economy is slowing, inflation is falling, and fiscal drag is heavy, ending QE, say in September, as some have said the FOMC will do, surely is an unwarranted reduction in stimulus. If you are starting up a steeper hill, you don’t lift off of the accelerator. You push down harder, even if it might not help you speed up. At least you don’t start rolling back down the hill.

Bernanke concedes that tapering’s timing depends on the path of the economy. That implies that he does see tapering’s timing as important. Again, when tapering starts matters a lot and should be conditional of the pace of growth and/or the path of inflation. More specifically, if in September the latest GDP numbers show growth below 1% and inflation is below 1% as well, reducing QE makes no sense. We can, I think, infer from Bernanke’s written testimony that he would readily agree with that claim.

In raising the issue of ZIRP while discussing QE, Bernanke accentuates the sometimes-unnoticed fact that the Fed’s unconventional, post-crisis policy is two-dimensional. ZIRP preceded QE, which was first introduced with QE 1 in March, 2009 after it became clear that the ZIRP-ERRA ($800 billion fiscal stimulus) combination wasn’t working. QE took on the “monetary big gun” role but it amounted to having Fed-financed budget deficits, something that made many Fed critics, both inside and outside the FOMC, uneasy. Surely, they warned, inflation would follow. When that didn’t happen because the economy was in a liquidity trap, something far too “Keynesian” for the Fed’s supposedly all-knowing critics to acknowledge, the cry became that “bubbles” will develop that will make exiting QE even more painful than not pursuing it. There is reason to doubt that notion, especially since many of the “bubble bursters” had previously claimed that a bubble can’t be identified until it bursts, that is, until it’s too late.

When the dust settles, we shall probably see that the QE-ZIRP, double-barreled monetary boost continues, at least until growth gets back above 2%. Then the Fed will start the “taper and pray” phase of the Great Monetary Experiment to end the Great Recession. By then we’ll have a new Fed chairman to kick around.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

John H.
Makin
  • John H. Makin is a resident scholar at the American Enterprise Institute (AEI) where he studies the US economy, monetary policy, financial markets, corporate taxation and banking. He also studies and writes frequently about Japanese, Chinese and European economic issues.

    Makin has served as a consultant to the US Treasury Department, the Congressional Budget Office, and the International Monetary Fund. He spent twenty years on Wall Street as the chief economist, and later as a principal of Caxton Associates a trading and investment firm. Earlier, Makin taught economics at various universities including the University of Virginia. He has also been a scholar at the Bank of Japan, the Federal Reserve Bank of San Francisco, the Federal Bank of Chicago, and the National Bureau of Economic Research. A prolific writer, Makin is the author of numerous books and articles on financial, monetary, and fiscal policy. Makin also writes AEI's monthly Economic Outlook which pairs insightful research with current economic topics.

    Makin received his doctorate and master’s degree in economics from University of Chicago, and bachelor’s degree in economics from Trinity College.


    Follow John Makin on Twitter.

  • Phone: 202-862-5828
    Email: jmakin@aei.org
  • Assistant Info

    Name: Brittany Pineros
    Phone: 202-862-5926
    Email: brittany.pineros@aei.org

What's new on AEI

image Recovering from tax time blues
image 10 welfare reform lessons
image Let HHS nominee Sylvia Burwell explain Obamacare lie
image Why bold ideas backfire in politics
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.