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When Even John Taylor Says Bernanke's Interpretation Of The Taylor Rule Is Wrong

Tyler Durden's picture




 

Something funny transpired over the the past two years in the Fed's interpretation of the critical Taylor rule, which Bernanke refers to in every testimony before Congress or the Senate: John Taylor, the creator of the rule, and Zero Hedge's nomination for Fed chairman (inasmuch as we need a Federal Reserve) said Bernanke is wrong in his interpretation of the rule, and if he had a proper interpretation the Fed Chairman should already be hiking rate. Yet leave it to Bernanke to believe he knows better what the rule is supposed to mean....than even its creator. From the WSJ: "Stanford University professor John Taylor, an outspoken critic of the Federal Reserve in recent years, has a new complaint: He says Fed Chairman Ben Bernanke is misrepresenting Mr. Taylor’s eponymous rule on interest rates." A brief reminder on the Taylor rule, which has been presented numerous times on Zero Hedge before: "The Taylor Rule offers a simple formula that economists often use as a
guide for the appropriate level of the federal funds rate. The formula
provides changes in interest rates depending on the level of inflation
and the output gap, which is the difference between actual gross
domestic product and the economy’s potential output. Depending on how
you define the rule (for instance if you give the output gap a lot of
weight in the formula or just a little, or if you use a projected
inflation rate or actual inflation) you can come up with different
interpretations of whether interest rates should be high, low or even
negative in a theoretical world." And an odd dilemma appears when one uses the original version of the Taylor rule as presented in 1993 or its 1999 revision: they provide totally different results: the first one says the Fed is wrong, the second one validates QE. Yet here is Taylor himself: "I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way." So is the entire US monetary policy based on a rule derivative that is not even endorsed by its creator? The answer is a resounding yes.

From the WSJ:

Mr. Bernanke said Tuesday that the Taylor Rule suggested that short-term interest rates, if they could be, should be pushed way below zero. That, in turn, helped to justify the Fed’s $600 billion bond-buying program, he said.

When Sen. Pat Toomey, Republican from Pennsylvania, challenged him on whether Mr. Taylor himself believed that, Mr. Bernanke asserted even Mr. Taylor has come up with variations of his own rule. The one he originally formulated in 1993 doesn’t support the Fed’s current policy, but Taylor’s revision to it in 1999 does support the Fed’s current policy, Mr. Bernanke said.

“There’s no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer,” Mr. Bernanke said in an exchange Tuesday with Sen. Toomey.

Taylor’s 1999 paper (read it here) does point to alternate versions of his rule. But Mr. Taylor says he never stood behind any alternatives to his original 1993 rule. Instead he says he was citing alternatives that others proposed, including the Fed. The 1993 version of the rule calls for a federal funds rate of around 1%, not close to zero as it is now. He charges Mr. Bernanke with misrepresenting his preferences.

“I did not propose or prefer an alternative rule in that 1999 paper, and it is hard to see how one could interpret the paper that way,” Mr. Taylor says in a blog post today.

WSJ's Hilsenrath explains why this is such a material issue:

If this were just two academics feuding over a formula, it wouldn’t be very interesting. But it’s more than that. Mr. Bernanke is the Fed chairman. Mr. Taylor is one of the most influential voices in monetary economics and he’s saying the Fed chairman is distorting his views to justify a controversial policy.

“It is important to correct the record because the ‘others have suggested’ rule has a much larger coefficient on the GDP gap and is therefore more likely to generate negative interest rates and be used to rationalize discretionary actions such as quantitative easing,” he says on his blog.

And below is the full transcript of the exchange between Bernanke and Toomey:

MR. BERNANKE: I think that many of the monetary or nominal indicators that somebody like Milton Friedman would look at did suggest the need for a monetary stimulus. For example, nominal GDP has grown very slowly. Growth in the money supply is in fact — I’m not talking about the reserves held by banks which are basically idle — but if you look at M1 and M2, those have grown pretty slowly. The Taylor Rule suggests that we should be, in some sense, way below zero in our interest rate, and therefore we need some method other than just normal interest rate changes to —

SEN. TOOMEY: Do you know if Mr. Taylor believes that?

MR. BERNANKE: Well, there are different versions of the Taylor Rule, and there’s no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer.
SEN. TOOMEY: My understanding is that his view of his own rule is that it would call for a higher Fed funds rate than what we have now.

MR. BERNANKE: There are, again, many ways of looking at that rule, and I think that ones that look at history, ones that are justified by modeling analysis, many of them suggest that we should be well below zero. And I just would disagree that that’s the only way to look at it. But anyway, so I think there are some — there is some basis for doing that.

Which begs the question: is the broken US monetary system so institutionalized that the only person willing to speak up against the faulty usage and interpretation of a rule, is its own creator? What would happen should the Fed follow the Taylor-endorsed rule is that QE2 would immediately have to be ended. But of course this will never happen: after all it is now clear the Fed's policy was never to actually control inflation or maximize unemployment: the whole point was always just to get stocks as high as possible. And when the bubble pops, which it will, it will be time to point fingers, and we are confident that the Fed will resort to blaming Taylor himself. Luckily by then there will be no Fed, as the monetary system will have finally reverted back to its one sustainable form, backed by either precious metals or some other non-dilutable instrument.

The fiat experiment has taken enough casualties.

 

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Thu, 03/03/2011 - 18:01 | 1016524 emsolý
emsolý's picture

It shall be referred to as the Modified Taylor Rule, then. Or the Unexpectedly unusually unconventional Bernankefied Taylor Rule. There, I fixed it.

Thu, 03/03/2011 - 18:07 | 1016589 Dr. Porkchop
Dr. Porkchop's picture

Bernankefied.

 

I like how that rolls off the tongue.

Thu, 03/03/2011 - 18:19 | 1016627 10kby2k
10kby2k's picture

Has Southpark done an episode on bernanke? 

Thu, 03/03/2011 - 18:21 | 1016639 redpill
redpill's picture

Bernankefied (adj.) <buhr-NANK-i-fie-d>: the state of being subjected to Bernankification.

Thu, 03/03/2011 - 17:55 | 1016543 SparkyvonBellagio
SparkyvonBellagio's picture


Dear benny - PHUCK YOU!

Unless the USA is currently being held hostage by Aliens from the planet PrintEmIfYouveGotem you are by far the Dumbest MotherPhucker ever birthed.

Could it be aliens benny? Seriously that is the only possible reason you'd sell out this Country for a bag of TV time and for the financial demise of 99% of the citizens. Do you enjoy seeing yourself on the teevee? We don't, your FUGLY mug literally looks like a skanky overgrown 70's bush from bad porn.

I have to ask you.... got crabs?

Hope QI 574722  (Quantitative Infestation 574722 finally makes you shave that thing)

 

 

ps Have a nice day you Phucking Cawksucker! 

Thu, 03/03/2011 - 17:58 | 1016549 Scottj88
Scottj88's picture

Almost nothing Bernanke says is verifialbe in the real world:

Check out this perspective of the debt crisis we are facing.  Speak to this analysis bernanke, I dare you...

http://thehardrightedge.com/budget/

-

It includes calculations with Bernanke's numbers showing 5 million to 18 million jobs lost if we actually balance our budget (very conservative, but check it out!)

Thu, 03/03/2011 - 19:30 | 1016898 NotApplicable
NotApplicable's picture

Well, if it was verifiable, it would be an extremely poor example of sophistry.

Thu, 03/03/2011 - 17:59 | 1016551 ghostfaceinvestah
ghostfaceinvestah's picture

Congrats to Toomey for even knowing Bernanke was misinterpreting the rule.

But without that justification, von Havenstein will just find another reason to print.

Thu, 03/03/2011 - 17:59 | 1016553 JohnG
JohnG's picture

I have a rule.  I call it the John rule.

Drown The Bernank in a toilet.

Thu, 03/03/2011 - 18:12 | 1016594 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

Rule #5. Imposed by Marla about 1.5 yrs ago.

A clear violation of free speech, YES. Does it matter, NO.

We all are thinking it but we have to be nice or the Southern Poverty Center will paint us into the jew corner.

Thu, 03/03/2011 - 18:29 | 1016662 JohnG
JohnG's picture

No, I don't want to violate his right to free speech.

I want to hear him gasp and gurgle and beg for mercy as I dunk him again and again and again until he stops twitching.

(Yes, I'm in a very surly mood today, moreso than most.)

Thu, 03/03/2011 - 18:48 | 1016731 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

Many, many vicarious thanks for sharing. Yes indeed!

Thu, 03/03/2011 - 17:58 | 1016554 101 years and c...
101 years and counting's picture

the Taylor rule needs to adjust for:

insolvency of banks

$100+ billion in banker bonuses, despite insolvency

Thu, 03/03/2011 - 18:00 | 1016563 camaro68ss
camaro68ss's picture

Its the I hate america rule

Thu, 03/03/2011 - 18:05 | 1016575 karzai_luver
karzai_luver's picture

I love it when the professors fight.

 

 

Fairy dust all over the place!

 

 

Thu, 03/03/2011 - 18:06 | 1016583 tmftdoyle
tmftdoyle's picture

"And when the bubble pops, which it will, it will be time to point fingers, and we are confident that the Fed will resort to blaming Taylor himself."

It's unfortunate, but I think things will play out differently. By the time the shit hits the fan, again, Ben, like his predecessor, will be taking down his $10-20mm annual retainer from all those he greased as a government official, and the next chairman will repeat the "no one saw it coming mantra", bail out his masters at the expense of the broad populace and wait for his two terms to expire so that he can pick which beneficiary he will choose to collect from.

Sadly, I thought that as a country we would have taken 2008 a bit more seriously. But, maybe next time the masses will finally demand no mas.

Thu, 03/03/2011 - 18:08 | 1016588 rlouis
rlouis's picture

SEN. TOOMEY: Do you know if Mr. Taylor believes that?

MR. BERNANKE: Well, there are different versions of the Taylor Rule, and there’s no particular reason to pick the one that he picked in 1993. In fact, he preferred a different one in 1999 which, if you use that one, gives you a much different answer

 

Bernbank's expression just before he provided that answer was priceless...

but really, in the fog of war the only thing that matters is that the military machine have the money to maintain the empire.

 

 

Thu, 03/03/2011 - 18:11 | 1016595 Sizzurp
Sizzurp's picture

Bernanke is a reptilian

Thu, 03/03/2011 - 18:10 | 1016598 Sancho Ponzi
Sancho Ponzi's picture

'Rules? We don't need no stinkin' rules.'

The Bernank

Thu, 03/03/2011 - 18:12 | 1016601 centerline
centerline's picture

It is just broken math inside a scheme whose overall mathematics ends in certain failure anyhow.  Seems like just another example of controls intended to keep the host alive a little longer... to play the ponzi out to it's maximum wealth extraction (maximum debt saturation for all of us of course).

Thu, 03/03/2011 - 18:15 | 1016609 Rainman
Rainman's picture

These guys spout some smart sounding bullshit....but they know the dial back of decades of bubble printing, manipulation, fraud and bad debt is gonna sink many ships sooner or later. They both have the same desire to make it later...an argument unto itself. 

Thu, 03/03/2011 - 18:19 | 1016628 Mad Max
Mad Max's picture

Bernanke = Baghdad Bob

Thu, 03/03/2011 - 18:20 | 1016631 franzpick
franzpick's picture

Listening to Ben 'n Tim's obfuscations is toxic and probably a lesson in how language is used to disguise thought;  if some day we hear one of them explain how a collapse of the U$D was the natural result of their long-term plan to establish the $ as the world's reverse currency, with all the resulting trade, debt and other benefits, I will remain underwhelmed, and of the opinion that those who attempt substantive debate on their propositions will become party to the crime.

Thu, 03/03/2011 - 18:19 | 1016632 glenlloyd
glenlloyd's picture

If you take the forumla and substitute john williams measures for gdp/inflation you get a significantly higher rate.

The value of a forumla is nil if the imputs are worthless.

Thu, 03/03/2011 - 19:32 | 1016916 NotApplicable
NotApplicable's picture

Not if your name is Bernanke. Then, the value is in its obfuscation.

Thu, 03/03/2011 - 18:23 | 1016645 LongSoupLine
LongSoupLine's picture

Taylor: "uh, that's not what I meant you assclown!"

 

BerBANKe: "You don't know what you meant, and I have a hot printing press...chump!"

Thu, 03/03/2011 - 18:30 | 1016664 Rider
Rider's picture

 

Perhaps the Chairman should learn to read english first.

Thu, 03/03/2011 - 18:36 | 1016682 nathandegraaf
nathandegraaf's picture

Again, I just cannot fathom how the nicest thing you can say about Bernanke is that he is a total idiot.  When "Maybe he's just stupid" is the most polite way your peers can define your relationship to your work, it is hard to imagine your work as being seen in a positive light, even through the peverted lense of percieved history. 

Thu, 03/03/2011 - 19:01 | 1016787 hamurobby
hamurobby's picture

MR. BERNANKE: There are, again, many ways of looking at that rule, and I think that ones that look at history, ones that are justified by modeling analysis, many of them suggest that we should be well below zero.

 

So the Bernanke sees himself as a conservative. I interpret that as he has many more moves left.

Thu, 03/03/2011 - 19:17 | 1016845 Catullus
Catullus's picture

The Federal Funds rate doesn't mean anything any longer.  The Fed has written about this several times. Banks needn't concern themselves with lending to each other, when they're getting paid interest on "excess" reserves at the Fed.  The Fed is now managing monetary policy in this fashion.

Thu, 03/03/2011 - 19:29 | 1016900 spinone
spinone's picture

This undermines the transparentness and credibility of the FED, and of the dollar.  Who could blame countries for creating bilateral trade agreements and rejecting the dollar as WRC

Thu, 03/03/2011 - 19:25 | 1016878 NotApplicable
NotApplicable's picture

LOL

On a similar note, I came up with this one day.

http://www.urbandictionary.com/define.php?term=krugmaned

Thu, 03/03/2011 - 19:31 | 1016905 playitcool
playitcool's picture

++ nice!

Thu, 03/03/2011 - 19:22 | 1016866 NotApplicable
NotApplicable's picture

Wow, color me shocked. Not only is Bernanke's interpretation labeled as intentional distortion, it's done so by WSJ's Hilsenrath?

Surely TPTB aren't getting ready to toss him under the bus when there's so much pillaging left to do?

Good thing it's almost beer-thirty. It's just too fucking weird these days, when reality actually appears realistic.

Thu, 03/03/2011 - 19:26 | 1016873 spinone
spinone's picture

I laughed out loud at the John rule.  If you missed it, read up.

This is a big deal. This means that an academic guy, who is supposed to be a big wig academic, totally mis-interpreted a collegue's rule. 

In the real academic world, you don't quote someone and also basterdize his/her findings. 

This really proves Bernanke is a bullshit artist.

THE CREDIBILITY OF THE DOLLAR IS AT STAKE WHEN THE FED CHARIMAN IS A BULL-SHITTER

Thu, 03/03/2011 - 19:48 | 1016972 Orly
Orly's picture

Oh, it's worse.  When the fellow academic says of the heretofore generally accepted economic principle that the guy who wrote it was mistaken!

Un()believable.

Thu, 03/03/2011 - 20:34 | 1017071 snowball777
snowball777's picture

It's even worse...he just plain lied about the modified rule's being Taylor's in the first place.

It's one class of mistake to apply a rule incorrectly, but this is either a problem in simple comprehension or an inability to suppress one's pathological instinct to lie under oath.

 

Fri, 03/04/2011 - 00:29 | 1017567 RockyRacoon
RockyRacoon's picture

Very apropos comments.   See my comment below about Nassim Taleb's interview on the topic of damage to society for academics and "economists" being wrong.

Thu, 03/03/2011 - 20:13 | 1017034 Sopra Tutt1
Sopra Tutt1's picture

"John Taylor, the creator of the rule, and Zero Hedge's nomination for Fed chairman"

The only person I know of, that can raise the bar to a higher level as a FED chairman, after Greenspan and Bernanke, is the one and only... Timothy Franz Geithner.

Thu, 03/03/2011 - 21:38 | 1017129 Pure Evil
Pure Evil's picture

Oh, who really cares if he follows the rules.

Uncle Benster is a rebel.

Keep printing those Professor Fun Bucks, Uncle Benster.

When he's finally printed a trillion trillion googolplexian dollars by Dec 21, 2012...........

well, we all know what happens then, the Earth will implode from the weight of all that funny money.

Thu, 03/03/2011 - 21:15 | 1017136 KickIce
KickIce's picture

Bernanke is a pirate.

They're not rules, more guidelines.

Thu, 03/03/2011 - 21:21 | 1017142 Waterfallsparkles
Waterfallsparkles's picture

Maybe everyone is angry that they did not get in on the Bottom and the FED gave all of the Banks the Money to buy up everything at the lowest prices.  Maybe people are angry about selling out at the bottom or they owned Bear Stearns, Washington Mutual, Lehman, Country Wide, Aig, Fre, Fnm, Nfi, New, Abk, Mbia, Pmi, etc. Plus, you have all of the people that ended up selling out at the totally bottom and when the market went up could not buy the stocks back.

In a normal market the stocks would have gone back to the bottom a second time to give you a chance to maybe buy the stocks back again after a small bounce.  That never happened.  This is not normal.  Bernanke stepped in and changed the normal function of the Market.

Yet, even if you happened to buy at the bottom now you have to sell your stock just to buy heating oil, gas for your car or food for your table. 

Such a shame.

Thu, 03/03/2011 - 22:12 | 1017246 Lapri
Lapri's picture

Bernanke was just sloppy. Bullard, in his paper ("Seven Faces of the Peril") last year, doesn't deal with "Taylor Rule" but "Taylor-type Rule". It's more like "inspired by Taylor's work but not Taylor's work".

Bullard's "Taylor-type Rule" where the nominal interest rate goes below zero is is the first of "Seven Perils". Page 7 of the paper here:

http://research.stlouisfed.org/econ/bullard/pdf/SevenFacesFinalJul28.pdf

Thu, 03/03/2011 - 23:05 | 1017349 dark pools of soros
dark pools of soros's picture

are those seven perils anywhere near Dante's Inferno?  Or Bernak's Benocide?

Fri, 03/04/2011 - 00:00 | 1017489 anonnn
anonnn's picture

"... I think that ones that look at history, ones that are justified by modeling analysis..."

Modeling analysis yields powerful results, such as: society strongly benefits when the rich-and-powerful class are immune to common, ordinary, garden-variety, run-of-the-mill, every-day sense of fairness.

Modeling, especially when done with the latest mathematical fads and hi-speed computers running the most complicated of team-developed algorithms, simply blows away any ordinary human logic.

No wonder that past efforts, before contemporary modeling, defined the limits of Homo Sap.

Whaddyaknow! The new meme is Justice Sucks. We all are so much better served by having father figures. Who would of thought...

Fri, 03/04/2011 - 00:43 | 1017515 RockyRacoon
RockyRacoon's picture

If this were just two academics feuding over a formula, it wouldn’t be very interesting. But it’s more than that. Mr. Bernanke is the Fed chairman. Mr. Taylor is one of the most influential voices in monetary economics and he’s saying the Fed chairman is distorting his views to justify a controversial policy.

http://www.charlierose.com/view/interview/11516

Nassim Taleb on Charlie Rose last night:  He says that economists can be wrong until people suffer for their errors.   I believe we are at that point.  The entire converstion is worth a listen (yeah, even if you skip Charlie's persistent interruptions and proving that he already knows what you are going to say).

"The risk that banks hold is like dynamite in the basement."

Taleb was outraged at Friedman's book, The Earth is Flat.

Pick up the conversation at 16:20 for the real core idea.

Fri, 03/04/2011 - 08:42 | 1017962 Judge Judy Scheinlok
Judge Judy Scheinlok's picture

It's a shame that a man with this type of innate wisdom is not put into a position of leadership.

Fri, 03/04/2011 - 00:07 | 1017528 AldoHux_IV
AldoHux_IV's picture

Insanity is doing the same thing twice and expecting a different outcome.  It can also lead to a total misunderstanding of reality.

Looks like fuck face Bernanke is insane and crazy, but I don't think we should let him off with any insanity defense... he should be so lucky.

Fri, 03/04/2011 - 03:12 | 1017785 hugolp
hugolp's picture

Which goes to show the "value" of this rules...

A rule depending on expected inflation and potential GDP is worthless. Potential GDP has to be the most stupid idea keynesians had.

Mon, 03/07/2011 - 20:43 | 1028089 lsjcma
lsjcma's picture

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