Bernanke Proposes "Price-Level Targeting" Before Next Crisis, Admits There May Be A Problem

Tyler Durden's picture

Having taken a four month hiatus from blogging, Citadel advisor and former Fed chair Ben Bernanke penned another article on his Brookings blog in which he discusses a familiar subject: that the Fed has run out of tools, a problematic reality which would be exposed by the next financial crisis, so in advance, Bernanke proposes an even more unorthodox monetary policy: price-level targeting.

Pointing out the obvious, namely that as a result of the bursting of the last Fed-created bubble, the US economy remains mired in "low nominal interest rates, low inflation, and slow economic growth" which "pose challenges to central bankers", central banks may want to consider temporary price-level targeting, or PLT, as Bernanke is "no longer confident" that the Fed’s “current monetary toolbox would prove sufficient to address a sharp downturn."

The problem, as the ex-Chairman explains, is that with estimates of long-run equilibrium level of real interest rate “quite low,” Bernanke writes that the next recession may occur when the Fed has “little room to cut short-term rates”; as "problems associated with the zero-lower bound (ZLB) on interest rates could be severe and enduring."

What Bernanke concedes here, is that the current pace of rate hikes and balance sheet unwind are not nearly rapid enough to provide the monetary policy buffer that will be needed to address the next economic crisis, and as a result the Fed needs to resort to more aggressive "temporary" measures to boost inflation, bypassing the Fed's implicit 2% inflation target, and heating up the economy substantially.

To short-circuit the effects of the zero-lower bound, and to "temporarily" (that word is critical to Benanke, who uses it no less than 24 times in his article) overheat the economy so the Fed can boost its recession-fighting ammunition, Bernanke "proposes an option for an alternative monetary framework" that he calls "a temporary price-level target—temporary, because it would apply only at times when short-term interest rates are at or very near zero."

As noted, Bernanke says "temporary" over 20 times, which is ironic because after the Fed injected over $4 trillion in liquidity in the financial system, and 8 years later the Fed is not only still unable to hit its stated 2% inflation target on a consistent basis, but openly admits inflation is a "mystery", a better word would be "permanent."

How does price-level targeting differ from conventional inflation-targeting? 

As Bernanke explains, the "the principal difference is the treatment of “bygones.”  An inflation-targeter can “look through” a temporary change in the inflation rate so long as inflation returns to target after a time.  By ignoring past misses of the target, an inflation targeter lets “bygones be bygones.”  A price-level targeter, by contrast, commits to reversing temporary deviations of inflation from target, by following a temporary surge in inflation with a period of inflation below target; and an episode of low inflation with a period of inflation above target.  Both inflation targeters and price-level targeters can be “flexible,” in that they can take output and employment considerations into account in determining the speed at which they return to the inflation or price-level target."

That is a long-winded way of saying that price-level targeting is an even more brute force approach to pushing inflation higher, one which ignores transitory bursts in inflation, which in a world of record debt has the potential to unleash a financial disaster as its sends the price of global (record) debt tumbling, creating a risk waterfall across financial markets, and reverberate in the economy. In other words, the Fed would flood the system with so much liquidity that economic inflation spikes and only afterwards is reduced back to some baseline level. What happens in between, to Bernanke, is of secondary importance, although with many Wall Street strategists conceding that a burst of inflation is the critical catalyst to unleash a sharp market drop, one could also say that Bernanke is advocating a market crash, wiping away trillions in "welath effect" for the top 1%.

Bernanke ignores such potential downsides, and instead focuses on the positive, saying that price-level targeting has two advantages over raising the inflation target: "The first is that price-level targeting is consistent with low average inflation (say, 2 percent) over time and thus with the price stability mandate. The second advantage is that price-level targeting has the desirable “lower for longer” or “make-up” feature of the theoretically optimal monetary policy."

That said, the author concedes that PLT has drawbacks:

For one, it would amount to a significant change in the Fed’s policy framework and reaction function, and it is hard to judge how difficult it would be to get the public and markets to understand the new approach. In particular, switching from the inflation concept to the price-level concept might require considerable education and explanation by policymakers. Another drawback is that the “bygones are not bygones” aspect of this approach is a two-edged sword.  Under price-level targeting, the central bank cannot “look through” supply shocks that temporarily drive up inflation, but must commit to tightening to reverse the effects of the shock on the price level.

Bernanke's punchline at least contains some truth, namely that PLT would be a "painful" process to all those who rely on nominal incomes to purchase goods and services, especially if said process ends up running away from the Fed's control and results in hyperinflation, to wit:

"Given that such a process could be painful and have adverse effects on employment and output, the Fed’s commitment to this policy might not be fully credible."

And in case his PLT idea is frowned upon - perhaps politicians don't want a revolution - Bernanke proposes another, just as "painful" idea, namely using inflation targeting "but to raise the target to, say, 3 or 4 percent.  If credible, this change should lead to a corresponding increase in the average level of nominal interest rates, which in turn would give the Fed more space to cut rates in a downturn. This approach has the advantage of being straightforward, relatively easy to communicate and explain; and it would allow the Fed to stay within its established, inflation-targeting framework."

Quite easy to explain indeed, and here's one attempt "we will inject so much liquidity, not only will we blow the biggest asset bubble ever, but it will make your head spin how fast prices soar." But it's ok, it will be "temporary."

Finally, while there is much more in Bernanke's proposal which was inspired by the "insightful theoretical work of Paul Krugman, Michael Woodford and Gauti Eggertsson", even Bernanke admits there will be problems, or rather one major one: the peasantry - for some "unknown" reason - is not a fan of runaway inflation:

One obvious problem is that a permanent increase in inflation would be highly unpopular with the public.  The unpopularity of inflation may be due to reasons that economists find unpersuasive, such as the tendency of people to focus on inflation’s effects on the prices of things they buy but not on the things they sell, including their own labor.  But there are also real (if hard to quantify) problems associated with higher inflation, such as the greater difficulty of long-term economic planning or of interpreting price signals in markets.  In any case, it’s not a coincidence that the promotion of price stability is a key part of the mandate of the Fed and most other central banks. A higher inflation target would therefore invite a political backlash, perhaps even a legal challenge.

Ah yes, nothing quite like a former Fed reserve chairman confused by why surging inflation is "highly unpopular with the public", which is unable to grasp that only through soaring prices of goods and services will wages rise... well, maybe: because as the whole broken Phillips Curve fiaso has shown 8 years into this recovery with 4.2% unemployment and virtually no real wage growth, perhaps the reason why the "public" is not too crazy about 4% inflation is that while prices surge, wages seems to have flatlined.

In short, Bernanke is alleging that inflation is unpopular because we, simple peasants, only focus on rising prices while ignoring wage growth. To which the only possible retort is that the "public" would be more than happy to focus on higher wages... if these were permitted for anyone but the top 1%.

Full Bernanke article here

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remain calm's picture

Fuck off Bernanke, you created the fucking mess. Lts ask the arsonist on how to stop all the fires.

hedgeless_horseman's picture


"What happened here was the gradual habituation of the people, little by little, to being governed by surprise; to receiving decisions deliberated in secret; to believing that the situation was so complicated that the government had to act on information which the people could not understand, or so dangerous that, even if the people could not understand it, it could not be released because of national security. And their sense of identification with Hitler, their trust in him, made it easier to widen this gap and reassured those who would otherwise have worried about it.


"This separation of government from people, this widening of the gap, took place so gradually and so insensibly, each step disguised (perhaps not even intentionally) as a temporary emergency measure or associated with true patriotic allegiance or with real social purposes. And all the crises and reforms (real reforms, too) so occupied the people that they did not see the slow motion underneath, of the whole process of government growing remoter and remoter.

overbet's picture

They have one move, prop up junk


"Effective September 21, 2017, the Federal Open Market Committee directs the Desk to undertake open market operations as necessary....."

hedgeless_horseman's picture


They have one move, prop up junk.

In Calvinball, one bank's junk is another bank's AAA collateral, thanks to the FASB's TEMPORARY Mark-To-Myth rule change...8.5 years ago.

Gaius Frakkin' Baltar's picture

We are forced to conclude that the eternal jew feels no remorse for the suffering of the goy.

knukles's picture

They still don't know what the fuck they're doing.

hedgeless_horseman's picture


I could never decide if they are stupid or evil, so I settled on both.

mtl4's picture

Seems ironic to continue to listen to advice from a former FED chair that caused the situation we are trying to navigate through, doesn't it?!


Sorta like the cane toad situation in Australia or perhaps feral hogs, looked good on paper anyway.

BennyBoy's picture


What $100 saved today will be worth with:

2% inflation for 10 years: $82

2% inflation for 20 years: $67 

2% inflation for 30 years: $55

Who loves inflation: Banks, FED, gov.

skbull44's picture

Kinda like that temporary income tax to help pay for the war effort...

knukles's picture

HH, I could not agree with you more.  There Must be Evil in their Souls for them to treat with such disdain those they've pledged to help.
Pure and simple Evil.

syzygysus's picture

+1 for transmogrifier.  Oh hell yeah Calvin.

wise_owl_says...'s picture

incredible that gold and silver eliminates all problems you mention above, yet progressive self loathing sheeple continue on slippery slop of destruction. refusing to accept that paper and vapor are meaningless, preferring FED lies to golden truth, hell awaits them all. 

QQQBall's picture

Labor Particpation Rate near historic lows. Borders wide open - worker visas wide open. Real incomes have been declining for like 30 years... so kick up inflation and the slope of declining real wages will get steeper. Lucky Bernank didntmajor in plumbing or he would have a mouth full of crap.

shadow_index's picture

Excellent quote, thanks for that.

Hari_Seldon's picture

Bernanke should be 'temporary'

dead hobo's picture

Bernanke is a pinhead for reasons that are so obvious it would be insulting to have to enumerate.

Seasmoke's picture

Temporary. Bernanke must have the same dictionary as Richard Nixon. 

holmes's picture

Bernacke, you moron, go crawl in a hole. The free market works if you let it.

QQQBall's picture

QE & TARP & TWIST & WHATEVER worked so well, lets get ready for the next shitstorm with some other hair-brained idea.


Funny Bernank never addresses or proposes and solutions for retirees and other savers who will have to work cradle to grave to eat and keep a roof over their head. Fine with the banksters and .gubbermint - Gubbermnt loves taxing income and the FED passes through like 88% of the IR they pay on Bonds. Massive circle jerk with a skim.

TheMexican's picture

God dam, this asshole is full of himself!

Talk about long winded bullshit.

remain calm's picture

Go Jack off bernanke

U4 eee aaa's picture

he needs to take a selfie first

D503's picture

How about you set the dollar equal to the joule or the calorie spent or displaced and we refine what the gold standard used to define? Finally a purpose for all those fucking fitbits that were the tamagochi of this decade. 

ThePhantom's picture

how do brain surgeons joules compare to carpenter joules... somehow that wont work

Doom Porn Star's picture

"How about you set the dollar equal to the joule or the calorie spent or displaced and we refine what the gold standard used to define? "



A true scientifically measured unit of caloric value.  

The Duke of New York A No.1's picture

PPT needs to sell lots more VIX ... keep the Sheeple pacified.



Codwell's picture

Quite odd that the steps necessary to ease the next downturn will cause the next downturn. 

Imagine a patient bleeding internally and the blood bank is out of blood, so a quick thinking Fed member suggests drawing blood from the patient to give it to them as they need it in the future. A quicker thinking doctor points out that taking blood from the patient will kill them. 


That is all. Back to your regular programing.

small axe's picture

do the world a favor, Ben, and kill yourself before you do any more damage

falak pema's picture

When things get serious we awl have to lie... or to fry like the greenback. 

Big Ben sounds off after having installed the CB debt beanstalk. 

topspinslicer's picture

Targets .... I like that

farmboy's picture

Ben wake up. It's already there it is called S&P 500 rigging.

onthedeschutes's picture

I wonder if SHEPWAVE predicted that Bernanke would turn out to be such a huge asshole.

Tolomeo's picture

What a crock of sh...!!! The balls this guys has... He's as responsible for the next crisis, as Yellen... if it happens!!!

onthedeschutes's picture

not if...but when it happens

affirmed_78's picture

Who cares?  We have bitcoin now.

GlassHouse101's picture

Don't forget Uncle Ben is keynoting the Blockchain Conference this month. . These super-criminals may be evil, but they are not stupid. They are standing up the new one world currency as a crypto currency.

Bill of Rights's picture

Gold is not money right Ben...Its traditional.

rp2016's picture

Sorry Uncle Ben, I am not sure what kind of target practice you have been doing... you and your chorts are among the most evil this world has ever seen. time is coming when you should think of your penance.

Seasmoke's picture

That's some HERO

Sacker of Cities's picture

If George the Idiot had any balls at all when the the financial collapse occurred he would have calmly said throw Paulsen and Bernanke in chains and the deepest darkest prison they could find and he would still be there.

LOL123's picture

Geotge is a child sitting in a childs chair as the US looked to him as leader.... He's a good follower, his daddy was the real leader head and he took orders from "The City" in London.... Just like now.

csmith's picture

They've been "targeting" the price level of the S&P 500 for a decade. And by the way, the interest rate isn't the problem...its the TRILLIONS IN DEBT that we've used to solve the EXISTING debt problem.

Dragon HAwk's picture

If you read it and it Sounds like BullShit.. It's Probably BullShit..

I was gonna read it twice and really Try but i said  Fuck It.

zzzz88's picture

this evil ben created a biggest monster in the human history. 

let us see if he can sleep well in the grave

Turquoise5's picture

Translation: Ctrl + P until everybody starves and dies or the revolution starts.

ThePhantom's picture

well he taught me a thing or two about "wage inflation" ... boy am i stupid! how could i have not known.... stupid stupid me...Im so ashamed i didn't know...