There was a time when one couldn't get Bernanke to shut up: whether it was swearing to Congress how the Fed is not monetizing debt [9], explaining to Ron Paul that gold is nothing but "tradition", [10]or otherwise issuing one after another after another debt monetizing quantitative easing program in hopes that "this time" the trickle down from the record high stock market would finally unleash central-planning utopia, Bernanke's verbal insight was in a state of constant deflation. However, ever since his departure from the marble halls of the Marriner Eccles building, suddenly Bernanke's insight has hyperinflated to the tune of some $250,000 per hour of Bernanke's time (time during which he says such profound insights as "No Rate Normalization During My Lifetime [11]").
But why pay this ridiculous amount to hear what is nothing but more of the same? Bragging rights or a chairsatan autograph? Ok, but for everyone else who is not insane there is an option. Here, courtesy of Drobny Global, is a brief, and certainly far less cheaper than $250,000, summary of what the former Fed Chairman said said at the first Drobny/BNP Paribas IMF Forum held on October 9 in Washington D.C.
So without further ado, and without having to fork over a ridiculous quarter of a million dollars, here is what the Chairsatan really said...
Dr Ben S Bernanke kicked off the first session. We started with historical parallels to today; the Chairman is widely regarded as a scholar of the 1930s, and an expert on the liquidity trap. Surprising to some, he suggested the run on commercial paper and repo markets in 2008 is more reminiscent of the 19th century financial panics with corporate bonds, and not so comparable to the run on the banks as in 1929-32. Moreover, he pointed out, the 1929 crash was the direct result of a policy designed to prick an asset bubble. That wasn’t the case this time. And, what happened in the 1930’s, when financial panic turned to depression because of tight money and fiscal austerity policies pursued by the authorities, was not repeated this time around.
Avoiding policy mistakes is one of the well known lessons from the 1930’s. But, the former Chairman noted, there are other lessons here as well: (1) low interest rates are not sufficient to insure an easy monetary policy, other tools might be needed (eg, getting off the gold standard in 1933 or QE and forward guidance today); and (2) financial crises are very destructive to an economy so you want to preempt them and minimize their effects as much as possible.
And, there was the premature tightening of policy in 1937, which derailed the recovery from the big crash. This came up as an analogy for current times on several occasions during the proceedings. The US recovery seems to have survived through both the tax hike at the start of 2013 and the ‘taper tantrum’ later in the spring. But will the Japanese recovery be sustained through a second tax hike next year? Especially since, as Bernanke pointed out, Japanese inflation is virtually all imported; so far, home grown inflation hasn’t really emerged. And, doesn’t the policy regime in the Eurozone look a lot like the US policy regime of the early 1930s? How can QE succeed in generating a sustained rebound in the Eurozone given a gold-type currency regime and a policy of fiscal rectitude? Dr Bernanke, who suggested that QE probably succeeded but seems to work largely through signaling effects, was not at all confident that it would be effective in the Eurozone. More generally, he suggested that foreign developments could become a reason to delay US rate hikes.
And, that was generally a theme. The former Chairman seemed surprisingly dovish, and much less even handed than when he was at the FED. He has to be more circumspect in that job, it seems. Dr Bernanke talked about the benefits of slow and late tightening, and letting inflation initially overshoot. He also emphasized the importance of fiscal stimulus in ensuring that the rebound from the financial crash is sustained. He certainly couldn’t say much about that when he was at the FED!
Perhaps most intriguing was his suggestion that a 2% inflation target may be too low. Such a target, he pointed out, was premised on the notion that the zero bound would be hit maybe 5% of the time. It’s been hit much more than that. Bernanke suggested a 3% target, as he thought 4% was a bit high. What a contrast with how the BUBA seem to think about policy! More on this in a post-event comment at the end of this Review.
Wouldn’t a policy of persistently low interest rates naturally lead to asset bubbles?, Bernanke was asked. The best predictor of bubbles, he responded, is rapid credit growth. But, that isn’t the same as low nominal rates. Regulatory changes can be a driver of rapid credit growth, with the last decade in the US a good example. Low rates can contribute to bubbles, but typically there are other variables in play as well. And, right now, credit growth is not at all rapid.
The former Chairman raised another important point that regarding wages and inflation. It is widely recognized that a missing link in the recovery thus far has been muted wage inflation. But, he noted, less widely recognized is that mark ups are unusually high. That’s part of this environment where the distribution of factor incomes has moved strongly in favor of profits. With markups and profits so high, firms can absorb higher wages for a while before they have to raise prices. That is, accelerated wage inflation might result in a redistribution in favor of labor and, at least initially, may not place much upward pressure on price inflation. Most of us know the likely impact effect on rates markets when higher wage numbers are released. But, the chairman’s comments suggest that such an effect may not be sustained if price inflation does not accelerate commensurately.
And there it is. Now, was that really worth the down payment on a new house?
