Via ConvergEx's Nicholas Colas,
Recent press accounts report that former Federal Reserve Chairman Ben Bernanke gets seven figures from money management firms, presumably to consult on all things economic. Fair enough – markets set prices for everything, even former Fed Chairs. But what do these firms get for their money? Today we review what the former Fed head has been writing in his blog for the Brookings Institution. In his 10 posts so far (plus a guest spot from Larry Summers), Bernanke actually breaks little new ground. He expresses confidence in the Fed’s current low rate policies, professes some confusion about why long rates remain so low, and spends little time on the Fed’s role as regulator. Taken as a whole, his writing very much reflects the academic underpinnings of a “Much lower for longer” Fed Funds policy. So why is he worth $1 million and more to money managers? Likely because they want to ascertain what he doesn’t know more than what he does.
In thinking about the news that former Federal Reserve Chairman Ben Bernanke now gets millions of dollars for consulting to the money management industry, I can’t help but think of the old Saturday Night Live character of Chico Escuela. Played by Garrett Morris, Chico was an affable Dominican baseball player whose typical response to any question posed by the press was a sincerely grateful “Baseball been very very good to me”. The study of economics, like baseball, has lots of statistics and featured events that seem to move at a snail’s pace to the uninitiated. And, certainly, economics has been very very good to Ben Bernanke.
But what do these titans of our industry get for their money? It is certainly a feather in the cap of any portfolio manager to tell his or her clients that they are getting the very best thoughts from a former Fed Chair. He no doubt makes a splash at client events as well and can likely fill in a lot of the microscopic blanks that policy wonks wonder about daily. As a marketing expense, therefore, private access to Dr. Bernanke is no doubt worth its weight in gold. Or $1 million in fiat currency, apparently, if the gold standard isn’t your thing.
To get a sense of what – and how - Dr. Bernanke thinks, however, you don’t need to plunk down a 5 inch Halliburton aluminum briefcase jammed with Benjamins, for Ben Bernanke has a blog. It is hosted on the Brookings Institution website, where he is a Distinguished Fellow in Residence with the Economic Studies Program. The former Fed Chair has already posted 10 original pieces plus a guest entry from Larry Summers. It may not be the same as sitting down with him in a private conference room, but let’s not forget that Bernanke has been either an academic or public servant his entire life. The chances that what he writes publicly and what he says privately differ in any material respect are remote indeed. He likely wouldn’t know how to do it if he tried.
The topic for Bernanke’s inaugural post was “Why are interest rates so low?” It is a prosaic topic, but it does offer the change to hear his most fundamental thoughts on the issue. They are:
“Low interest rates are not an aberration, but part of a long term trend.” He assigns inflationary expectations partial credit for the decline since the late 1970s. To the degree that we’ve reached the zero lower bound for short-term rates, it is not just a function of the Financial Crisis but also a persistent secular trend to lower inflation. What will reverse this +30 year trend? Dr. Bernanke is somewhat mum on that point.
He believes that the “person on the street” holds the Federal Reserve responsible for the current low level of interest rates. That’s an odd characterization, if only because it seems unlikely that the average citizen knows very much about the Federal Reserve. Above that, if you look at Google Correlate for online searches that occur in tandem with queries for “Federal Reserve” you’ll see concurrent online interest in “T Bills” and “Treasury bill” and “Treasury bill rates”. What you don’t see: “Mortgage rates” or “Refi rates”. To the degree people understand the role of the Federal Reserve, they do actually link it to the level of short-term interest rates, not the long end of the curve.
We bring this up because you have to ask why Dr. Bernanke is so publicly visible in his post-government life. I don’t think it is his personal legacy that he worries most about; rather, it is defending the societal value of an independent central bank led primarily by academically trained economists. After the Federal Reserve’s unprecedented interventions since 2007, he feels the need to explain both what the institution did and why it acts the way it does now.
Notably absent from Dr. Bernanke’s maiden effort was any discussion of quantitative easing. Yes, $3 trillion of capital on the Fed’s balance sheet and nary a word as to why or wherefore. The topic does arise in later posts, but you’d think a program of its size would engender more commentary.
As for the balance of his writing, Dr. Bernanke seems to have three critical points that reappear with regularity:
He feels that governments are not doing enough to spur economic growth, relying too much on central banks to help domestic economies. One blog entry calls out Germany by name, with recommendations for more fiscal spending on infrastructure to spur imports. Germany’s trade surplus creates structural imbalances within the Eurozone, threatening its long run stability, according to Dr. Bernanke. No doubt he also has in the back of his mind the challenges the Federal Reserve faced during the aftermath of the Financial Crisis, when fiscal austerity was a headwind to economic growth.
In his comments to an International Monetary Fund conference, included in his blog, Dr. Bernanke argued that the Federal Reserve might consider maintaining a larger balance sheet than before the Financial Crisis. His argument was essentially that it offers a more nuanced set of monetary policy options. The subtext, however, is that central banks need more firepower to help manage the economy. Given his worries over the actions of elected officials during times of economic turmoil, it’s not hard to see why.
Dr. Bernanke considers the possibility that the U.S. economy is in a period of low growth “Secular stagnation”, but ultimately dismisses the notion. To his thinking, the current slow growth in the U.S. is temporary, unemployment is declining, and inflationary expectations are within normal bounds. The only guest post so far on Bernanke’s blog is from Larry Summers, who worries that for the last 20 years or so we’ve only had healthy economic growth alongside financial and residential real estate bubbles. Bottom line: Dr. Bernanke doesn’t think things are different from prior cycles in enough ways to merit changing cyclically-minded monetary policy.
Regulation and monetary policy are very different mandates, and the Federal Reserve needs to address them separately. One central criticism of the Federal Reserve since the Financial Crisis has been its pre-2007 oversight of the U.S. banking system. Fair enough, even if the there is enough blame to go around among other regulatory bodies. Dr. Bernanke feels that the Federal Reserve should essentially firewall that issue away from monetary policy. To the degree speculative bubbles occur due to lax lending standards, regulation can address that. Monetary policy shouldn’t be used to deflate financial asset prices. The subtext here: strictly regulating systematically important financial institutions is necessary to maintaining optimal monetary policy.
You might be thinking that much of this is familiar ground, so why would financial firms pay so much for Dr. Bernanke’s thoughts? Aside from the marketing benefits we noted, there is one good reason. You really want to know what Dr. Bernanke doesn’t know and/or about what issues he is mistaken. As one simple example, what if the U.S. only grows at 1-2% this year and employment gains are limited to 150,000 jobs/month? That would fly in the face of his rejection of “Secular stagnation”, a dismissal that the current Federal Reserve seems to share. Since he mentioned quantitative easing so infrequently in his writing, does he think a “QE4” would not be useful?
In essence, you’d want to know what Dr. Bernanke would think if he were wrong or ill-informed about some important economic issue. That is something money managers understand in a way that academics and policymakers do not, for being wrong – and knowing what to do next – is a critical skill in the professional. Getting the most information from Dr. Bernanke, either in a one-on-one or just reading his work online, boils down to just two questions: “What doesn’t he know” and “What is he sure of that is actually wrong?"
