A Tale of Two Bens

Paul Krugman has an interesting post up on Ben Bernanke’s contrasting economic policy positions. Simply, the younger Bernanke was much more Krugmanite than the older Bernanke:

[The younger Bernanke] endorsed, at least as possibilities:

– Targeting long-term interest rates
– Currency depreciation
– Money financed deficit spending
– A Krugman-style inflation target

After 2003, however, his menu seemed to have been reduced to:

– Guidance on future short-term rates (the rates the Fed sets)
– Purchases of long-term bonds and other nonconventional assets
– “Oversupplying reserves”, that is, just pushing up the monetary base

Krugman concludes — quite rightly — that Bernanke has been “assimilated by the Fedborg.” Krugman should probably know that Ben’s main goal has nothing whatever to do with inflation, or “aggregate demand” or currency depreciation. Nothing. These are all handmaidens to one thingthe rate that the Treasury is paying on its debt.

America is in an impossibly tough fiscal position:

Even at the government’s impossibly cheap projections, a lot of money is going to be pushed out from the Treasury to creditors.

And so the Fed’s main implicit goal is to keep Treasury rates as low as possible without excessive inflation  — the more inflation, the more creditors will ditch Treasury debt, thus forcing the Fed to monetise more. This is a foreign policy imperative: the bottom line is that America has gotten herself deeply in hock to foreign creditors. The Fed’s task is to keep the creditors buying debt, and to minimise rates so as little capital gets out of America as possible. Ben Bernanke has become precisely what many American accuse China: a currency manipulator.

There are a few secondary goals: reflating housing is one (more home equity means more consumption), and reflating equities is another. But all of these are subordinated to keeping rates cheap and thus delaying America’s inevitable fiscal (and thus foreign policy) meltdown.

Of course, under present circumstances, this is an impossible task. And without another round of QE, rates are rising.

From Bloomberg:

U.S. government securities lost 1 percent from the start of the year to March 29, Bank of America Merrill Lynch indexes show.

And that — in one sentence — is why Bernanke will be printing again soon.

19 thoughts on “A Tale of Two Bens

  1. Krugman criticizing Bernanke is like the Titanic orchestra arguing about which sonata to play during the last minutes of their own lives.

    Every economic theory and model starts with assumptions. From these assumptions, models and theories are constructed with the goal of making a complex world a little easier to understand. The “granddaddy” of all assumptions is that every actor on the stage of life makes rational decisions. History, of course, would beg to differ greatly with this rational.

    Reading Krugman gives me massive heartburn. He is so wrapped in his economic central planning paradigm, that he misses and makes the on of the ultimate sins any human can make, his basic assumptions are wrong.

    First, interest rates are not policy tools that governments and central bankers can use to “smooth out” the business cycle. Krugman (and most neo keynesians) still will not admit the tampering with the IR distorts the pricing information that IR provides and leads to malinvestment. (Please see housing in what now seems to be a world wide bust)

    Second, human beings DO NOT always make rational decisions regarding their own economic affairs. This can be seen in a whole host of everday activities. Did your brother just buy a $30,000 motorcycle when he he is nearing his retirement age and has little saved up for his golden years? Not a rational choice! Did your neighbor, whos yearly income is $50,000, just take out a $500,000 home loan? Not a rational choice!

    Third, when these individual unrational choices are aggregated into the whole of the economy, the malinvestment can have disasterous consequences. These consequences are what Krugman seems to avoid in his writings. Truely proving that the greatest lies are those that are never spoken.

    • Well the main difference is that Krugman’s economic raison d’etre is aggregate demand, whereas Bernanke’s is keeping the price of Treasuries high and rates low. I understand and completely agree with all your objections to Krugmanism. It is a very strong (and thus fragile) form of central planning. I am not for Krugmanism either (at all), but it is very interesting watching this central planners’ catfight develop.

  2. Thanks for plugging my site John. I really appreciate it. Sometimes I wonder if people actually care, sort of like Gonzalo lira wrote about in a recent post about a painting of the execution of lady something.

    I had been taking a bit of a break. Just disheartening to write when you don’t think people care, you know?

    • Mr. Fruth,

      Just a little constructive criticism from an ant (me).

      Your blog could use a bit more pizzazz. Pictures, excitement and cutting edge commentary.

      Same as it ever was.

    • If you really want to attract the masses use a topless economist to discuss economics on a chalk board. Just a joke.

      You know you have to realise, our passion is not everyones passion. There is a sea of information out there.

      Survival of the most passionate!

    • P.S. I know I signed up, but I don’t recall getting an email when new articles are written. In a sea of emails your site can get lost. Johns Blog is always fresh and new. A kind of Tabloid style of writing that engages viewers.

      Length papers are rarely read. If you want to influence the masses read Mein Kampf. Hitler reenforces the message that simple one liners and pictures repeated over and over a more effective at change than intelligent articles.

      You just have to decide who your target audience is.

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  4. Could Krugman be clinically insane?

    If so then we are being lead by a mad man.

    There may be a clinical disorder, yet to be recognised.

    Inability to understand that humans act irrationally.

    When I watched Hard Core Pawn ( US Reality series where people take possessions to a Pawn Shop) and I see people giving stuff away, people are not rational. If they were they would plan their cash flow. Realise there is going to be a deficit in 6 months. Advertise on Craigslist. Wait for a buyer, and get a better price. That is rational.

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