The Agenda

Matt Yglesias on President Obama’s Monetary Policy Preferences

Matt Yglesias of Slate observes that none of President Obama’s appointees to the Federal Reserves Open Market Committee are calling for monetary expansion:

This is a Fed full of Obama appointees pursuing a disastrous policy trajectory that’s creating all kinds of problems for Obama. But I’ve never read any reporting indicating that the Obama economic team is upset about monetary policy, I’ve never heard any discontent with monetary policy from administration officials on or off the recod, and Obama’s allies on Capitol Hill have basically never called publicly or privately for more expansionary monetary policy. Rather than someting as simple as an error, there seems to be a totally comprehensive systematic blunder in which Democrats simply ignore the most powerful tool for bolstering aggregate demand while Republicans call for a disastrous tight money agenda.

In an email, Arpit Gupta reminds me that Ben Bernanke’s criticisms of Japanese monetary policy were sharpest when Japan was experiencing genuine deflation or something very close to it, which could mean that he sees U.S. inflation levels as acceptable. Moreover, Bernanke may well have been persuaded by Vincent Reinhart’s relative hawkishness. Laurence Ball of Johns Hopkins has argued to this effect. He cites a Federal Open Market Committee meeting on June 24th of 2003 as a crucial moment in Bernanke’s transition:

In a speech in May 2003, Bernanke was still advocating aggressive policies such as a money-financed tax cut. In a speech in July 2003, he was much more cautious. What happened between May and July?

The obvious answer, at one level, is that Bernanke attended the Federal Open Market Committee meeting of June 24. At that meeting, the Committee heard a briefing on policy at the zero bound prepared by the Board’s Division of Monetary Affairs and presented by its director, Vincent Reinhart. The policy options that Reinhart emphasised were close to those that the Fed has actually implemented since 2008; Reinhart either rejected or ignored the more aggressive policies that Bernanke had previously advocated. In the discussion that followed, Chairman Greenspan and other Committee members generally supported Reinhart’s views.

Bernanke spoke toward the end of the meeting, and he joined the consensus supporting Reinhart. The meeting’s impact is clear from Bernanke’s July speech, in which he mostly echoed Reinhart’s proposals. In January 2004, Bernanke and Reinhart co-authored a paper that closely followed Reinhart’s reasoning at the June meeting. Since the US hit the zero bound, the Fed has implemented the proposals in the Bernanke-Reinhart paper.

As for why Bernanke changed his position so markedly, Ball speculates that it was “groupthink” at the Fed that did the trick. Regardless, it is fair to say that Bernanke was not subject to strong countervailing pressure from the Obama White House to adhere to his earlier views.  

Arpit points to the fact that the leading left-of-center intellectuals, including Paul Krugman, were somewhat more skeptical about the potential of monetary policy in 2008 than is the case now, when many have embraced the idea that the U.S. economy is very much in need of monetary expansion. And more importantly, I get the impression that relatively few of Obama’s chief economic advisors have called for monetary expansion, with the exception of Christina Romer, who was reportedly very frustrated during her tenure in the Obama White House. 

This reluctance on the part of the president to embrace monetary expansion is an opportunity for the political right, which ought to find it an attractive alternative to fiscal expansion as a means of sparking a strong and sustainable economic recovery, a case that David Beckworth and Ramesh Ponnuru have made in National Review

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