Guest post: J’Accuse Mr. Ben Bernanke-San
Benjamin Cole is well-known commentator on the Market Monetarist blogs. Benjamin's perspective is not that of an academic or a nerdy commercial bank economist, but rather the voice of the practically oriented advocate of Market Monetarist monetary policies. I greatly admire Benjamin for his always frank advocacy for monetary easing to pull the US economy out of this crisis. I often also disagree with Benjamin, but my blog is open to free and frank discussion of monetary policy issues. I have therefore invited Benjamin to share his views on US monetary policy and to outline his monetary plan for revival of the US economy. Benjamin's advocacy brings memories of the 1980s where the US right had a pro-growth agenda that spurred optimism not only in the US, but around the world. I am grateful to Benjamin for his contribution to my blog and hope my readers will enjoy it. Benjamin, the floor is yours... Lars Christensen Guest post: J’Accuse Mr. Ben Bernanke-San By Benjamin Cole Regime Uncertainty? The business class of the United States needs a clear picture of where the Federal Reserve Board plans to go, and assurance that the Fed is will brook no obstacle or political interference in its journey. Moreover, the Fed must define our future not only in terms of policies, but clear targets. Lastly, the Fed must eschew any regime that places prosperity below other related goals. The Fed’s obligations are catholic, enduring and immediate—and cannot be dodged by citing adherence and slavish rectitude towards “price stability,” however defined. Beating inflation is easy—the Bank of Japan has proved that, and redundantly. Providing a regime for prosperity is another matter. Recent events prove that the Fed, like the Bank of Japan, has failed in its true mission—sustained economic prosperity—perhaps aided by mediocre federal regulatory and tax policies. The Cure—Market Monetarism Ben Bernanke, Fed chieftain, must forthrightly embrace the targeting of growth in nominal gross domestic product, or NGDP, then publicly set targets, and then identify the appropriate, aggressive and sustained policies or mechanisms to reach the NGDP targets. These are basic market monetarism principles. Feeble dithering is not Market Monetarism. Transparency, clarity and resolve in government are tonics upon markets, as they are upon democracies. There is no better way to govern, whether from the White House or the Federal Reserve. Ergo, Bernanke needs to directly, with resolve and without equivocation, dissembling or qualifiers, adopt of NGDP target of 7.5 percent annual growth for the next four years. To get there, Bernanke needs to affirm to the market that the Fed will conduct quantitative easing to the tune of $100 billion a month until quarterly readings assure that we have reached the 7.5 percent level of NGDP growth—a policy very much in keeping with what the great economist Milton Friedman recommended to Japan, when he advised that nation in the 1990s. Forgotten today is not only did Friedman advocate tight money for restraining inflation, but he also advocated aggressive central bank action to spur growth in low-inflation environments. The recommended concrete sum of $100 billion a month in QE is not an amount rendered after consultation with esoteric, complex and often fragile econometric models. Quite the opposite—it is sum admittedly only roughly right, but more importantly a sum that sends a clear signal to the market. It is a sum that can be tracked every month by all market players. It has the supreme attributes of resolve, clarity and conviction. The sum states the Fed will beat the recession, that is the Fed’s goal, and that the Fed is bringing the big guns to bear until it does, no ifs, ands, or buts. At such time that the NGDP growth targets are hit, the Fed should transparently usher in a new rules-based regime for targeting NGDP going forward, drawing upon the full range of tools, from interest rates to QE to limiting interest on excess reserves at commercial banks. At the present, the Fed needs to stop rewarding banks to sit on their hands, as it does when it pays banks 0.25 percent annual interest on excess reserves. This is not a time for “do nothing” policies, or to promote caution and inaction on the part of our nation’s banks. Bankers always want to lend, especially on real estate, in good times—oddly enough, when risks to capital are highest. In bad times (after property values have cratered) banks don’t want to lend. No need to the Fed to exacerbate this market curiosity. Consider the current economic environment: Our countrymen are too much unemployed; indeed they are quitting the labor force, and labor participation rates are falling. Our real estate industry is in a shambles, and the Dow Jones Industrial Average is languishing at levels breeched 13 years ago. Ever more we resemble Japan. In the United States, real GDP is 13 percent below trend, with attendant losses in income for businesses and families. Investors have been kicked in the head—it is precisely the wrong time for do-nothing leaders, timid caretakers or kowtowing to the Chicken Inflation Littles. That said, certain policies seem to reward unemployment, most notably the extended unemployment insurance. The record shows people tend to find jobs when insurance runs out. Ergo, unemployment insurance should not be extended—harsh medicine, but necessary for harsh times. The American Character The worst course of action today is to allow a peevish fixation—really an unhealthy obsession—with inflation to undercut a confident and expansionary monetary policy. The United States economy flourished from 1982 to 2007—industrial production, for example, doubled, while per capita rose by more than one-third—while inflation (as measured by the CPI) almost invariably ranged between 2 percent and 6 percent. That is not an ideology speaking, that is not a theoretical construct. It is irrefutably the historical record. If that is the historical record, why the current hysterical insistence that inflation of more than 2 percent is dangerous or even catastrophic? Why would Bernanke genuflect to 2 percent inflation—even in the depths of the worst recession since the days of Franklin Delano Roosevelt? It is an inexplicably poor time to pompously pettifog about minute rates of inflation. Add on: Americans like boom times; investors take the plunge not when they sense a pending 2 percent increase in asset values, but that home runs will be swatted. Few invest in real estate or stocks assuming values will rise by 2 percent a year. Americans need the prospect of Fat City. We have the gambling streak in us. The Fed and tax and regulatory code must reward risk-taking, a trait deep in the American character, but suffocated lately by the Fed’s overly cramped, even perversely obstinate monetary policy. Is there anything more deeply annoying than prim announcements from the Fed that it could do more for the economy, but is not? While the American business class needs assurance of a pro-growth monetary policy, instead the Fed issues sermonettes that caution, to the point of inaction, is prudent. Every commodities boom—and commodities prices are determined in global markets and speculative exchanges—chills the American business class, who then fear the monetary noose of the Fed will draw tight. That sort of regime uncertainty destroys investment incentives. Some say the Fed cannot stimulate, as the economy cannot expand under he current regulatory regime, and thus only inflation will result. To be sure, the U.S. federal government needs to radically reconsider its posture towards business, and abandon any hint of an adversarial stance. It is the private sector, for of all its flaws, that generates innovations and a higher standard of living. The private sector, every year, does more with less, while the opposite is true of the federal government, civilian and military. Shrinking the federal government share of GDP to 18 percent or less should also be a goal. However, in no way should monetary policy be held captive to the fiscal policy objectives or outcomes. Whatever the share of federal spending of total outlays, or whatever the size of the federal deficit, or whatever regulatory regime is in place, the Fed must always target NGDP, to give at least that level of regime certainty to our business class. By and large, today’s tax and regulatory regime is better than that of the 1970s, and on par with that of the 1980s and 1990s. And most concede the United States has a better regulatory posture than the governments of Europe, or even that of mainland China. The productivity of US workers is still rising, and unit labor costs are actually falling. The regulatory environment could be improved, but that is no grounds to add to woes by an unpredictable and restrictive monetary policy. Conclusion There are times in history when caution is not rewarded, and for the crafters of monetary policy, this is one of those times. What appears prudent by old shibboleths is in fact precarious by today’s realities. Feeble inaction, and stilted moralizing about inflation are not substitutes for transparent resolve to reinvigorate the United States economy. Market Monetarism is an idea whose time has come. It offers a way to prosperity without crushing federal deficits, and offers regime stability to the American business class. The only question is why Bernanke instead chooses the pathway cleared by the Bank of Japan.