Independence, Transparency and Accuntability

Ben Bernanke

Economic Policy: Lessons from History

At the 43rd Annual Alexander Hamilton Awards Dinner, where was honoring with the Hamilton Award, Ben Bernanke drew four relevant lessons from the financial collapse of the 1930s:

1) Economic prosperity depends on financial stability

2) Policymakers must respond forcefully, creatively, and decisively to severe financial crises - e.g. SCAP

3) International crises require and international response

4) History is never perfect guide – "History does not repeat itself, but it can rhyme"

It's just an illusion

Calling it "basically no more than five rectangular strips of paper," Fed chairman Ben Bernanke illustrates how much "$200" is actually worth.

Bernanke vs. Taylor

Too low for too long fight

From Bernanke's AEA Speech

"[…] The alternative Taylor rule (that replaces the current rate of inflation on the right-hand side with a forecast of inflation over the current and subsequent three quarters) prescribes a path for policy that is much closer to that followed throughout the decade, including recent years. In other words, when one takes into account that policymakers should and do respond differently to temporary and longer-lasting changes in inflation, monetary policy following the 2001 recession appears to have been reasonably appropriate, at least in relation to a simple policy rule."

Taylor’s disagreement

"[…] The speech was largly an attempt to refute the now commonly held view that the Fed held interest rates too low for too long in 2002-2005. I was in Atlanta and though I could not go to the speech I read it afterwards and expressed by disagreement first in a Bloomberg interview with Steve Matthews and later in a CNBC interview with Larry Kudlow and will follow up with more details; note that a working paper prepared by seven Fed Board staff was released just before the speech. Others have raised questions about the speech from a variety perspectives […] "

Are potential "asset-price bubbles" always dangerous?

En un artículo publicado en Financial Times Frederic Mishkin identifica dos tipos de asset-bubbles: "pure irrational exuberance bubble" (Mild) y "a credit boom bubble" (Severe). Las burbujas del segundo tipo (feedback loop) presentan las siguientes características:

"[…] exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues. [...] Eventually, the bubble bursts and asset prices collapse, leading to a reversal of the feedback loop."

A diferencia de la perspectiva de Dr. Doom, Mishkin señala que:

"But if bubbles are a possibility now, does it look like they are of the dangerous, credit boom variety? At least in the US and Europe, the answer is clearly no. Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy."
Source: FT.com