No Doubt Ben Bernanke is Sincere, But What If He is Sincerely Wrong?

|Peter Boettke|

As you no doubt know, Ben Bernanke gave an interview tonight on CBS 60 Minutes.   Let me stress once again, as I have in the past, that I consider Ben Bernanke one of the most genuinely nice guys among elite economist I have had the good fortunate to meet.  He has no reason to remember me, but we actually spoke several times when he visited NYU and he answered my questions about his studies on the Great Depression and monetary policy.  He tolerated my questions and always talked to me, not down to me. And I certainly don't view him in his capacity as the Fed Chairman as engaged in some grand political conspiracy to make his friends rich and the rest of us poor.  I view his "mistakes" as a result of intellectual error.  His scholarship on the Great Depression is rigorous and carefully done.  But his focus was on the 1930s, not the policy errors of the 1920s that caused the problems. He read Friedman, perhaps he would have been wise to have read Hayek. 

I have increasingly come to the opinion that the data that individuals are pointing to as an example of the down-turn in 2008 is merely the manifestation of the market correcting for the previous distortions caused by the policy error of the manipulation of money and credit of the previous period.  The claims that we must be pro-active as the system adjusts translates into a demand to be pro-active to prevent the market correction.  In short, the demands to engage in monetary expansion to counter-act the downturn are in effect a demand to reinflate the previous credit induced boom.

But that is not what I want to focus on, though I know my position is controversial even among my peers in Austrian economics.  Instead, I want to focus on the segment of Bernanke's interview where he dealt with the question of inflation and deflation.  Bernanke --- as a good student of Milton Friedman --- wants to be known as an inflation fighter but ultimately he fears deflation far more than he worries about inflation.  At one point in this segment of the interview he actually says in response to a question about inflation that he could stop inflation in 15 minutes.

His intellectual framework minimizes the costs of inflation, and his understanding of public administration minimizes the difficulties of policy making.  Bernanke doesn't see the point of Hayek's "tiger by the tail" analogy with regard to inflation, and I don't think he buys the political difficulties that the legacy of Lord Keynes left us that Buchanan and Wagner identify in Democracy in Deficit. Bernanke's emphasis in the interview was the costs of doing nothing, but he doesn't really address the costs of what was done.  I don't expect a man in his position to do so in an interview on CBS.  But he is such a sincere man, that I actually think his private views and his public views are not so divorced from one another.  His is not an error of malfeasance, but one of intellectual error.  That intellectual error includes an overconfidence in the ability of Fed powers to keep inflation in check with a single policy decision that takes 15 minutes to implement, as well as his assessment that in fighting the deflationary spiral the tools of monetary policy can be used optimally to keep an economy from collapsing.  He has read Miltion Friedman on the Great Depression in depth, I suggest a close reading of Friedman's review of Abba Lerner's The Economics of Control, where he warns about thinking about public administration and policy making as if it was in a vacuum.  Bernanke insisted in the interview that the Fed was completely independent of politics, and was in fact an institution of benevolent social control with the public interest as its only purpose.  

But what if this form of sincere but ultimately arrogant progressivism is the ultimately source of policy errors?

Comments

[J Oxman]

Isn't this an example of what Sanford Ikeda calls "radical ignorance" in his Dynamics of the Mixed Economy? In other words, Ben Bernanke doesn't know the consequences of his actions because he doesn't know the relevant theory. Ikeda, if I recall correctly, makes the point that this is one of the main destabilizing errors of the interventionist state.

[K Sralla]

At one point Bernanke states flatly that buying treasuries on the open market will not effect the money supply, and is not tantamount to "money printing". Now will one of the monetary scholars who frequently comment here please explain that statement. It was made with a great deal of confidence, and I did not see Bernanke blink as he said it. If those $600B in securities are purchased on the open market, where does Dr. Bernanke think the money will end up? He must calculate that it will mostly go straight under the matress??

[Mathieu Bédard]

Saying that he is dishonest doesn't necessarily mean that he's an evil grabber part of a big conspiracy or something as cooky. Even good intentioned politicians sometimes choose arguments that are easier to sell to describe their policy, but not necessarily the honest truth.

[Pietro M.]

I do believe the majority of men to be honest and sincere, at least most of the time. This belief has never made me any more optimistic regarding mankind. The evils of politics would be more or less the same without corruption and sadism: antisocial politicians are not required to obtain antisocial policies.

[Steve Horwitz]

"In short, the demands to engage in monetary expansion to counter-act the downturn are in effect a demand to reinflate the previous credit induced boom.

But that is not what I want to focus on, though I know my position is controversial even among my peers in Austrian economics."

Really? Who are the Austrian defenders of QE2? Scott Sumner is not an Austrian. :)

[Peter Boettke]

Steve,

Have you seen this? .... http://macromarketmusings.blogspot.com/2010/11/would-fa-hayek-favor-qe2.html

Pete

[Richard Ebeling]

One of the things I've learned from traveling to various parts of the world over the years, and from my reading of history, is that the most dangerous men (in terms of implementing policies that have disastrous consequences) is that they were and are "sincere."

That is, they actually believe what they say and do.

For example, the "problem" with people like, say, Hitler and Stalin is that they actually believed in what they said. In other words, Hitler was a Nazi and Stalin was a communist.

Those who view individuals like them as "mere" thugs and power-lusting people, and argue that their ideological arguments were just smoke-screen to hide their desire for control, miss the real harm in their desire for power -- they want to do "good". However perverse that "good" may seem to us.

If people like them were "only" after power some of them could have been "bought off." Nothing is worse than an honest bureaucrat, who you can't bribe to look the other way, or to do something different than he is planning.

(If only Hitler could have been bribed not to kill millions of Jews. Or Stalin not to kill millions of peasants who resisted collectivization of the land.)

And, if Pete is right, that is part of the problem with Bernanke: he really believes in what he says. He considers himself wise and able enough to be an monetary central planner. That is what Hayek meant by "the pretense of knowledge" and Wilhelm Roepke referred to as the "hubris of the intellectual."

And one should recall Adam Smith's words:

"The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

Clearly, Bernanke fits into that last part of the passage: ". . . would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

Richard Ebeling

[Peter Boettke]

To follow up on Richard's wonderful comment, this is why in Sovietology, I have always found -- despite my great respect -- Richard Pipes to miss an essential element in understanding that history in a way that Martin Malia, let alone Robert Conquest never did.

And for those who want to understand the history of the 20th century, reading these historians is essential. But the way economists have tackled these ideological movements (say Alec Nove among the best) falls way short of dealing with ideology in an acceptable way.

BTW, Richard recommended to me a great work along these lines back when I was a student --- Tony Smith's Thinking Like a Communist -- http://www.amazon.com/Thinking-Like-Communist-Tony-Smith/dp/0393956911

[Bob]

I think your really bending over backwards to give this "THIEF" the benefit of the doubt! The lesson learned is that saving and following the rules are for suckers.Bernanke is using debasement as the tool to bailout institutions that are bad actors that screwed up at the expense of savers and more productive good actors! I know your a nice guy Pete but did you lose your Jersey straight talking ability. As people on fixed incomes have to do with less due to "Helicopter Ben's"debasement, I'm sure they'll be comforted by the fact that the power elite can still fill and heat their pools and theirs yachts will sail!

[Lee Kelly]

Bob,

Inflation is sometimes good for savers. Lenders must trade-off default risk and real returns, and while deflation (or disinflation) increases real returns, it can also increase default risk while prices adjust. (Specifically, this occurs with monetary deflation, not productivity deflation). It is not clear whether the lender benefits from the new trade-off between default risk and real returns, and I suspect usually not.

A case can be made that we are in such a circumstance right now.

[George Selgin]

A nice post, Pete. I also am inclined to believe that Bernanke is sincere, and that his mistakes are intellectual rather than venal. But we mustn't overlook the pressures that incline bureaucrats to behave as they do--they're weighing of the costs of alternative possible errors is bound to be different than that of the detached scholar.

Also, regarding David Beckworth's views concerning QE2, although I'm not fully in agreement with him, I'm proud to claim him as a chip off this ol' block! Alas, at UGA we don't get many such.

[John Voigt]

First, Ben Bernanke is not “a good student of Milton Friedman.” Friedman advocated monetary expansion in the face of double digit deflation, where the supply of money contracted by 30%. Bernanke has, in response to DISINFLATION (not deflation), increased the monetary base by around 150%, also known as QE1. Additionally, he has decided to pursue a second round of quantitative easing (600 billion in purchases) in the face of actual consumer price inflation (he’s solely focusing on the core CPI). So please, Milton Friedman and Bernanke are worlds apart, and conflating the two is extremely deceptive. Also, Anna Schwartz warns that FED policy could potentially yield hyperinflation somewhere down the line.

Next, it would be useful if Austrian economists could begin debunking the myth that if the government allowed another bank to fail that the banking system would have collapsed, and the world would have ended (the "too big to fail" argument). It is disingenuous to claim that allowing Lehman to fail is what caused 10% unemployment, not only because it ignores all other potentially relevant variables (such as bad policy, regime uncertainty, wage rigidity, structural imbalances, etc), but also because it implicitly assumes that there’s 1-1 proportional connection between individual bank failures and unemployment. The failure of Lehman Brothers caused a banking panic, which, in turn, froze the credit markets (it’s not like another bank failure would have frozen the already frozen credit markets that much more). If other banks were allowed to fail, it would have been worse, no doubt, but it wouldn’t have been exponentially worse.

Additionally, it’s not like allowing individual banks to fail would somehow lead to the end of banking. Resources would be freed from imprudent banks and would be reallocated towards their more prudent competitors. This would eliminate bad bankers and alleviate, if not eliminate, moral hazard.

[Niko]

"Inflation is sometimes good for savers."

Yes, and cancer is useful for keeping population in check. Did you think much about it?

[Lee Kelly]

Niko,

I really wrote that comment for you.

[Bill Woolsey]

Voigt:

You are in error.

Friedman didn't argue that quantity of money in the Great Depression needed to be maintained (or increased again when it fell) to prevent or reverse the deflation. Rather, it was to return nominal income to the growth path of the twenties. Because he favored targeting the quantity of money, any productivity shocks (away from trend) would change the price level and cause inflation or deflation.

So, Friedman, like those of use quasimonetarists favoring an expansion of base money, wasn't focused on deflation (or inflation.) Bernanke, of course, is trying to stop the disinflation. Well, to get prices rising 2 percent again.

Further, base money increased in the Great Depression. Your contrast of Bernanke raising base money (alot) and the "money supply" falling in the Great Depression is confused.

It is true that Friedman believed that offseting the decrease in the M2 money multiplier and keeping M2 money growth on a 3 percent growth path (not just increasing it at a 3 percent rate from its depressed level in the early thirties) would have resuled in Nominal income rising back to its pre-1929 growth path. That is, increasing very rapidly until returning it that growth path and then resuming slow, steady growth. Yes, the price level would have stopped falling and risen back up to its level of the twenties, more or less, but that wasn't the target. M2 was the target, but with the assumption of constant velocity (or or less) that is the same thing as a target for nominal GDP.

The difference between Bernanke and Friedman is that Friedman focuses on the quantity of money and nominal GDP. Bernanke focuses on improving the operations of credit markets. Though, I think QE2, comes closer to Friedman's approach than QE1.

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