Fed Policy Disagreements

The minutes of the most recent Fed meeting have been published. The Wall Street Journal is running an article today about the increasing differences in views about what the Fed should do.  A recent speech by Jeremy Stein, a new member of the board of the Fed, emphasizes some of the concerns that many have concerning some unwanted effects of the current policy.  As someone I saw on Squawk Box this morning put it--we may go from one financial crisis to another without having a boom time in between.  The persistently very low interest rates pusued by the Fed have to have some perverse effects.  The one talked about the most is that it encourages people to take on more risk to get a higher expected return.  In my view, the whole allocating process of financial markets is disrupted and perverted, and cannot be healthy in the long run and not doing much good in the short run.

Fed extends bond buying.

The Fed is extending buying bonds. See WSJ article http://online.wsj.com/article/SB10001424127887323981504578175362999853652.html?mod=WSJ__LEFTTopStorieshere.

Professor Krugman on Chairman (Professor) Bernanke

I don't agree with Paul Krugman often; although when  he focuses on economics rather than politics, the odds of agreement increase.  The New York Times published an excerpt from Krugman's new book concerning Ben Bernanke.  As an aside--Bernanke was chair at Princeton when Krugman moved to Princeton.  Krugman argues that Chairman Bernanke should listen to Professor Bernanke.  Bernanke's scholarly work centered on the Great Depression, and he is considered one of the leading experts on the causes and consequences of the Great Depression.  He also wrote about Japan's economic woes that began in the 90s, and urged the Bank of Japan to be more aggressive.  He suggested several things that the Bank of Japan could have done but didn't.  Krugman notes that Bernanke's Fed has also not done some of these earlier recommendation. 
I am less confident on the Fed's ability to do more than it has than Krugman, but he may be correct that the Fed has been too timid.  It is curious that Bernanke has not attempted policies he recommended while an academic.  Krugman offers a couple of reasons why Bernanke may be more cautious in his article.  One is that he is adapting to political pressures. While it is true the Fed is supposed to be independent of political considerations, Fed officials also know that Congress can change the rules.  Another is that the Fed bureaucracy got to Bernanke when he was newly on the Board.
I think a third possibility exists.  It is one thing to write academic papers and make recommendations.  It is another to implement untried policies in the real world where unintended and unknow consequences may follow.  A former professor of mine left academia and became an economist for a business. I saw him a couple of years later, and he commented that it often was daunting.  As he put it, "It's tougher when real dollars at stake and not hypothetical dollars represented by a diagram on a blackboard."
Krugman's article can be found here.

Current Policy as Reason for Concern

Christina Romer's column in Sunday's New York Times offers her judgment on the affect that uncertainty is having on the economic recovery. She discusses several concerns that are in the popular press and on shows like SquawkBox. These concerns are the fate of the Bush tax cuts, and environmental regulation. (I think she leaves out some though). She argues the biggest concern is uncertainty over the health of the economy. Her solution for resolving this uncertainty is a reaffirmation from the president, Congress, and the Fed that they will do whatever is necessary to create jobs. Fiscal and monetary policy must be expansionary, but a plan for tackling the long-term budget problems should be developed also.

It appears she is calling for additional fiscal stimulus. She is sticking with a Keynesian approach for the current state of the economy. But, she is ignoring the housing market. The wealth of most households is impacted more by changes in the value of their homes than in their portfolios. Further, housing is part of the real economy. The inventory of houses still exists, defaults and foreclosures continue to occur, and many others are still under water. The housing market is no where close to a new equilibrium as yet. I believe both Romer and those still in the Obama Administration are focusing on the wrong solutions because they misinterpret the problem.

Ben Bernanke was on 60 Minutes last night. He defended Fed policy, including the current round of quantitative easing. He noted that the Fed can change interest rates on very short notice so that they can reverse their policy when the time is right. When asked how confident he was that the Fed could achieve the necessary reversal at the right time, he replied, "100 percent." I hope and trust that this comment was for the sake of public confidence. If he literally is that confident in the Fed's ability to turn quantitative easing around and that they can know when the proper time to do so, then I am very nervous. Economists have no reason for such hubris. When we think that we can control the economy or fine tune the economy, or act like engineers, it is time to panic.

Two Links of Interest

Saturdays WSJ had an interesting op-ed by Joseph Stiglitz on why quantitative easing will not succeed. The linkages between quantitative easing and business activity are tenuous, which seems to be the case to me as well.

On a different area, Bernanke gave a talk today about housing markets. His written remarks are here.

Bernanke's Speech

Here is the link to the speech Bernanke is giving at a conference for the Boston Fed.

Do We Get It?

An article in today's Wall Street Journal discusses actions of the Fed to encourage home buying. These include keeping interest rates low, buying up mortgage-backed securities, and exptening a mortgage-purchase program. The current crisis began when the bubble in housing prices burst. Some adjustments were needed in housing and mortgage markets. Is continuing to subsidize housing and increasing the extent of subsidization really in the best interests of generating a sustainable recovery? Will we revert to an over-reliance on debt?

Bernanke Chosen for Second Term as Fed Chairman

President Obama has nominated Ben Bernanke for another term as chair of the Fed. (For a news article on this, see here.) Bernanke likely will face some sharp questioning in his confirmation hearings because of his role in the financial bail outs. Likely, he will face criticism from both the left and the right. But I think he is a good choice for a couple of reasons. First, his knowledge of the Great Depression has proven valuable in the ways he handled the Fed's reaction this time. Second, his focus has been on the task at hand rather than his own ego. Third, he is respected by other central bankers and many within the Fed. Fourth, he has to better than Larry Summers, who apparently was on a short list for the job. (Janet Yellen would have been better, but Bernanke is better yet).
I have some reservations though. I fear that his actions may impinge long term on the Fed's independence. I also am leery of adding more regulatory power to the Fed because that may make it more difficult to remain independent.
Senators tend to be great Monday-morning quarterbacks, so I expect the fact that Bernanke made some mistakes will be emphasized in the hearings. Hopefully, it will just be a lot of huffing and puffing, and Bernanke will be confirmed.