A Bernanke conundrum?

Is there a real conundrum concerning Federal Reserve Chairman Ben Bernanke aka Helicopter Ben?

Paul Krugman thinks so, because there’s an apparent “divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.

Pavlina R. Tcherneva think so, too—although she sees a different conundrum:

I have been asking myself the same question: why isn’t Bernanke following his own advice? But the answer I give is that it’s because he cannot, literally. Whatever policy options he believes to be genuinely effective actually depend on Congress and not on him. . .

Bernanke understands well that for monetary policy to be effective, fiscal policy must be aggressive (which the Fed always finances). Without bold Congressional action and a large fiscal stimulus package to boost demand and employment, nominal GDP cannot and will not rise to desired levels, no matter what the Fed does. Bernanke knows that despite his commitment to low interest rates and alternative OMOs, what he really needs is big fiscal components, but those can only come from Congress, not the Fed. Bernanke also knows that the US has infinite ability to finance these fiscal components, that there is no solvency issue and that the policy rate and both ends of the yield curve are under the direct control of the Fed. All of this is clear both from his academic writings and policy actions.

William Greider offers a complement to Tcherneva’s view, that Bernanke is actually dissenting from the conventional wisdom and turning toward the Left.

The central bank declines to participate in the happy talk about recovery or in the righteous sermons attacking the deficit. In its muted manner, the Fed keeps explaining why the house is still on fire, why more aggressive action is needed, and is gently nudging the politicians who decide fiscal policy to step up. But its message is ignored by Congress and the president and viciously attacked by right-wing Republicans who say, Butt out.

It’s a pretty extraordinary divergence in interpretations of Bernanke’s monetary policy, and that’s just from within the liberal/left wing of the political-economic spectrum.

Another interpretation is that Fed Chairman Bernanke has done exactly what Professor Bernanke believed could be and needed to be done in terms of monetary policy. The goal throughout has been to avoid deflation and to cap inflation at 2 percent.

And that makes sense once you consider the distributional consequences of monetary policy. The Fed doesn’t do more because, as Bernanke himself explained, it’s already “doing a great deal” and it has no interest in actively seeking a higher inflation rate “in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate.”

As Tim Duy explains,

changing monetary policy at this juncture would likely have significant impacts on the distribution of income and wealth.  And an unwillingness to alter this current distribution is likely another reason we would not expect the Federal Reserve to change their basic policy framework away from the current 2 percent inflation target regime.

In the distributional battle of creditors versus debtors, and of capital versus labor, Bernanke has decided to favor creditors and capital, with the promise that—eventually, someday, without rocking the distributional boat—debtors and labor will benefit.

From this perspective, there’s no Bernanke conundrum. And there’s no left-wing tilt on the part of Bernanke and the Fed. There may be a lingering worry about deflation in the housing market (as expressed in the famous January white paper [pdf]), but that’s only because the persistently high level of foreclosures and continuing household deleveraging pose an ongoing threat to bank finances—and therefore to creditors and capital.

I won’t pretend to have a full-blown analysis of Bernanke and the Fed. But I do think, if we want to understand what’s going on, we’re going to have to take seriously the class conditions and consequences of monetary policy.