Ben Bernanke sees ‘stagflation’ coming

Standing in his kitchen one morning in Washington, DC, and drinking a glass of lightly flavored water, Ben Bernanke wears a gray suit, button-down shirt, no tie, and a pair of Brooks sneakers. He seems a far cry from his time at the Federal Reserve, where he chaired for eight years during what was – until recently – considered the most precarious financial moment of the past half-century.

But the coronavirus pandemic and its economic impact – the overnight decline in employment coupled with an injection of cash never seen in history and now, apparently, runaway inflation – gave Mr Bernanke pause. And writing. Mr. Bernanke has sort of quarantined himself to write a book, “21st Century Monetary Policy: The Federal Reserve From the Great Inflation to Covid-19,” which will be published on Tuesday.

Mr. Bernanke describes the book as “academic”, but at this particular time it may be a purely practical book as the public tries to better understand the powers of the Federal Reserve and Congress to speed up or slow down our economy in the middle of a supply chain. crisis and exorbitant demand. The former president’s book itself is an example of the cross-currents happening in our economy: “Given supply chain disruptions, this book took six months to go from final manuscript to appearance in the store,” he said.

Mr. Bernanke, who wrote the book “when it became apparent that I was not going to travel much and that we were at home for a while” at the start of the pandemic, provides a story from the Federal Reserve – the His graduation thesis focused on the 1929 crash and its aftermath, which he says provided valuable lessons on how he responded to the 2008 recession. However, this time he does not focus on 2008 but on the 1970s, which he says is closest. analogous to what is happening in today’s economy and what might happen next.

He hopes Jay Powell, the current Federal Reserve Chairman, can help bring inflation under control without having to implement the extreme measures that former Fed Chairman Paul Volcker took in the 1970s or send the economy into recession.

But it also suggests the country may be experiencing a period of “stagflation”, a word which Mr Bernanke said was coined in the 1970s.

“Even in the benign scenario, we should have a slowing economy,” he said. “And inflation is still too high but falling. So there should be a period over the next couple of years when growth is weak, unemployment is at least a bit on the rise, and inflation is still high,” he predicted. “So you could call it stagflation.”

He’s especially aware that runaway inflation can quickly become a political issue — perhaps putting the Federal Reserve in the public eye — in ways that even unemployment doesn’t conjure up. “The difference between inflation and unemployment is that inflation affects everyone,” he said. “Unemployment affects some people a lot, but most people don’t react too much to unemployment because they’re not personally unemployed. Inflation has an impact on a social scale.

This time, however, it does not focus on 2008 but on how the Federal Reserve has responded to various economic scenarios over more than a century, taking readers on a journey through the reins of different Fed Chairs like Alan Greenspan. . Readers will likely be particularly focused on Mr. Bernake’s analysis of the 1970s, which may be the closest analog to what is happening in today’s economy.

Mr. Bernanke seems somewhat concerned about the credibility of the Federal Reserve in the public conscience, especially given the aggressive approach he took in 2008 and which Mr. Powell has continued during the pandemic. “I had this fantastic conversation in my head between Jay Powell and William McChesney Martin, where I think Martin probably would have had a stroke or something because of the different things the interim presidents did,” he said. said, referring to Mr. Martin, the chairman of the Federal Reserve from 1951 to 1970.

In the book, Bernanke discusses how he sought to improve the Federal Reserve’s reputation for independence by making it more transparent, including by holding press conferences. “In everyday life, we judge the credibility of promises more by the reputation of the promise-makers than by the exact words they use,” he said. “The same principle applies to central bank promises. Central bank credibility depends in part on the personal reputation and communication skills of key decision makers, but since decision makers cannot irrevocably commit themselves or their successors, institutional reputation is also important. Because of concerns about institutional reputation, policy makers have an incentive to keep their promises, even those made by their predecessors.

Mr. Bernanke left the Fed as chairman in 2014, but remained in Washington, where he is a fellow at the Brookings Institution and a senior adviser to investment firm Pimco. He said he’d rather not have to make the decisions Mr. Powell now faces, or endure the hours of congressional testimony in which his decisions were questioned.

Instead, he prefers to think of the role with a slight distance and the ability to pontificate on political issues that he used to avoid.

When asked if he believed student debt should be forgiven, his characteristic pause disappeared: “It would be very unfair to eliminate it. Many of the people who have significant student debt are professionals who will continue to earn a lot of money over their lifetime. So why would we favor them over someone who didn’t go to college, for example? »

Or what about the Federal Reserve changing its inflation target? No break either. “Inflation targets shouldn’t be used as a short-term tool, you know? If you raise the inflation target to 3% for a short term purpose, then why not 4%, or why not 3.5%, or why not create a band, or whatever?

The good news is that Mr Bernanke isn’t worried about a 2008-style crisis. He is concerned about house prices, saying they’ve gone up ‘a lot, like 30% in the last two years’.

“It’s something that needs to be watched,” he said, but unlike 2008, “the mortgages that are loaned out to buy these homes are generally much better quality than the subprime mortgages of he 15 years ago”.

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