Sumner on DeLong on Bernanke
When I wrote my earlier post on Bernanke’s reconfirmation I was wondering what Sumner thinks. I didn’t have time to dig back through his posts to see if he already touched it (I don’t read them all). But before I got around to it he posted this:
As you know, I am not a fan of Brad DeLong’s old-style Keynesianism. But I have to give him grudging credit for this post, which is the best analysis of the Bernanke debate that I have read. You can see how DeLong’s comparative advantage lies in economic history rather than pure theory–he is very good at weighing and analyzing a complex set of political and economic factors.
And that’s why I am focusing on my comparative advantage—getting people to think about monetary issues from a different perspective. People know what I think the Fed should do, I’ll let those with better political instincts than me determine the best way to get there.
So, Sumner seems to defer to DeLong on Bernanke. And his reason is sound. He doesn’t have a comparative advantage in the areas necessary to address the reconfirmation question. Well I don’t either, not by a long shot. (What a joke it would be for me to even pretend.) So, in DeLong I will trust. I’ll stick my neck out on issues I know well. This is not one of them.
Later: Kevin Drum is willing to stick his neck out on Bernanke. As usual he brings some important political context to the conversation. And, again as usual, it is more nuanced than you’ll see just about anywhere else.
An Opening at the Fed?
There’s some talk that Bernanke won’t be reconfirmed as Fed chair and speculation about an alternative. Brian Johnson suggested Paul Krugman which surprised me given my view of his interest in political nuance. Krugman himself called Johnson’s idea crazy and James Kwak countered that it isn’t as crazy as Krugman thinks, but concludes that Krugman is probably serious that he doesn’t want the job anyway.
My thoughts on Krugman are closer to those of Tyler Cowen who writes,
[H]e is too dedicated to reading and writing and speaking his mind. The Fed Chair has to be an expert on building consensus and at maintaining more credibility than Congress; even when the Fed screws up you can’t just dump this equilibrium in favor of Fed-bashing. What lies on the other side of that curtain isn’t pretty. Would Krugman gladly suffer the fools in Congress? Johnson and Kwak are overrating the technocratic aspects of the job (which largely fall upon the Fed staff anyway) and underrating the public relations and balance of power aspects. It’s unusual that an academic will be the best person for the job.
Meanwhile, James Hamilton argues that Bernanke should be reconfirmed and concludes his post with links to the opinions of many others (just in case you’re interested). Since many macro-economists I trust (DeLong, Thoma, and Hamilton himself) who follow the Fed more closely than I are in favor of keeping Bernanke at the helm I’m inclined to go along. That’s especially so because the turn against him seems to be a form of political cover against populist backlash, which is far from the best reason to change Fed leadership at a time of economic fragility.
Is Inflation Under Control?
This post originally appeared on The Finance Buff.
There has been a lot written lately about the possible effect of Federal Reserve activities on the inflation rate.
One person I trust on this topic is economics professor James Hamilton (UC San Diego). He tracks the Fed’s balance sheet pretty carefully and has put out an exceptional post that explains its recent activities and the extent to which they’re inflationary. He followed up that post with another good one and I’m sure there will be more.
I encourage you to read Hamilton’s posts on this topic. In summary, in the above-referenced posts he shows that very few of the dollars the Fed has pumped out recently have entered circulation. Banks are sitting on most of it because they’re not lending. The Treasury Department soaked up some more by issuing additional US debt. Meanwhile, what the Fed has mostly been doing is swapping its Treasury holdings for other types of assets.
In the vernacular of macroeconomics, the Fed has been utilizing qualitative easing. On paper they have also been engaging in quantitative easing. Since the funds have ended up in bank reserve accounts or in Treasury accounts and not in the hands of the citizenry, effectively the amount of quantitative easing has been small so far.
The tricky bit down the road is how quickly the Fed can soak up dollars if and when inflation shows up. To facilitate doing so, the Fed wants to hold assets that would be in high demand during times of inflation. This is why Hamilton recommends the Fed buy TIPS.
Nevertheless, he says that inflationary pressures remain under control at the moment, “but stay tuned.”
April 12, 2009 update: How the Fed induces banks to hold on to reserves above the required minimum is explained clearly in this post by Susan Woodward and Robert Hall.
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