A number of commenters have discussed Bernanke’s speech from nine days ago. There are market monetarist ideas throughout the speech, including:
1. Low long term rates do not reflect easy money.
2. Slower growth in AD could worsen the financial crisis.
3. We should address the risk of financial excess through better regulation, not tighter money.
4. The downward trend in long-term real interest rates reflects sluggish growth, and expectations of slower growth going forward (in developed countries.)
5. Tighter money could (paradoxically) lead to lower long term interest rates.
I certainly don’t believe that these are exclusively market monetarist ideas, but what struck me is how Bernanke seemed to emphasize the very same points that MMs tend to keep harping on.
If you were to boil the whole speech down to a couple paragraphs, I’d say these show what was really on Bernanke’s mind:
One might argue that the right response to these risks is to tighten monetary policy, raising long-term interest rates with the aim of forestalling any undesirable buildup of risk. I hope my discussion this evening has convinced you that, at least in economic circumstances of the sort that prevail today, such an approach could be quite costly and might well be counterproductive from the standpoint of promoting financial stability. Long-term interest rates in the major industrial countries are low for good reason: Inflation is low and stable and, given expectations of weak growth, expected real short rates are low. Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading–ironically enough–to an even longer period of low long- term rates. Only a strong economy can deliver persistently high real returns to savers and investors, and the economies of the major industrial countries are still in the recovery phase.
. . .
Conclusion
Let me finish with some thoughts on balancing the risks we face in the current challenging economic environment, at a time when our main policy tool, the federal funds rate, is near its effective lower bound. On the one hand, the Fed’s dual mandate has led us to provide strong support for the recovery, both to promote maximum employment and to keep inflation from falling below our price stability objective. One purpose of this support is to prompt a return to the productive risk-taking that is essential to robust growth and to getting the unemployed back to work. On the other hand, we must be mindful of the possibility that sustained periods of low interest rates and highly accommodative policy could lead to excessive risk-taking in some financial markets. The balance here is not an easy one to strike. While the recent crisis is vivid testament to the costs of ill-judged risk-taking, we must also be aware of constraints posed by the present state of the economy. In light of the moderate pace of the recovery and the continued high level of economic slack, dialing back accommodation with the goal of deterring excessive risk-taking in some areas poses its own risks to growth, price stability, and, ultimately, financial stability. Indeed, as I noted, a premature removal of accommodation could, by slowing the economy, perversely serve to extend the period of low long-term rates.
For these reasons, we are responding to financial stability concerns with the multipronged approach I summarized a moment ago, which relies primarily on monitoring, supervision and regulation, and communication. (emphasis added)
Regular readers of my blog know that I focus on counterintuitive ideas. It’s not because I like counterintuitive ideas (although I do), but because in the area of monetary policy I think they are correct. (In many other areas of econ I go with the conventional wisdom.) That’s why I bolded “ironically enough” and “perversely.” It really jumped out at me that Bernanke is becoming surprisingly counterintuitive for a Fed chairman. But then he’s already looking beyond this job to his legacy, and doesn’t want to see all his hard work destroyed by a repeat of the “Folly of 1937.”
Or the eurozone folly of 2011.
PS. David Beckworth, Joe Weisenthal, Ryan Avent, Jim Hamilton, and Marcus Nunes also comment.