The Washington Post - USA (2022-05-29)

SUNDAY, MAY 29 , 2022. THE WASHINGTON POST EZ BD B5

standing of the dynamics of inequality in the

21st-century economy.

Bernanke’s problem, like that of many of his

Fed colleagues past and present, is a refusal to

acknowledge the prevalence of asset bubbles,

the extent of their impact on the economy and

the Fed’s role in creating them, both through

expansionary monetary policy and weak fi-

nancial regulation. It was this blind spot about

the irrationality and games-playing on Wall

Street that led Bernanke to assure the country

in 2008 that the subprime mortgage market

was simply too small to threaten the banking

system. And it is the same blind spot that

allowed the Fed in recent years to dismiss the

meme stocks, the tech unicorns and the crypto

insanity, along with the explosion of private

credit, and characterize it as nothing more

than one of those occasional exuberances

unworthy of a policy response. In both instanc-

es, Fed officials relied on comforting data

analyses that betrayed breathtaking naivete

about the behavior of Wall Street wiseguys and

dynamics of financial markets.

Under the asymmetric monetary frame-

work that Bernanke lays out and the Fed now

embraces, the central bank will keep interest

rates “lower for longer” during recessions and

recoveries but won’t keep them higher for

longer when the economy is booming. The Fed

will print up trillions of dollars to fight one

recession but never manage to withdraw them

before the next one begins. To fight recessions,

it will encourage undue risk taking by specula-

tive investors, money managers and corporate

executives, providing them with oodles of

cheap money and assuring them that it won’t

be withdrawn anytime soon. And when the

inevitable bubble bursts and it all comes

crashing down, the Fed will be there once

politicians who have tried to politicize the Fed,

but sees no contradiction in describing how

the agency lobbied Congress in 2010 to pre-

serve its role as the leading bank regulator,

including recruiting the support for the banks

it regulates.

Bernanke seems to have forgotten his own

role, under a previous Fed chairman, in the

excessive consolidation and deregulation of

banks and financial markets that continue to

destabilize markets and the economy to this

day.

And even though it is more than a decade

since he left the Fed for a research sinecure at

the Brookings Institution, Bernanke clings to

the obfuscating and euphemistic language of

the central banker — insisting, for example,

that when the Fed buys trillions of dollars of

government bonds to stimulate the economy,

it does so not by “printing money” but by

“creating bank reserves.”

Particularly unconvincing is Bernanke’s as-

sertion that the expansionary monetary policy

he supports does not favor the rich or signifi-

cantly contribute to income inequality. Ber-

nanke acknowledges that one intended effect

of such policies is to artificially raise the price

of stocks and other financial assets that are

owned disproportionately by the rich. But he

argues that those policies also have a similar

effect of increasing employment, income

home values and retirement savings of the

middle and working classes.

Unfortunately, any broad look at the data

confirms what most of us see all around us:

that the dramatically increased wealth of

those in the top 10 percent overwhelms the

modest gains of everyone else as that wealth is

invested and converted to income. Bernanke’s

analysis betrays a surprisingly shallow under-

Book World

21ST CENTURY

MONETARY

POLICY

The Federal

Reserve from

the Great

Inflation to

COVID-1 9

By Ben S.

Bernanke

Norton.

480 pp. $35

THE FED

UNBOUND

Central

Banking in a

Time of Crisis

By Lev Menand

Columbia Global

Reports.

176 pp. $15.99.

F

ederal Reserve Chairman William Mc-

Chesney Martin spoke for generations of

monetary policymakers when he fa-

mously declared in 1955 that the job of the

central bank was to take away the punch bowl

“just when the party was really warming up.”

But in recent years, this puritanical ap-

proach to managing the ups and downs of the

economy had fallen into disrepute. Citing

structural changes in the economy and the

lessons learned from the two most recent

recessions, central bankers have come to be-

lieve that they must “do whatever it takes” to

pull an economy out of a serious downturn and

keep the cheap money flowing until the econo-

my has fully recovered — and then some.

Taking away the punch bowl too early, they

have come to believe, results in jobless recov-

eries in which the economy never reaches its

full potential and workers never gain the

leverage to bargain for a decent wage.

Among the intellectual godfathers for this

more muscular, run-it-hot monetary policy,

none is more respected than Ben Bernanke,

the Princeton academic who courageously and

creatively led the Fed into and through the

Great Recession. In his latest book, “21st

Century Monetary Policy: The Federal Reserve

from the Great Inflation to COVID-19,” Ber-

nanke aims to build public support for this

new monetary framework.

Unfortunately for Bernanke, however, his

book arrives just as this new framework is

being put to the test, with an inflationary

spiral taking hold, an economic slowdown on

the horizon, and tech and crypto bubbles

starting to burst. Earlier this month, as the

current Fed chair and his colleagues scram-

bled to hike interest rates and halt a multi-tril-

lion-dollar bond-buying spree, a somewhat-

chastened Jerome Powell admitted that they

had left the punch bowl out too long.

You can tell from its title that this is not a

book aimed at the bestseller list. Half is given

over to a history of Federal Reserve policy from

the Johnson administration to the present.

That is followed by a remarkably accessible

but unavoidably wonkish discussion of the

extraordinary steps taken by the Fed and other

central banks in the wake of the 2008 financial

crisis and then again during the recent pan-

demic. Readers will be treated to a spirited

defense of inflation-targeting but skepticism

toward nominal GDP-targeting; a nuanced

explanation of the difference between “for-

ward guidance” of the Delphic and Odyssean

varieties; a celebration of the success of “quan-

titative easing,” which has allowed central

banks to stimulate the economy even after

interest rates have fallen to zero; and an

impassioned plea for central bank independ-

ence from political interference. There’s even

an elegant put-down of Modern Monetary

Theory, a recently fashionable fantasy of un-

limited government borrowing that has cap-

tured the imagination of the libertarian right

and the free-spending left. Anyone looking for

the score settling, mea culpas and juicy anec-

dotes usually found in books by Washington

insiders will be disappointed.

Indeed, one of the weaknesses of the book is

that Bernanke cannot seem to bring himself to

say anything critical about any of his Fed

colleagues — or, for that matter, any of his

predecessors or successors — or the insular

Fed culture that remains smugly dismissive of

critics and dissenters, overreliant on its eco-

nomic models and willfully ignorant of the

machinations on Wall Street.

For example, Bernanke rightfully criticizes

former president Donald Trump and other

A former Fed chair still wants the punch bowl — and a high-proof punch

ECONOMY REVIEW BY STEVEN PEARLSTEIN

WIN MCNAMEE/GETTY IMAGES

F ederal Reserve

Board Chairman

Ben Bernanke

testifies before the

Senate Banking

Committee in 20 12.

Steven Pearlstein

writes that the

ideas Bernake lays

out in his new book

will be tested in the

months ahead.

again to do “whatever it takes” to rescue the

financial system and save risk-takers from the

full consequences of their actions.

This framework, in effect, creates a one-way

monetary ratchet that requires ever-increas-

ing doses of monetary stimulus to maintain

the economy at full employment, in the proc-

ess creating a floor under asset prices with

only a vague hint there might be a ceiling. Its

fixation on “forward guidance” about future

Fed moves invites everyone on financial mar-

kets to lean in the same direction while con-

straining the Fed from responding quickly to

changing conditions. And although Bernanke,

like his successors, may claim they’re doing it

all for the little guy, the clear message it sends

to the Wall Street is, We’ve Got Your Back!

In the coming months, the Fed will try to

rescue this strategy with a series of sharp rate

increases and gradual withdrawal of bank

reserves, moves that it hopes can tame infla-

tion without throwing the economy into reces-

sion. If the Fed succeeds in engineering such a

“soft landing,” Bernanke’s book could see a

second printing as it becomes the go-to text for

courses in monetary policy.

But if the strategy fails, the result is likely to

be an extended period of uncomfortably high

inflation and uncomfortably high unemploy-

ment. Such “stagflation” is confounding for

central bankers, as any move to solve one

problem is likely to exacerbate the other. In

that event, the most likely place to find a copy

of “21st Century Monetary Policy” will be the

remainder bin of your local bookstore.

Steven Pearlstein is a former business and

economics columnist for the Post. He is also the

Robinson Professor of Public Affairs at George

Mason University.

into U.S. dollars at a fixed rate — pose risks to

financial stability that remain unaddressed

more than a decade after the global financial

crisis.

Yes, Congress should expand automatic

stabilizers — enhanced unemployment ben-

efits, aid to state and local governments,

perhaps stimulus payments to low- and mod-

erate-income households — that turn on

when the economy stumbles and turn off

when it recovers.

Yes, Congress should do more to increase

the supply of housing to bring down its cost,

and make the health-care system more effi-

cient and less expensive, even though that

wouldn’t do much about today’s inflation.

Yes, the Fed is not the arm of the federal

government best suited to take the lead on

fighting climate change, even if elected politi-

cians are paralyzed.

Menand does offer a clear, textbook-style

history of the founding of the Fed and an

created by the [private] banking system does

not prevent the economy from achieving

these goals over the long term,” he says.

That may be what Woodrow Wilson and

Congress were thinking in 1913, but Menand

disregards more than half a century of

economic thought. He even declares in a

footnote that “arguments that the Fed should

raise interest rates to prevent prices from

rising above a certain annual rate are incon-

sistent with its mandate” because higher

interest rates discourage business invest-

ment. (He lost me there.)

Several of Menand’s policy recommenda-

tions are sound, even if the arguments he uses

to get to them are a bit tortured.

Yes, financial powerhouses outside the

perimeter of bank regulation — money mar-

ket mutual funds, investment firms whose

short-term borrowing resembles bank depos-

its and, lately, stablecoins, the crypto curren-

cies that promise holders can convert them

explanation of what it actually does in the

money markets; that alone is useful. He

correctly observes that in the fall of 2019 the

Fed intervened in the market for U.S. Treasury

debt because of dysfunction in that market,

which returned with vehemence in the early

days of the pandemic. And he briefly makes

the case, as he has elsewhere, that the Fed

should offer no-fee bank accounts to all “to

rectify predatory and exclusionary practices

in the investor-owned banking system that

have significantly harmed low-income and

minority communities by making it hard (if

not impossible) for many households to open

and maintain bank accounts.” He does not in

this volume, however, discuss the potential

for such accounts to destabilize the banking

system in a crisis, nor does he acknowledge

that this would substantially expand the role

of the Fed in the economy, a role that he thinks

is already too broad.

We do tend to ask too much of the Fed.

When the shadow banking system, its growth

insufficiently addressed by Congress and

regulators, threatens financial stability and

prosperity, we expect the Fed to save us. When

Congress is slow to rescue the economy from a

recession or turns the spigot off too soon (as it

did in pre-pandemic times), we count on the

Fed to do more. When elected politicians fail

to cope with some pressing problem —

inequality, climate change — there are inevi-

tably those (many aware that the Fed can

spend freely without congressional approval)

who demand that the Fed step in. And as

Menand argues, echoing warnings from Paul

Tucker, formerly of the Bank of England,

when unelected central banks tread too far

onto the turf of elected representatives, they

risk undermining their legitimacy and their

ability to achieve their mandate of maximum

employment and price stability.

W

hen the Federal Reserve came up

with $85 billion in 2008 to rescue

AIG, the insurance giant that gam-

bled and lost on derivatives, Rep. Barney

Frank, then chairman of the House Financial

Services Committee, asked Fed Chair Ben

Bernanke where he got all that money.

According to Frank, Bernanke responded: “I

have $800 billion,” referring to the Fed’s

portfolio of government bonds and loans.

Frank’s reply: “No one in a democracy, un-

elected, should have $800 billion to spend as

he sees fit. That’s not the way to run a

democracy.”

Lev Menand agrees.

A Columbia Law School associate professor

who did stints at the Obama Treasury Depart-

ment and the Federal Reserve Bank of New

York, Menand argues in a slim paperback —

“The Fed Unbound: Central Banking in a

Time of Crisis” — that the Fed has been forced

to stray from its roots by the evolution of the

financial system, to which Congress has failed

to respond. The result, he argues, is that the

Fed has done too much and that this, among

other things, has widened wealth inequality

in the United States.

He largely absolves the Fed of blame for this

(though I would have noted that the Green-

span Fed was reluctant to use the regulatory

muscle it did have). Menand does, however,

suggest that if the Fed hadn’t been so quick to

act, Congress might have done more to repair

the flaws in financial oversight and macroeco-

nomic management that he identifies. “With

Fed-led macroeconomic policy tailor-made to

advance their interests,” he says, “why would

asset owners seek other responses from

Congress?”

The core of Menand’s historical and legal

argument is that the Fed was designed not to

stabilize the economy but solely “to adminis-

ter the banking system.” He argues that its

mandate is not to use its tools to deliver price

stability and maximum employment (as the

Fed itself and almost everyone else reads the

law) but, rather, to grow the money supply at a

rate consistent with the economy’s full poten-

tial. “Its job is to ensure that a lack of money

The problem with a Fed that does too much

ECONOMY REVIEW BY DAVID WESSEL

JABIN BOTSFORD/THE WASHINGTON POST

The Marriner S.

Eccles Federal

Reserve Board

Building in 20 19.

Lev Menand argues

that the Fed was

designed solely “to

administer the

banking system.”

David Wessel is the director of the Hutchins

Center on Fiscal and Monetary Policy at the

Brookings Institution and the author of “In Fed We

Trust: Ben Bernanke’s War on the Great Panic.” His

latest book is “Only the Rich Can Play,” the story of

Opportunity Zones.