Parsing The Finer Points Of “Reckless” Behavior For Monetary Policy

The word “reckless” is defined as acts that are irresponsible, wild, thoughtless, and the byproduct of someone who is utterly unconcerned about the consequences of some action. And for the record, Fed chairman Ben Bernanke wants you to know that he will tolerate none of those personal failings as a steward of the nation’s monetary policy.

When asked yesterday, at the Fed’s news conference, about whether he would lead the central bank to use all of its monetary levers to revive the economy, including raising the inflation target, the chairman dismissed the idea:

I guess the — the question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased reduction — a slightly increased pace of reduction in the unemployment rate?

The view of the committee is that that would be very reckless. We have — we, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

His answer is said to be a response to Paul Krugman’s new critique of Bernanke. Krugman’s complaint is that the Fed isn’t doing enough to address the economic weakness, the high unemployment rate in particular. Given Bernanke’s previous views about Japan’s economic malaise, the chairman’s latest commentary sounds misplaced, Krugman advises:

In a hard-hitting 2000 paper titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Bernanke declared that “far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He proceeded to lay out a number of actions the Bank of Japan could take. And he called on Japanese policy makers to act like F.D.R. and do whatever it took: “Japan is not in a Great Depression by any means, but its economy has operated below potential for nearly a decade. Nor is it by any means clear that recovery is imminent. Policy options exist that could greatly reduce these losses. Why isn’t more happening? To this outsider, at least, Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced. Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.”

The problem, as Krugman sees it, is that “Chairman Bernanke’s Fed has been much more passive than Professor Bernanke’s writings would have led us to expect.” He’s not alone in wondering why the Fed head changed his mind. David Beckworth writes that “many observers have been baffled by the transformation of Ben Bernanke the academic who argued the Bank of Japan in the 1990s was not trying hard enough to restore aggregate demand to Ben Bernanke the central banker who now seems to be making the same mistakes for which he criticized the Japanese.”
Bernanke’s defense is that “we are not in deflation. When deflation became a significant risk in late 2010, or at least a modest risk in late 2010, we used additional balance sheet tools to help return inflation close to the 2 percent target.”
Marcus Nunes asserts that Bernanke’s “sole concern” all along has been one of preventing deflation, and so there’s really nothing surprising by the chairman’s reluctance to embrace the medicine that he recommended for Japan all those years ago.
But if there’s a method to Bernanke’s monetary madness, there are also risks. Scott Sumner sums up the potential pitfall for Bernanke in claiming that keeping the U.S. out of the deflation ditch is the main priority:

I think what Bernanke meant to say was that the Fed should not raise its long run inflation goal when unemployment is high. And that’s certainly a defensible proposition. But he didn’t express this view clearly, and hence got hammered by people like Paul Krugman and Brad DeLong. And I can’t blame them, because the Fed is acting as if they don’t care at all about the unemployed. It’s acting like the ECB. Inflation has averaged much less than 2% since mid-2008, which would be an excessively tight policy even if the Fed didn’t care at all about the suffering of the unemployed.

My hunch is that Bernanke does care about the unemployed, and wishes the Fed had done more. My hunch is that he doesn’t have the Fed with him, but feels forced to defend Fed policy for political reasons. This is very awkward, and he occasionally stumbles. (It’s also a very poor reflection on Obama’s leadership, as he appointed 80% of the Board of Governors, including Bernanke.)

Defining “reckless,” it seems, may not be so simple after all.