"Bernanke on Japan"
A number of people who I read, notably including Mark Thoma and commenter DTM, don’t like it when people criticize Ben Bernanke and take the view that the Fed is basically doing all that it can to boost growth. I’m not a specialist in this area, so I’ll happily acknowledge that this is what a number of specialists in the field think and those specialists may be right. But when it comes to criticizing Bernanke, it’s important to note that Bernanke does not agree with those who think there’s nothing he can do to boost growth. When Brad DeLong asked Bernanke why he doesn’t raise the inflation target to reduce unemployment, he didn’t say it wouldn’t work. He said it “could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward.”
Similarly, Scott Sumner notes that in the late 1990s Bernanke’s recommendations to the Bank of Japan evince a clear belief that central banks stuck in this kind of situation can, in fact, take action to boost growth.
Now if the issue is that Bernanke has changed his mind and now agrees with Professor Thoma that only fiscal policy can boost growth, he really ought to say this. When Alan Greenspan was Fed chair he didn’t shy away from making his views about fiscal policy known, and the Bernanke-era Fed has, thanks to crisis measures, gotten much more substantively involved in fiscal policy.
It seems to me, though, that the wisest course of action is to take Bernanke at face value. He knows that unemployment is a problem now and he believes that he could fight it, but that fighting it more aggressively would elevate the risk of inflation in the future and he thinks that reducing the possibility of future inflation is more important than reducing the reality of current unemployment. I think that’s nuts. But it’s an attitude the Bank of Japan has consistently maintained since the 1990s. It’s also clear that the European Central Bank has a strong deflationary bias. The Bernanke Fed isn’t as bad as those two, but it’s suffering from a similar problem. Under the circumstances, is it any surprise that sales of new homes are lagging and there’s no new business investment?