Thanks, Vi, for throwing that speech by Bernanke across our path.
I wouldn’t use the word “clueless” to describe it, however. The problem is more subtle and dangerous.
Yes, Bernanke is probably right when he says that the principal mechanism of transmission of money policy is risk. But is he right about the direction of influence? Does easier money policy lead to lower risk?
Well, yes, possibly, if you consider small changes in the very short run --- say, from 2:15 to 2:30 on a given Wednesday afternoon. But my gosh, who really thinks that an easier monetary policy leads in some general sense to lower risk.
It seems to me that a more accommodative stance of the FED triggers all sorts of evaluations. A lot of these have to do with an assessment of the intentions of the FED itself. Does the change to an easier money policy represent a short term response? Does it represent a fundamental shift in policy that is going to play out over many years. Is it a response forced upon the FED by imbalances elsewhere in the system? Etc. etc.
Bernanke’s method of measurement is full of precision. He breaks out expected versus unexpected change down to a basis point, e.g. the market expected a 31 basis point easing, got 50, so 19 of the 50 basis point change were unexpected.
Meanwhile, back at the real world, people are making assessments over all sort of time frames ABOUT THE FED ITSELF. None of this is picked up by Bernanke, and none of it can be.
Bernanke thinks he knows something. And he does. He has developed a “feel.” He thinks the “feel” that he has developed is for the market and how it works. But such is not the case. What he has developed a feel for is his own model.
The trouble is that he now is in a position of influence, and makes decisions that apply far beyond his model. Neither he (nor anyone else) really knows what the consequences of his decisions will be. The danger that Bernanke represents is that he thinks he does.
Sorry, that’s my rant for the day. |
