At an economic conference in San Diego last week, former Federal Reserve Chairman Ben Bernanke presented a paper outlining two unconventional policy tools central banks use when economic crises render traditional monetary policy fruitless. The tools, forward guidance and quantitative easing, are policy mechanisms The Demand Side has discussed at length, and should be well known to most readers of economic news or those who follow the Fed.
Many believe forward guidance and quantitative easing deserve credit for saving the US economy in 2008. I can’t say I disagree. The problem, though, is that these tools are not new, nor are they sufficient stand-alone policies for fighting a future recession. Bernanke certainly relied on communication and transparency more than any other Fed chairman in history, and acted boldly by taking advantage of the "unusual and exigent circumstances" clause of the Federal Reserve Act to defend the Fed's large scale asset purchases that no doubt saved the American housing market from collapse, but these tools are not novel, nor are they as powerful as he and other central bankers would like us to believe. The mere act of buying assets and communicating near-term decision-making has been done, in one way or another, since the FOMC's inception, in 1933.
But Bernanke states that these tools, when used in combination, are equivalent to a 3 percent cut in the Fed Funds rate—the rate the Federal Reserve uses to steer monetary policy—and can be invaluable when central bankers are constrained by the zero-lower bound and fear moving into negative rate territory. While the 3 percent number is certainly debatable, what is irrefutable is that a three percent policy movement is far from enough to stem a 21st Century recession. And despite what the economic press has reported, Bernanke knows this.
For some reason (perhaps simply wanting to create unnecessary drama), the economic press turned his opinions on these tools into: “Bernanke believes forward guidance and QE are all that is needed to address a future crisis,” which certainly isn’t the case. He was merely arguing that the measures deployed during the crisis should be permanent fixtures in central bank toolkits, as they reap ample rewards with few downside risks. In his new paper, Bernanke specifically states that the "old methods won't do; if monetary policy is to remain relevant, policy makers will have to adopt new tools, tactics and frameworks."
The fact is that Bernanke knows better than anyone the limits to monetary policy. People often forget that he begged Congress to take fiscal action in 2008, even after QE and forward guidance were in place. He did that because, even as Fed Chairman, he knew there was only so much he could do fix the failing economy. He thought that relying on tools that proved effective in the past will only lead to an unprepared monetary framework in the future, which is why he drafted numerous policy proposals centered on giving the Fed authority to expand its scope beyond QE and forward guidance.
For instance: in 2016, he proposed a Money-Finance Fiscal Program that uses money creation as a conduit for fiscal expansion, without incurring additional debt; he also came out in support of negative interest rates, but said bankers should approach them with caution; and while at the Fed, he recommended paying interest on reserves as a way to better control the policy rate, something very few agreed with at the time.
Those policies, initially disregarded as ludicrous, are the types of policies central bankers need to be thinking about, and nobody has spent more time agonizing over them than Ben Bernanke.
Rather than dissecting his every word and manufacturing reasons to discredit his work, central bankers should be following his lead—playing out the unthinkable, drafting policies that, hopefully, will never need to be implemented, then requesting the legislative power to deploy them, if necessary. We need more central bankers like Bernanke: those who think outside the box and allow themselves to embrace that which is unconventional.