Bryan Caplan muses on why Ben Bernanke changed once he’d become Fed chairman:
Ben Bernanke was my teacher, and a major influence on my macroeconomic thinking. When he became Fed chairman, I expected the best of him. I was sorely disappointed. His behavior as Fed chairman seemed utterly disconnected from his lectures and writing. In 2008, I kept wondering why he backed the madness of TARP instead of following his own long-standing prescriptions.
Most of the economists I talked to simply dismissed this path not taken. Amidst the chaos, something had to be done. Why couldn’t that “something” be Bernanke’s inflation targeting? Oh, the zero nominal bound. But what about Bernanke’s dismissive writing about the zero nominal bound? You don’t understand, Bryan: We have to do something or the world will end. Eventually the noble Scott Sumner came along, explained my original position better than I ever could, and changed a lot of minds that originally dismissed me.
Still, a mystery remained. If Sumner’s right, why on earth did Bernanke act as he did? Why discard a lifetime’s worth of insight into monetary policy when the world economy was on the line?
I think there’s a pretty simple explanation. In business there used to be a wisecrack: “Nobody ever got fired for recommending IBM”. I’m not sure what the contemporary equivalent would be. Microsoft? Maybe that’s dated, too.
The point is that it takes real courage to do something other than what’s expected. The pressure to go with the flow, to follow the prescriptions of a majority of economists is just overwhelming.
I think that’s correct, Dave. I believe you may also be referring, in the opposite sense, to the old Wang commercials with the actor/ boss adopting a look of horror on his face at the notion of buying Wang instead of IBM.
The general point is one I’ve attempted to make here, clumsily at times, about how we challenge the assumptions and thinking of our portfolio company mangers. For example my typical quip that when a manager will not test the assumptions of his expense base requirements or strategic initiatives we call them “ex-managers.”. It’s obviously not that simple, but it makes the point. go with the flow or think differently given the realities of the competitive environment.
So back to Bernanke, I think that’s exactly right, easier to go along and get along. Said differently, a lack of leadership and fortitude. Churchill he ain’t. I know it sound cynical, but I think it describes much of government behavior, and is a prime reason for our current fiscal position.
In business there used to be a wisecrack: “Nobody ever got fired for recommending IBMâ€. I’m not sure what the contemporary equivalent would be. Microsoft? Maybe that’s dated, too.
I do not think there is a modern equivalent. The world changes so quickly now that nothing is that solid. A fair number of us, for example, can remember when Apple wasn’t the current collosus but a minor firm that had failed to ever live up to its promise. Steve Jobs changed that, but he’s dead now.
Google? No one with any brains would think that firm (and its current dominance) is permanent – they’re just one Google-esque start-up away from being Yahoo, or AOL.
Berkshire Hathaway? Nah. Everyone has to wonder when the head honcho is going to die, or get too senile to get bailouts from the government.
Microsoft is about as close as anyone, except that Microsoft seems old and stodgy, and no one really likes them*.
And of course the current incarnation of IBM just isn’t the old IBM at all.
Maybe the only company that would come close, and then only in certain circles, would be Foxconn.
* That last part isn’t really true, but close enough to the truth to negate its being the modern equivalent of the old IBM.
I think that’s one of the ways in which I’m out of touch with contemporary thought. I know first-hand of too many technology firms of the 1960s and 1970s who had key personnel literally walk across the street, start their own companies, and present serious competition to their original company within a year or so to see Google as a prospective AT&T, i.e. a company that achieves and maintains industry dominance for generations.
“In the “Preventing It” speech, Bernanke assures the American public that they have little to fear from the zero bound. At the time of the speech, inflation and interest rates were both approaching zero. Yet Bernanke says “the chance of significant deflation in the United States in the foreseeable future is extremely small.” “I am confident,” he says, “that the Federal Reserve would take whatever means necessary to prevent significant deflation” and that “U.S. policymakers have the tools they need to prevent, and if necessary cure, a deflationary recession.”
Perhaps, dear Mr. Caplan, Ben finally understood the Fed does not control the money supply. Referencing Scott Sumner only undermines your argument.
I think Caplan would have done the same things in the acute part of the crisis. When you have to work in real time, with imperfect information it really puts things into focus. Minutes until someone dies, or days before the world’s economy tanks and I think you might see things differently. Most people never face those kinds of decisions. Record TED spreads and the credit market frozen with one middling investment bank down. What happens when all the big banks, AIG and dozens of big banks across the pond go under. In theory, you might believe it is better to let everything go on its own. In reality, no one really knows and as the guy in charge, you know that.
IOW, Caplan is Monday morning QBing. Why didnt he see that guy wide open in the end zone in the snow storm while being chased by 3 huge linemen faster than he is?
After the acute phase is when Caplan should be disappointed in Bernanke.
Steve
Great write up by Scott Sumner that you only get by clicking through to Bryan Caplan’s post.
steve,
I think you should read Scott Sumner’s post. Panicking when others are panicking is not a sign of leadership. Our leadership has,
1. Failed to learn the lessons of the Great Depression.
2. In fact they learned the wrong lessons.
3. As a result have failed us miserably.
Steve V.:
One remark related to Dr. Sumner’s post.
IMO they didn’t care. Distinguish between the bankers and the banks. The banks may have lost billions but bankers made billions in wages and commissions.
A great, far too unheralded revelation from the last four years is how far the breach of fiduciary responsibility went. We now know that the great investment banks were defrauding or at the very least misleading their own customers, taking the money, and running.
Additionally, I think they were confident of a very limited downside risk (a confidence fully borne out by subsequent events). That’s why there was so much panic when Lehman was allowed to fold. They thought that maybe it could happen to them, too.
I think the observation still holds Dave. After all, alot of those people did have money involved as well. I think it is problematic to say after the fact, well of course it was obvious….now that I look back and have the benefit of hindsight. Lots of things are obvious that way. Gravity? What was the big deal? Isaac Newton? Genius? Okay, if you say so, but it sure looks like it was trivial to me lots of that stuff. At best it might have been obvious very near the peak when some were able to get out with some of their money.
As for the downside risk I think you are correct that many thought they were protected more than they were. A lot of the problem stems from the belief that while foreclosures do happen they were perceived as isolated events. The idea that the entire market could move together just didn’t seem to register or was deemed less likely than it was. Seems bizarre in hindsight since the market moved upwards together. So you had these mortgage backed securities that were comprised of mortgages from all over….the likelihood of there being a problem is small because, all those mortgages can’t go bad at once…not even a significant portion of them can…the chances of that happening are really small…never mind that the idea that the house prices continue to go up for all or most of those same houses would also be a small probability event by the same logic.
Exactly when did people say there was a bubble? 2007? Sorry no bubble then. 2008? See 2007. 2006? That is the year when housing prices peaked, not a very good job Kreskin. 2005? Who here was saying in 2005 we have a bubble and we have a problem? And 2004? Back when people were still complaining about the lackluster economy under Bush? And certainly not 2003 or earlier. So you’d be on good ground if you were saying, “Housing bubble,” in 2005, IMO.
And keep in mind what Sumner is pointing out. In 2006 the housing market started to retreat from its lofty heights. Was that the start of the recession? Not hardly. The recession didn’t start till the very end of 2007. Sumner points to tight money as the cause with things not really getting bad until the last part of 2008.
LOL…I have to admit that is funny.
I don’t disagree with his observations overall. I just have reservations about the single point I cited.
Well, I was for one. I went back and did a search of my early posts. I was posting to that effect in 2005 and pointing out the likelihood of state and local governments turning to hikes in the income tax to offset the loss of revenues which, here in Illinois, has indeed happened.
Speaking of Illinois I was complaining about the stupid, short-sighted Illinois budget back in 2005 as well and pointing out that the decision to “balance” the budget by delaying contributions to the state employee pension plan would bite us in the butt which has also happened.
Yes, but I note in that post that you weren’t entirely sure. And a few months earlier you have an A-to-Z post that links to the big picture that also talks about the bubble, but is also not entirely in the bubble camp. And this was a year or so prior to the bubble bursting…i.e. we were will in it. Way too late to do all that much about it besides letting it pop and deal with the aftermath. Most talk of the bubble hedged their bets….”if we are in a bubble, and we probably are…but maybe not….”
Bubbles are hard to spot when you are in them. And they are damn hard to spot early on. And they are practically impossible to spot before they start.
Who here was saying in 2005 we have a bubble and we have a problem?
I knew there was a property bubble in Florida back then, and I knew it had to pop eventually. (It’s not like these things don’t happen.) I knew that because my wife and I started looking to buy a house that spring. The house we found that we liked best (meaning that we might just possibly have been able to afford) had an asking price of $330,000 for 1,800 sq ft on a smallish lot. (Compared to the lot sizes in Florida when I was young.) Checking online we saw that the owners of that house had bought it in 2000 for the price of $140,000.
At that point we realized that (a) we were nuts to be thinking about spending a third of a million dollars on a house that size, and (b) that the entire housing market down here was completely batshit crazy. Adding to that second part was the realization that a house down the street from where were living had been badly damaged in Hurricane Charley, had been renovated and flipped twice in the previous eight months and was about to be flipped again. At no point had anyone actually lived in the house.
In hindsight my regret is that we didn’t (a) start buying in 2003, (b) start flipping at that time, and (c) got out in 2006. Oh well. Alternately, buying in 2003, using the home equity credit card to pay off student loans, and then going into foreclosure back in 2008 or 2009. Oh well.
I don’t remember when I became cognizant of a national (more or less) housing bubble, but I believe I started paying cursory attention to it after our adventure in not buying a home. And it wasn’t until the melt-down started in the spring of 2008 that I found out how crazy Wall Street had been. So I only get partial credit.
Incidentally, the third paragraph I wrote illustrates and interesting point – my wife and I screwed the pooch by doing the responsible thing back in 2005. We should have been completely mercenary. We might have gotten our student loan debt converted into something we could dispose of in bankruptcy. C’est la vie.
Lots of things are obvious that way. Gravity? What was the big deal? Isaac Newton? Genius? Okay, if you say so, but it sure looks like it was trivial to me lots of that stuff.
Riiiiiggggghhhtttt, sure it does. It’s completely obvious to you that the same thing that makes the apple fall controls the motion of the heavenly orbs and even the tides. From that you can deduce differential calculus and integral calculus, show the relation between the two, and come up with a handy-dandy mathematical folrmula to rule the Universe*. Riiiigggghhhhtttt.
I’ll note that Kepler got about as close as anyone to both a theory of gravity and the calculus, and even he fell well short. Newton and Leibniz deserve all the credit they got for the calculus. And Newton, for inventing modern physics? Well, what peers he has are on a very short list, probably no more than three others in history, and none were as pivotal. Make that four, as Euclid might be the only other person to have made as great an impact as Newton in the history of human thought.
* At least until better instrumentation reveals a small but significant problem.
All of which is to say that the day after tomorrow, what happened tomorrow will seem obvious. From the vantage point of today tomorrow looks completely mysterious.
Really? Might want to look at what James Hamilton wrote. He notes that if local income is going up faster than the housing stock can increase then you’d expect prices to go up…possibly alot. In other words, leading up to 2005 there might have been rather rational reasons to expect housing prices to go up in places like (wait for it….wait for it….) California, Florida, and the like.
Still convinced that 2005 absolutely was a bubble?
Here is a different story….
…due to changes in the economy and demographics in the early 2000s housing prices were rapidly rising in some markets. So long as those economic and demographic trends held prices would continue to rise. This lead people to thinking that housing prices had to rise or that it was time to get in on the gold rush or both. Then the economic and demographics changed and the housing prices no longer had the underlying process that was driving growth. Add in the moral hazard problem with regards to lending practices that Hamilton also talks about, maybe even a dash of very low interest rates that started to rise in 2006 and…POP!
In other words, the run up to 2005 might have been reasonable, but after that no, that is 2005 was the turning point. I’m not saying this is what happened, but pointing out that there are alternative interpretations. Simply because prices rise alot for a given commodity does not mean there is a bubble for that commodity. Not paying attention to the underlying forces driving the price increase and/or misconstruing their significance could lead to a bubble…maybe.
Babble about a housing bubble
Our host expresses his skepticism here on the existence of a housing bubble in 2005. :p
“I think you should read Scott Sumner’s post. Panicking when others are panicking is not a sign of leadership. Our leadership has,
1. Failed to learn the lessons of the Great Depression.
2. In fact they learned the wrong lessons.
3. As a result have failed us miserably.”
I think they saw that our banks were insolvent. That when AIG went under, hundreds of other banks would go. A lot of what Sumner notes is after the fact information or theory, and we all know how reliable macro theory is.
Now, if Sumner and Caplan want to fault Bernanke for 2007 and early 2008, or later in 2009, fine. When Lehman collapsed, shortly after Bear Stearns almost went and then AIG, I think leadership called for more drastic action. No one really knows how to go through a bankruptcy with a big international bank. Would you want to do it with dozens at a time?
Steve
Still convinced that 2005 absolutely was a bubble?
Absolutely.
I’ve lived in Florida since 1968, with the exception of three years. I’ve seen massive growth in that time, and in fact frequently find myself lost because this just isn’t home anymore. At no time have I ever seen housing prices explode like that. Houses were being built at a huge rate as well, and many houses were being bought before or during the build, sold during the build, sold shortly after the build, and sometimes bought and sold a few more times before anyone bothered to actually move into the house. The whole state was like one of those crazy infomercials that air at 3:30 in the morning, starring some improbably dweeby guy living like Hugh Hefner.
When the bubble burst we ended up with massive amounts of housing that had never been lived in. It was reported that something like 18% of the houses in Osceola County were sitting empty in 2009, many of them having never been lived in.
That simply is not rational, not even in Florida. Hell, the 2000s were more insane than the 1980s, when the cocaine cowboys were shooting up the place.
Not to mention, if those trends drove prices up, especially those driven by demographics, what happened in the meantime? Did all those people suddenly leave in 2006 to drive prices down? In my neighborhood (admittedly old and run down) prices are back to levels not seen since around the time Carter was still President. What’s even crazier is that prices were on average 400% higher just six years ago. The neighborhood has emptied out some, but that hardly explains it. And for that matter, the neighborhood is actually a better place to live now. (Apparently a lot of the drug dealers were also into real estate, and ARMs!)
Houses being bought and sold repeatedly with ever increasing valuations and with no one ever living in them is simply absurd.
The state did see some retrenchment on population growth. But most of that seems to have been illegal Mexican immigrants leaving the area when housing starts cratered. And those guys were living in houses set-up more like dormatories than anything else. For the ones working their asses off under-cutting American wages that’s how they managed to send all those remitances back to Mexico – by living dirt cheap.
Occam’s Razor sez? Bubble! (MacBeth’s witches too.)
Yeah, the end result of a bubble is crazy, but the beginning of a bubble may actually be based on something reasonable. So, bubble in 2005? Maybe…maybe not. Probably the start of the bubble.
steve,
It isn’t just even the Great Depression, but also Japan as well. The fiscal stimulus, the bailouts, etc. are probably going to be seen, in the end as counter-productive and setting us up for the next big fall….which if we’re lucky will be even bigger.
HTH, HAND. 🙂