Next week, they will all have to pass another type of test from the Federal Reserve that is a more subjective measure of the banks’ planning and management processes. In the past, these so-called qualitative reviews have tripped up banks including Citigroup, which failed in 2014 even after demonstrating it had adequate capital.
.. On top of that, several Fed officials have recently said that for the nation’s biggest banks, future tests will become even more difficult, with stricter capital requirements.
.. “We need to have those eight most systemically important institutions more resilient than other banks in the economy,” he said.
.. Investors have worried that weakening employment could bring about an end to a period of low defaults, particularly in automobile lending and credit cards — which have been two areas of growth for the banks.
Ben Bernanke’s The Courage to Act: A Review Essay
The most interesting lessons of The Courage to Act are not about Bernanke himself, but about the system in which he operated. The key revelation is that the way that the U.S. deals with macroeconomic challenges, and with monetary policy, is fundamentally flawed. In both academia and in politics, old ideas and prejudices are firmly entrenched, and not even the disasters of crisis and depression were enough to dislodge them
.. Most people who are forced to deal with momentous historical events do not have the luxury of preparing for the particular challenges they face. Franklin Roosevelt, for example, did not come into office expecting to fight World War II. Ben Bernanke is an exception to this rule. More than almost any other economist of his time, he had spent his career thinking about the Great Depression—the closest analogue for the crisis he would eventually face.
.. But Lucas showed that if the public was expecting the Fed to lower interest rates in an attempt to boost employment, the relationship broke down, and all you got was inflation with no boost to the real economy. The experience of the 1970s seemed to vindicate that prediction. The profession was thus in Lucas’s hands to reshape. He joined up with Edward Prescott and others to promote a school of thought known as Real Business Cycle (RBC) modeling, also known as New Classical economics.
.. Economic downturns were the natural and efficient result of fluctuations in the rate at which scientists and engineers discovered new technologies—or, possibly, the result of harmful government meddling in the economy
.. Unemployment was a purely voluntary response to lower wages—in effect, a vacation
.. New Keynesian models were not, in fact, very Keynesian. Instead, they codified the intuition of Milton Friedman, who believed that counteracting depressions with easy money was a key job of central bankers.
.. So it was eerily providential that when the Great Recession hit, America’s most powerful economic policymaker (Bernanke was appointed Fed chair in 2006) was the economist who had spent more time than almost anyone thinking about the main historical precedent for this sort of crisis. At a time when the financial sector threatened to collapse, the Fed was headed by one of the only macroeconomists who realized how dangerous a financial collapse could be. Nearly anyone else—for example, Martin Feldstein or Glenn Hubbard, who were widely mooted for the top Fed job—would have been more blase about letting the big banks collapse under the weight of their own bad decisions. Bernanke, on the other hand, bailed out big banks quickly and decisively.
.. Reading these sections, one comes to understand just how much Fed policy-making was constrained by the intellectual ghosts of the 1970s and 1980s.
.. Bernanke also appears to be one of the only Fed officials to have thought about the thread of deflation before 2008.
.. In other words, the anti-inflation firewalls that academic macroeconomics built after the 1970s held firm. Even as deep and lasting of an economic wound as the Great Recession failed to convince the most dovish of Fed officials that a 4% inflation rate was a risk worth running. Even the 2% target—enshrined in official Fed policy since 2012—looks more like a ceiling than a target
.. One example is the Senate’s refusal to confirm Peter Diamond to the Fed’s Board of Governors in 2010. Diamond, an enormously respected economist who won a Nobel Prize for his work on labor search theory in October of that same year, should © 2016 John Wiley & Sons Ltd Ben Bernanke’s The Courage to Act 115 by any reasonable criteria have been a shoo-in for the nomination. But Senate Republicans, deciding that Diamond’s politics were too liberal for their tastes, blocked his nomination twice, forcing him to withdraw on the third round. Anti-tax activist Grover Norquist even threatened Republicans to keep them from voting for Diamond.
.. Top congressional Republicans, for example, publicly opposed the second round of quantitative easing in late 2010. They wrote a letter warning that QE2 would generate “long-term inflation and … artificial asset bubbles.” Needless to say, none of these politicians were experts in the inflationary or financial consequences of asset purchase programs.
.. ” This sort of behavior by politicians, of course, serves to illustrate why central bank independence is a good idea in the first place
.. Even worse was the attempt by a few politicians to “audit the Fed”—a somewhat misnamed campaign, since the Fed is already audited quite thoroughly. The “audit the Fed” campaign was actually an attempt to end the central bank’s independence by allowing Congress to review monetary policy decisions through the Government Accountability Office
.. But the episodes illustrate how technocracy, which functioned effectively during the crisis, nevertheless became a target for political grandstanding and opportunism
.. If policy uncertainty is bad for the economy—and many studies indicate that it is—then it appears clear that partisan brinksmanship made central bank technocrats’ job harder in the early 2010s.
..” The worsening extremism of the Republican Party during and after the crisis caused Bernanke, a lifelong Republican, to leave his party and become an independent
On Economic Stupidity
Yet the truth is that Mr. Trump’s position isn’t that far from the Republican mainstream. After all, Paul Ryan, the speaker of the House, not only berated Ben Bernanke, Ms. Yellen’s predecessor, for policies that allegedly risked inflation (which never materialized), but he also dabbled in conspiracy theorizing, accusing Mr. Bernanke of acting to “bail out fiscal policy.”
And even superficially sensible-sounding Republicans go off the deep end on macroeconomic policy. John Kasich’s signature initiative is a balanced-budget amendment that would cripple the economy in a recession, but he’s also a monetary hawk, arguing, bizarrely, that the Fed’s low-interest-rate policy is responsible for wage stagnation.
.. You see, Mr. Sanders argues that the financial industry has too much influence on the Fed, which is surely true. But his solution is more congressional oversight — and he was one of the few non-Republican senators to vote for a bill, sponsored by Rand Paul, that called for “audits” of Fed monetary policy decisions. (In case you’re wondering, the Fed is already audited regularly in the normal sense of the word.)
.. But even without Mr. Paul’s bill, one shudders to think about how U.S. policy would respond to another downturn if any of the surviving Republican candidates make it to the Oval Office.
The Fed Should Let Middle-Class Workers Prosper
The Fed’s Phillips curve model isn’t working anyway. The unemployment rate has come down to 5 percent and the inflation rate is near zero. According the Fed, inflation ought to be 4 or 5 percent. It’s not. The dollar is up. Oil and commodities are down. There is no global rise of inflation. And there’s a strong worldwide demand for greenbacks. This is good, not bad, according to veteran free-market economist Alan Reynolds. He’s right. What causes inflation? Bad money. Excess money. Too much money chasing too few goods. How do we measure this? We use market-price indicators, such as commodities, the dollar exchange rate, and Treasury inflation expectations.
.. Supply-side policies to reduce burdensome taxes and regulations will grow the economy and reward workers. That’s what’s missing from the picture. The Fed should wise up and stick to price stability rather than slamming workers. And China should let markets determine currency and stock prices instead of the central planners.
Then we can get bullish again.