Bernanke Speaks (Do we listen?):
- 2007-07-11: Inflation: "Although inflation expectations seem much better anchored today than they were a few decades ago, they appear to remain imperfectly anchored ... Why do we care about the variability of inflation expectations? ... The extent to which inflation expectations are anchored has first-order implications for the performance of inflation and of the economy more generally."
(From an economics conference in Cambridge, Mass.) - 2007-06-05: Subprime: "Thus far, however, we have not seen major spillovers from housing onto other sectors of the economy." ... "We will follow developments in the subprime market closely. However, fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."
(Remarks to the 2007 International Monetary Conference, Cape Town, South Africa) - 2007-05-17: Subprime: "We at the Federal Reserve will do all that we can to prevent fraud and abusive lending and to ensure that lenders employ sound underwriting practices and make effective disclosures to consumers," ... "We believe the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system" ... "We must be careful not to inadvertently suppress responsible lending or eliminate refinancing opportunities for subprime borrowers" ... "[The] vast majority of mortgages, including even subprime mortgages, continue to perform well."
(From remarks made at a financial conference in Chicago) - 2007-03-02: Globalization and Inflation: "When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation," ... "Indeed, the opposite may be true." ... "Globalization of financial markets has not materially reduced the ability of the Federal Reserve to influence financial conditions in the United States," ... "globalization has added a dimension of complexity to the analysis of financial conditions and their determinants which monetary policy makers must take into account." ...
Mortgage Lending: "Banks should be underwriting in a sensible way, which means in particular that banks should not be underwriting borrowers based on the initial interest rate," Bernanke said. "If you have an adjustable-rate mortgage where the interest rate is going to go up, you need to make sure that people can pay the higher rate, not the rate where they start." ... "So far, the prime market seems to be strong," Bernanke said. "The credit quality in the prime market still seems to be good. We have not yet seen any spillover."
(From a speech at the Stanford Institute for Economic Policy Research in Stanford, California) - 2006-02-16: China: "I don't think that the Chinese ownership of U.S. assets is so large as to put our country at risk economically" ... "I think that realistic changes in China's portfolio are not going to have major impacts on U.S. asset prices or interest rates"
(Remarks at an appearance before the Senate) - 2006-02-06: Policy: "Our mission, as set forth by the Congress, is a critical one: to preserve price stability, to foster maximum sustainable growth in output and employment, and to promote a stable and efficient financial system that serves all Americans well and fairly."
(Ceremony swearing in Ben Bernanke as Chairman of the Federal Reserve) - 2005-11-15: Policy: "First, central bankers in the United States and around the world have come to understand that ensuring long-run price stability is essential for achieving maximum employment and overall economic stability. In recent decades, the variability of output and employment has decreased markedly, and recessions have been less frequent and less severe. I believe that the Federal Reserve's success in reducing and stabilizing inflation and inflation expectations is a major reason for this improved economic performance. If I am confirmed, I am confident that my colleagues on the Federal Open Market Committee (FOMC) and I will maintain the focus on long-term price stability as monetary policy's greatest contribution to general economic prosperity and maximum employment."
(Nomination hearing before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate) - 2005-11-15: Independence: "I believe that it is essential to maintain the independence and nonpartisan status of the Federal Reserve. As I discussed in my testimony, if confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve’s mandate from Congress and the public interest. ...
On the Federal Reserve:"The Federal Reserve System was created by the Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Today, the main duties of the nation’s central bank fall into four general areas:
• Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of the statutory objectives of maximum employment, stable prices, and moderate long-term interest rates;
• Supervising and regulating banking institutions to promote the safety and soundness of the nation’s banking and financial system and helping to protect the rights of consumers in credit markets;
• Fostering the stability of the financial system and containing systemic risk that may arise in financial markets; and
• Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system. ...
Energy: "The proximate cause of the energy price increases is a rapidly growing global demand for energy, coupled with insufficient investment in new energy supplies to meet this growth. In the long run, high prices will curb energy demand and call forth new energy supplies. In the near term, however, energy price increases have the potential to spill over into general inflation, sap consumer spending power, and damp overall activity....
Housing: "Certainly some powerful fundamental forces have contributed to the run-up in housing prices, including growth in jobs and incomes, demographic trends, low mortgage rates and limited supplies of buildable land in some areas. However, it is also true that exceptionally rapid price appreciation and what appears to be speculative buying have been observed in some local markets, suggesting that prices may exceed fundamental values in some areas. Whatever the sources, house price increases will surely moderate at some point, if they have not begun to do so already. If that moderation is not too sharp, then the slowing of consumption and residential investment that might result should be consistent with the modest cooling of growth that many forecasters expect over the next year or so. A sharper slowdown, less likely but possible, would have a larger effect on the growth of real output, particularly if it were to occur in the context of continued adverse developments in energy markets. ...
Foreign Holdings of U.S. Securities: "Concerns have been raised that the quantities of U.S. Treasury securities held by China and other foreign investors, both private and official, have become so large as to increase the vulnerability of the U.S. economy to changes in the portfolio allocations of those investors. However, many of the reasons that investors hold these securities--their unparalleled safety and liquidity, together with the dollar’s traditional role as a reserve currency--are unlikely to disappear any time soon. Moreover, markets for dollar-denominated financial assets are extraordinarily deep; for example, foreign official holdings of U.S. Treasuries, of which holdings by China represent only a part, collectively account for only three percent of total U.S. credit market debt outstanding. Accordingly, U.S. financial markets would likely be able to absorb a significant shift in foreign official demands for U.S. debt, including by China....
On "Helicopter Ben": "My [speech] was a discussion of the causes and effects of deflation, as well as of some possible policy tools to address deflation. In that speech, I noted that one possible tool for combating deflation, a money-financed tax cut, was essentially equivalent to a theoretical construct used by Professor Milton Friedman, a 'helicopter drop' of money. Of course, the 'helicopter drop' metaphor is purely a pedagogic device to help explain money’s role in the economy, not a practical policy tool. ...
M3 Discontinuation: "My understanding is that the Federal Reserve decided to discontinue publication of the monetary aggregate M3 because the costs of collecting and processing the underlying data were judged to exceed the benefits. The Federal Reserve will not withhold the M3 data from the public; rather, it will no longer collect and assemble that information. The Federal Reserve will continue to collect data for and publish the monetary aggregates M1 and M2 and their components.
"The benefits of continuing to publish M3 appear to be minimal, because M3 has not been actively used in the formulation of U.S. monetary policy and, at least within the Federal Reserve, has not been found to have much value for economic forecasting. ...
On GSEs and systemic risk: "Market discipline is typically the governing mechanism that constrains leverage and ensures that firms do not undertake excessive risks. The market system generally relies on the vigilance of creditors and investors in financial transactions to assure themselves of their counterparties’ current condition and the soundness of their risk management practices.
Because of the availability of deposit insurance, market discipline is not by itself sufficient to control risk-taking in the banking system; for this reason, the Federal Reserve and the other banking agencies supervise and regulate banks. I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too big too fail, so that bank management, shareholders, and uninsured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well managed and well controlled.
In the case of the GSEs, market discipline is problematic. Market participants recognize that the GSEs are closely tied to the federal government and such ties create a view among market participants that the GSEs are implicitly backed by the federal government, thereby weakening market discipline. Consequently, strong regulatory authority and controls on GSE risk-taking are needed to ensure that they do not create systemic risks. Unfortunately, the GSE regulator's constrained capital authority, the ineffective receivership process, and other limitations weaken regulatory oversight of GSEs. Capping the size of GSE portfolios, which beyond a certain size do not contribute to the GSEs’ housing mission, is also important for controlling potential systemic risk."
(Ben Bernanke's written response to questions posed by Senator Jim Bunning) - 2005-10-24: Policy: If I am confirmed by the Senate, I will do everything in my power, in collaboration with my Fed colleagues, to help to ensure the continued prosperity and stability of the American economy.
"In light of the announcement the President has just made, it's especially gratifying to have Chairman Greenspan here. In more than 18 years at the helm of the Federal Reserve, Alan Greenspan has set the standard for excellence in economic policymaking. I am personally grateful to Chairman Greenspan for his collegiality and support during my time as a member of the Fed's Board of Governors.
"Our understanding of the best practice in monetary policy evolved during Alan Greenspan's tenure at the Fed, and it will continue to evolve in the future. However, if I am confirmed to this position, my first priority will be to maintain continuity with the policies and policy strategies established during the Greenspan years."
(From the press conference held by President George W. Bush to appoint Ben S. Bernanke, Chairman of the Federal Reserve) - 2002-11-21: Inflation: "Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability. ...
Japan: "While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump. ...
Deflation:"Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. ...
"The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief. ...
"Deflation is defined as a general decline in prices, with emphasis on the word 'general.' At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
"However, a deflationary recession may differ in one respect from 'normal' recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero. Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
"Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be. To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Policy: "The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. ...
"The Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero. Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times. ...
"As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? ...
"As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. ... U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
"Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. ... One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation....
"The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.
"I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.
"Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."
[Footnote 8] Keynes ... once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public.
(In the speech, Deflation: Making Sure "It" [Deflation] Doesn't Happen Here) - 2002-10-15: Asset Bubbles: "Although neither I nor anyone else knows for sure, my suspicion is that bubbles can normally be arrested only by an increase in interest rates sharp enough to materially slow the whole economy. In short, we cannot practice "safe popping," at least not with the blunt tool of monetary policy. The situation is further complicated if, as is usually the case, the suspected bubble affects only a specific class of assets, such as high-tech stocks. Certainly there is no way to direct the effects of monetary policy at a single class of assets while leaving other financial markets and the broader economy untouched. One might as well try to perform brain surgery with a sledgehammer.
"The problem of safe popping applies with double force to the aggressive bubble-popping strategy. A truly vigorous attempt by a central bank to rein in a supposed speculative bubble may well succeed but only at the risk of throttling a legitimate economic boom or, worse, throwing the whole economy into depression. ...
"The correct interpretation of the 1920s, then, is not the popular one--that the stock market got overvalued, crashed, and caused a Great Depression. The true story is that monetary policy tried overzealously to stop the rise in stock prices. But the main effect of the tight monetary policy, as Benjamin Strong had predicted, was to slow the economy--both domestically and, through the workings of the gold standard, abroad. The slowing economy, together with rising interest rates, was in turn a major factor in precipitating the stock market crash. This interpretation of the events of the late 1920s is shared by the most knowledgeable students of the period, including Keynes, Friedman and Schwartz, and other leading scholars of both the Depression era and today. ...
"The Federal Reserve went on to make a number of serious additional mistakes that deepened and extended the Great Depression of the 1930s. Besides trying to pop the stock market bubble, the Fed made little or no effort to protect the banking system from depositor runs and panics. Most seriously, it permitted a severe deflation in the price level, which drove real interest rates sky-high and greatly increased the pressure on debtors. A small compensation for the enormous tragedy of the Great Depression is that we learned some valuable lessons about central banking. It would be a shame if those lessons were to be forgotten. ...
"Understandably, as a society, we would like to find ways to mitigate the potential instabilities associated with asset-price booms and busts. Monetary policy is not a useful tool for achieving this objective, however. Even putting aside the great difficulty of identifying bubbles in asset prices, monetary policy cannot be directed finely enough to guide asset prices without risking severe collateral damage to the economy.
"A far better approach, I believe, is to use micro-level policies to reduce the incidence of bubbles and to protect the financial system against their effects. I have already mentioned a variety of possible measures, including supervisory action to ensure capital adequacy in the banking system, stress-testing of portfolios, increased transparency in accounting and disclosure practices, improved financial literacy, greater care in the process of financial liberalization, and a willingness to play the role of lender of last resort when needed. Although eliminating volatility from the economy and the financial markets will never be possible, we should be able to moderate it without sacrificing the enormous strengths of our free-market system." (Remarks before the New York Chapter of the National Association for Business Economics) - 2000-09-00: Crash: "A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? Not necessarily. ...
"There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse."
(From an article titled "A Crash Course for Central Bankers" written by Ben Bernanke and published in 'Foreign Policy') - 1999-09-17: Policy: "... we think that financial conditions in the U.S. are quite accommodative. ... despite the Fed tightening that we have seen over the last couple of months, financial conditions in the U.S. are still very accomodative. The strength of the stock market is really making the financial conditions accommodative, and the Fed really hasn't done enough to offset that.
Now, having said that financial conditions must become less accommodative over time, we really don't know. There is lots of ways that can come about. The stock market can decline, the dollar can appreciate, or interest rates can go up.
So we are not sure which way it is going to go, but I would point out that spontaneous stock market declines are rare. Usually they are preceded by an unfriendly central bank. And, two, given the current account imbalance, it seems to me a lot more likely that the dollar depreciates than appreciates.
(From IMF Economic Forum "The US Economy: Where will it go from here?")