The Education of Ben Bernanke (Part 1)

What happened to Ben Bernanke?

As an academic and as Vice Chair of the Fed Ben Bernanke was a monetary dove. He studied the Depression extensively and applied those lessons to Japan’s boom-and-bust economy in the ‘80s and ‘90s and concluded that nominal price deflation was a disaster and that the Fed could and should do everything in its power to fight it. He strongly criticized Japan’s failure to do so.

But in 2003 something happened. For years Ben Bernanke had advocated targeting long-term interest rates as a way to fight a deflationary recession. He had also suggested money-financed tax cuts, currency depreciation, and establishing a 3-4% inflation target. He had been one of the world’s preeminent monetary economists, with strongly held views. But as a member of the Fed’s Open Market Committee, he never brought them up.

One factor might be the distinction between an academic’s life and a policymaker’s. Academics are free to propose and revise, to criticize and receive criticism. Academic freedom is something we prize. It allows professors to play freely with ideas. But things are different for policymakers. These aren’t just ideas anymore; they affect hundreds of millions of lives.

It’s like the difference between paper-trading and owning securities. Establishing and studying theoretical portfolios is a good exercise—it can help you understand the various characteristics of an investment portfolio in real-time. But there’s no substitute for actually owning the securities—the emotions, the questions, the time-pressures. It changes the way you look at things.

I’m not saying the Bernanke was a paper tiger—but when he joined the Fed in 2002, he had been an academic all his life. Playing with ideas is different than implementing them.

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