Wednesday, February 15, 2006

What happened to Bernanke the inflation targeter?

Have you ever seen a TV or film rendition of a paranoid man? The depth of paranoia is usually unveiled in a comment, as the paranoid guy turns to someone he used to trust and says, so they got to you too. Remember inflation targeting Ben Bernanke? It looks like they go to him too.

Here's an excerpt from the old Ben Bernanke of three years ago:

The second major element of best-practice inflation targeting (in my view) is the communications strategy, the central bank's regular procedures for communicating with the political authorities, the financial markets, and the general public. In general, a central bank's communications strategy, closely linked to the idea of transparency, has many aspects and many motivations.8 Aspects of communication that have been particularly emphasized by inflation-targeting central banks are the public announcement of policy objectives (notably, the objective for inflation), open discussion of the bank's policy framework (including in some cases, but not all, a timeframe for achieving the inflation objective), and public release of the central bank's forecast or evaluation of the economy.

His views adjusted slowly but inexorably away from what old timers might have called a "liberal" stance on political economy, by which is meant consitent with the view that government needed to be responsive to its citizens, to an elitist view, by which is meant consistent with the view that the government is already peopled by the best and brightest so why consult with the masses.

To wit, in today's testimony to Congress:

As always, however, translating the Federal Reserve's general economic objectives into operational decisions about the stance of monetary policy poses many challenges. Over the past few decades, policymakers have learned that no single economic or financial indicator, or even a small set of such indicators, can provide reliable guidance for the setting of monetary policy.

Rather, the Federal Reserve, together with all modern central banks, has found that the successful conduct of monetary policy requires painstaking examination of a broad range of economic and financial data, careful consideration of the implications of those data for the likely path of the economy and inflation, and prudent judgment regarding the effects of alternative courses of policy action on prospects for achieving our macroeconomic objectives. In that process, economic models can provide valuable guidance to policymakers, and over the years substantial progress has been made in developing formal models and forecasting techniques. But any model is by necessity a simplification of the real world, and sufficient data are seldom available to measure even the basic relationships with precision. Monetary policymakers must therefore strike a difficult balance--conducting rigorous analysis informed by sound economic theory and empirical methods [ note: which theories, there are many, and which empirical Greenspan his speech is so general it is uninformative ] while keeping an open mind about the many factors, including myriad global influences, at play in a dynamic modern economy like that of the United States. Amid significant uncertainty, we must formulate a view of the most likely course of the economy under a given policy approach while giving due weight to the potential risks and associated costs to the economy should those judgments turn out to be wrong.

During the nearly three years that I previously spent as a member of the Board of Governors and of the Federal Open Market Committee, the approach to policy that I have just outlined was standard operating procedure under the highly successful leadership of Chairman Greenspan. As I indicated to the Congress during my confirmation hearing, my intention is to maintain continuity with this and the other practices of the Federal Reserve in the Greenspan era. I believe that, with this approach, the Federal Reserve will continue to contribute to the sound performance of the U.S. economy in the years to come.

So Ben "transparent communications" Bernanke has decided to adopt Alan "inscrutable" Greenspan's approach to policy which can be summed up in a few words, we won't tell you exactly what we're doing or why we're doing it, just trust us.

Perhaps now we know why Ben got the nod. I wonder when the Queeen will Knight him?