Tag Archives: Ben Bernanke

Interest Rates under Volcker, Greenspan and Bernanke

Here is a chart from WSJ Graphics which shows the level of interest rates in the US from 1980 to today. With the stagflation of the 1970’s Paul Volcker was faced with some very tough decisions. Below is an extract from an interview with him on the PBS Commanding Heights documentary.

It came to be considered part of Keynesian doctrine that a little bit of inflation is a good thing. And of course what happens then, you get a little bit of inflation, then you need a little more, because it peps up the economy. People get used to it, and it loses its effectiveness. Like an antibiotic, you need a new one; you need a new one. Well, I certainly thought that inflation was a dragon that was eating at our innards, so the need was to slay that dragon.

If you had told me in August of 1979 that interest rates, the prime rate would get to 21.5 percent, I probably would have crawled into a hole. I would have crawled into a hole and cried, I suppose. But then we lived through it.

US Interest rates 1979-2014

US inflation and Unemployment under last 3 Fed Chairman

Below is a graphic from the WSJ which outlines inflation and unemployment under the last 3 Fed Chairmen – Paul Volcker, Alan Greenspan and Ben Bernanke. From the stagflation that was slain by Volker to the irrational exuberance of the Greenspan years and finally the financial contraction under Ben Bernanke. In the 1970’s Volcker tightened the money supply, the economy slowed and contracted – unemployment reached 10 percent. By August 1979 the prime interest rate got to 21.5% but by 1982 the inflation problem had been extinguished. However this was after 3 years of real hardship for the American people. Today we see that inflation isn’t the problem that it used to be and that stimulating growth and job creation is required.

Infl Unemp Fed Chairs

Professor Bernanke v Chairman Bernanke

In a recent edition of The New York Times magazine Paul Krugman wrote an article discussing the role of Ben Bernanke as an academic versus that of being the Fed Chairman.

When the financial crisis happened in 2008 it seemed that there could be no better person to be Fed Chairman. Having studied the Great Depression and written various academic papers on this and the crisis in Japan in 1990’s economists felt that Bernanke was the man for the job. Although the Fed has done a lot to rescue the financial system there is still major concerns about the labour market and the rising long-term rate of unemployment. Remember that the Fed has a dual mandate of Price Stability and Maximum Employment. In order to stimulate growth in the economy, especially when inflation is low, central banks lower interest rates but when the Fed Funds Rate reached 0 – 0.25% on the 16th December 2008 they basically ran out of ammunition as rates couldn’t go any lower. Here you tend to get stuck in what we call a “liquidity trap” in that monetary policy is no longer effective. When Japan was going through very slow growth in the 1990‘s, in which it experienced deflation, Professor Bernanke stated that Japanese policy makers should be a lot more active in trying to stimulate growth and inflation. With interest rates already at 0% he suggested that monetary authorities were not proactive enough to experiment with other policies even though they might have been radical. This all harks back to the days of FDR (Franklin D Roosevelt) in which he created work schemes, infrastructure projects etc, in order to boost employment. I have summarised Paul Krugman’s article below in a table format which shows Bernanke policies for the US economy as a Professor v Chairman.

So why hasn’t he taken on the role of the Academic Bernanke? Krugman suggests that:

this is the effect of bullies and the Fed Borg*, a combination of political intimidation and the desire to make life easy for the Fed as an institution. Whatever the mix of these motives the result is clear: faced with an economy still in desperate need of help, the Fed is unwilling to provide that help. And that, unfortunately, make the Fed part of the broader problem.

*Krugman is a keen “Star Trek” fan and compares the Federal Reserve to a Borg — a race of beings that act based on the wishes of a hive mind, and present major threats to the Starfleet and the Federation.