ECON430-Topic #1: Bernanke Out, Yellen In

Ben Bernanke will complete his second and final term as Federal Reserve Chairman this week. The eight years he has chaired the Fed were some of the most tumultuous since the Great Depression. Chairman Bernanke took over his position under former President George W. Bush in 2006, and was reappointed in 2010, approximately one year into Barack Obama’s first term in office. Most economists think that Bernanke did a reasonable job as Fed chair, but that certainly is not a unanimous view. People on the extreme left and right are both happy to see him go for one reason or another, and will continue their efforts to end the Fed. However, having extremists dislike you from both sides may be a sign that you were actually leading from the center (to a degree).

One of Bernanke’s hallmark legacies was the increasing role of information transparency through the use of Fed press conferences and increasing the amount of publicly available information that was made available. The increasing use of the Fed’s “open mouth” policy, was not flawless however, as a few notable occasions led to market turbulence and uncertainty about their future actions. In 2013 for example, the Fed’s announcement led to a rapid rise in mortgage rates when the Fed hinted that the economy might be doing well enough to begin easing off of stimulus measures (i.e., quantitative easing). So far, demands for information (i.e., auditing the Fed) by the far right have been defended by Bernanke and others, but that does not mean these demands will end with a new Fed chair who was widely disliked by the far right.

At this week’s meeting, it appears that U.S. and global inflation pressures are muted, however markets are jittery with earnings season upon us the Fed appears ready to continue the QE3 taper. What this means is unclear however, since the Fed is almost sure to point out that the Fed is actually still easing, just doing so at a slower pace than before. So, currently the FOMC members appear to believe that the economic conditions in the economy are improved enough that tapering can continue without pressure of higher inflation.

Questions you might want to answer

  • Is there anything remarkable about the current and former Fed chair being widely disliked by extremists of both parties? What does this say about policy and its effectiveness? Do you have any statistics you could use to support the belief that the Fed has done a good or bad job in the last eight years? How will Bernanke’s legacy be settled? Look back at how Greenspan’s legacy was settled after the financial crisis.
  • Should the Fed be more or less transparent? Why? What issues has the Fed had with transparency in the past? Has it always been this way, or was there a point at which the Fed was an even more secretive organization than it is today? What would happen if the Fed were required to submit to monetary policy audits by the GAO? Do you believe this would undermine the Fed’s independence?
  • What do you believe the Fed’s actions this week will have on the economy? Why do they continue to taper? Do you have any statistics on this or anything else that would support your beliefs?

Do not try to answer all of these questions, just parts of one. You have only 250 words or so to respond, so please do not try to argue too many points. Spreading yourself too thin makes for a bad blog comment.

10 thoughts on “ECON430-Topic #1: Bernanke Out, Yellen In”

  1. I think that Fed will likely agree on another $10 billion taper for its bond purchase program to $65 billion each month. They continue to taper their program because it is based on US economics outlooks. First, we see that labor market is improving. The economy has created a monthly average of 190,000 jobs over the last 15 months. Also, the number of jobs will be expected increasingly in the next a few months and unemployment rate is low at 6.7% in December 2013, from 7% the prior months. Second, US stock markets hit highest point ever because it thanks to US government’s stimulus programs. Many people have bought stocks, and its price has increased continuously. Market closed above 16,000 points for the first time on Nov 21, 2013 and reaching at the highest point of 16576.66 in January of 2014. Third, US gross domestic product grew continuously and exports has climbed their fastest pace in more than two years. For example, the gross domestic product (GDP) in the United States expanded at annual rate of 4.1 percent in the third quarter of 2013 over the previous quarter of 2012. Thus, I make sure that Fed will decide to taper its bond purchase program this week.
    Yes, I also have some statistics to support my beliefs such as,

    Unemployment rate: Graph
    This graph shows that unemployment rate has dropped from around 10% in 2009 to 6.7% in 2013

    DowJones index Graph
    This graph also shows that US stock markets increase continuously and hit the hightest point of 16576.66 in January of 2014

    Citation

    • Appelbaum, Binyamin “Support at Fed for Slow Stimulus Cuts”, NY times, Jan. 8, 2014. Web. http://www.nytimes.com/2014/01/09/business/fed-decided-bond-buying-program-served-purpose-account-says.html?_r=0
    • New York, Nov 21 “Dow Closes above 16,000 points for first time ever”.Web http://www.huffingtonpost.com/2013/11/21/dow-16000-record_n_4319152.html
    • Bureau of labor statistics, “Labor force Statistics from the Current Population Survey”. Web http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=LN_cpsbref3

  2. Fed improved its transparency from Greenspan’s secretive strategy to Bernanke’s open strategy. As I initially believe that Fed bringing transparency on the table is a good thing, now I’m more inclined to see the Fed keeping secrecy until actually making the move.
    Due to the power Fed possesses as world’s most essential monetary authority, each piece of information and statements from Fed can result in great disturbance, even panic, in market. For example, while U.S. stocks have held up well, emerging market plummeted after Fed announced that they would stop tapering during August 2013. However, later in September, the Federal Reserve Open Market Committee unexpectedly postponed the pre-announced “taper” of stimulus. As a result, dollars dropped dramatically against every major currency in the market (Yen/USD from 98.06 yen to 99.13 yen, USD/EU from $1.35 to $1.3517). In this case, we can clearly see the downside of transparency; “Too much information” can really be a bad thing especially when it comes to the Fed and the effects its actions could have on global economy.
    Still, in order to examine whether the Fed’s monetary policy has worked, general public does require certain degree of transparency to assess Fed’s work, or there would not even be an open discussion. Hence I believe transparency in Monetary policy is definitely a good thing, but the Fed should either stick with their announcement (else the announcement could be seem as purposely misleading information that abused in order to manipulate the market), or gradually announce what they has done after moves has been made to minimize the potential market disturbance.

    References
    • Fed Decision Batters Dollar
    http://online.wsj.com/news/articles/SB10001424127887323808204579083050835335792
    • Bernanke Pursuing Anti-Greenspan Strategy: Transparency
    http://www.foxbusiness.com/economy/2012/01/06/bernanke-pursuing-anti-greenspan-strategy-transparency/
    • Fed provokes run for the hills … in China and India
    http://buzz.money.cnn.com/2013/08/20/fear-emerging-markets/

  3. It is pretty crazy that the far left and far right can’t agree on much of anything except their mutual dislike of the Federal Reserve. Over the last eight years though, it seems like the Fed did a pretty good job of managing the recession and leading us forward. Considering the Fed’s two main goals are to control inflation and unemployment, then what it did was very effective at keeping a recession from becoming a depression. With the massive quantitative easing program, most would have predicted massive inflation but inflation is at 2.3% which is actually lower than the 2.7% when Bernanke took office. The unemployment levels also have been kept relatively in check when considering we had a recession. The height of the recession saw unemployment rise to around 10%, but it has already gotten back down to as low as 6.7% in December and has been decreasing consistently over the last few years as we are now out of the recession. While the extremes of both parties will continue to argue against the Fed, it is likely that Bernanke’s legacy will be good. He was able to keep the economy out of a depression while maintaining inflation rates and getting unemployment back down after the recession. It will be interesting to see what new actions will happen under Yellen and how the extremes will react to them.
    Sources
    http://research.stlouisfed.org/fred2/
    http://www.nytimes.com/2011/09/18/sunday-review/the-facts-on-the-fed.html?_r=0
    http://data.bls.gov/timeseries/LNS14000000

  4. I believe Ben Bernanke’s shift to more transparency in the Federal Reserve has negatively impacted the effectiveness of the Fed’s monetary policy actions. For example, before December 18, 2013 when the Federal Reserve announced that it would be tapering its bond purchases from $85 billion a month to a still considerable $75 billion a month, the volatility of the financial markets spiked amidst worries that interest rates and “cheap” money would start being less available. If the Federal Reserve were to be less transparent in their actions, the volatility in the stock market could have (arguably) been avoided. Ultimately, by the Federal Reserve being more transparent, they become more susceptible to political and societal pressures; sometimes from radically misinformed citizens.

    The ultimate goal of monetary policy is to encourage or discourage spending and investment through targeting the money supply and the interest rate. With a heightened sense of transparency in the Fed, the market sometimes reacts opposite to what is trying to be accomplished. This is a huge reason why large monetary policy decisions are so difficult; the Federal Reserve has to predict how consumers are going to react to the news of what it’s going to do and tailor the strategy to account for that.

    Ben Bernanke’s attempt at a more transparent Fed is respectable and strategically planned; however, it just may be the case that the more secretive the Fed is, the better for all of us.

    ——————————————————-
    Sources

    http://bonds.about.com/od/Issues-in-the-News/a/An-Explanation-Of-Fed-Tapering-And-Its-Impact-On-The-Markets.htm

    http://www.forbes.com/2009/12/01/grayson-paul-fed-independence-opinions-columnists-thomas-f-cooley.html

  5. Confidence at a Price
    After inheriting the worst financial crises since the Great Depression, Chairman Ben Bernanke undertook a challenging task- to restore investor and public confidence in the market. The Chairman accomplished this through stimulus and transparency. The Fed rescued Bear Sterns and employed quantitative easing to stimulate borrowing. By holding regular news conferences, the Chairman opened communication with the public and the Fed. The United States has since been on a recovery. GDP increased for eleven consecutive quarters, the Dow Jones has nearly doubled, and unemployment decreased from a high of 10% to less than 7%.
    While Bernanke should be praised for restoring confidence in the market, investors should be cautious about the long term effects. Some of the major concerns include the tapering of quantitative easing, an inflated stock market, and a moral hazard problem with banks. Bond purchases have been enormous, as much as a trillion dollars total in the past year. The last time stimulus was unwound in the 1940’s, four to five percent inflation followed. Also, quantitative easing may be artificially supporting the stock market. Since the Fed has effectively lowered interest rates to historic lows, investors have fled the bond market in favor of the stock market, which may lead to another stock bubble. Lastly, the bailout of Bear Sterns fostered a ‘too big to fail’ mentality among major banks, which could encourage risky behavior. While Bernanke has thus far successfully avoided economic calamity, his actions may have steep economic consequences.

  6. I believe the Fed should naturally be less transparent. When the Fed releases information on their future plans of action, plans that are developed according to the current direction of the economy, the market’s current expectations shift in response to this news. When Ben Bernanke announced this past June that if the economy stayed on track the Fed would begin to pull back on its quantitative easing later in the year, the S&P 500 immediately dropped 5.5% (Weil). Pimco’s CEO Mohamed El-Erian stated, “The openness can accelerate market decline….when you give so much guidance to the market, you risk over-determining”. Some times too much transparency can be a negative on the economy. Secondly, I believe that if the Fed were required to submit monetary policy audits to the GAO, they would no longer be able to act in a purely economic manner. I completely agree that the Fed should be very transparent and open with the public, but I do not agree that every monetary decision they make should be questioned and audited. It encourages the Fed to make decisions not strictly based on economic intuition, but instead allows for political influence in the decisions they make.

    Sources:

    Weil, Dan. “Pimco’s El-Erian: Fed May Be Giving Investors ‘Too Much Guidance'”, Moneynews, June 26, 2013. Web. http://www.moneynews.com/FinanceNews/El-Erian-Fed-information-guidance/2013/06/26/id/512037

  7. I believe that the transparency policy of Bernanke has been a detriment to the Fed and any monetary policy they try to enact. This is because if people know what types of policies the Fed is trying to enact they can infer what outcomes may come from these policies. Once the public knows the implications of a policy they generally take action and make this possible policy outcome a quick reality. For example when the Fed began to taper its 85 billion dollar bond-buying program the mortgage rate grew at its highest rate in thirty years to about 4.46 %. This is because as the Fed announces they are going to start buying less bonds the interest rate is expected to rise and given this was announced to the public the increase in interest rates rose almost immediately after they heard the news. Although recently the Fed under Bernanke has been transparent they were not always that way. Under Alan Greenspan the Fed was a much more “mysterious” institution if not only for the reason that Greenspan spoke in riddles.
    If the Fed was required to submit Policy audits to the GAO this would undermine the authority of the Fed which is supposed to be the central banking system of the United States. This is because it would make the Fed completely transparent through having to submit an audit for all of its policies. This would cause every policy to have a much larger impact on the United States economy than initially intended.
    Resources

    http://www.businessinsider.com/in-his-speech-last-week-ben-bernanke-explained-why-you-shouldnt-listen-to-rand-paul-today-2014-1

    http://www.washingtonpost.com/business/economy/mortgage-rates-spike-in-response-to-fed-statement-30-year-crosses-4-percent-mark/2013/06/27/4801bca4-df32-11e2-963a-72d740e88c12_story.html

    http://www.npr.org/2014/01/27/266753602/bernankes-fed-legacy-a-tenure-full-of-tough-decisions

  8. When the financial crisis began in 2008, the entire world was observing the collapse of the housing market, credit markets, and corporate credit, which is integral in the financial system. The FED responded by purchasing over 2.5 trillion USD of government debt and troubled private assets from banks and directly injected 600 billion USD into the US economy to avoid the liquidity trap.
    One can argue the FED did a bad job as it’s faced with a 4 trillion dollar balance sheet, while the economy is experiencing low nominal growth (3.8% since 2009). There is also the argument that the FED should have shutdown insolvent banks in 2008 instead of injecting them with liquidity. Jim Rickard’s argued that they should have closed them and stripped out bad assets, and that the Central Bank should lend freely against solid collateral to solvent banks, which wasn’t always the case (junk collateral from Bear Sterns).
    However, Bernanke and the FED were faced with a completely unorthodox situation. The years leading up to the financial crisis and prior to Bernanke’s term, were characterized by an increase in net investment by US households which was funded by borrowing rather than saving. Additionally, the vast majority of subprime mortgages (more than 75%) were short term hybrid loans where the interest rate became adjustable and tied to market interest rates after two or so years. Essentially loans were issued without full regard to the borrower’s ability to repay their loans from income.
    Therefore it is hard to see just how we may perceive Bernanke’s legacy in the future because one can easily make the case that he was stuck with this situation and the FED had no choice but to take the actions that it did in order to prevent further collapse.

    References:
    http://www.democracynow.org/2010/11/5/new_600b_fed_stimulus_fuels_fears
    http://jimrickards.blogspot.com/2014/01/bernankes-best-and-worst-decisions.html
    http://www.federalreserve.gov/pubs/feds/2010/201020/201020pap.pdf
    http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG

  9. I believe the Fed will announce an additional $10 billion taper to its current stimulus strategy to bring monthly bond purchases from $75 billion to $65 billion due to the strengthening U.S. economy, which is backed by economic indicators in the labor, housing, and financial markets. The U.S. economy expanded 1.9% for 2013, stemming from weak growth in the first half of the year due to the government shutdown but picked up in the second half with 4.1% growth in Q3 and 3.2% in Q4. The labor market plays a large part, visible by the latest December unemployment data of 6.7%, versus 7.9% in 2012, and average job growth for 2013 of 182,000 per month. The recovering housing market also bodes well for the economy with an estimated 923,400 housing starts for 2013, an 18.3% increase over 2012. Recently, financial markets closed at record highs with the Dow at 16,576.66 and S&P 500 at 1848.38. Yet, what are the possible effects of the taper? If the Fed tapers to $35 billion in Treasury securities and $30 billion in MBS, I expect a rise in rates in both markets based on the spike in 30-year fixed mortgage in June 2013 to 4.46% after rumors of tapering emerged. I expect the rising rates to cause a correction in the equity markets as investors discover higher yields in alternative markets and weaker growth in the housing market, thus the economy, as mortgages become more expensive.

    http://www.washingtonpost.com/business/economy/mortgage-rates-spike-in-response-to-fed-statement-30-year-crosses-4-percent-mark/2013/06/27/4801bca4-df32-11e2-963a-72d740e88c12_story.html
    http://www.washingtonpost.com/business/despite-market-unrest-fed-likely-to-pare-stimulus/2014/01/27/90109a68-8777-11e3-a760-a86415d0944d_story.html
    http://www.census.gov/construction/nrc/pdf/newresconst.pdf
    http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
    http://data.bls.gov/timeseries/LNS14000000
    I used Bloomberg in the Capital Markets Lab for the record highs of S&P and the Dow

  10. Ben Bernanke took office as Chairman just two years before the largest recession we have seen since the Great Depression of the 1930’s. Bernanke did a commendable job considering the circumstances. If not for the extraordinary accommodative policy that occurred during his term, the economy could have easily gone into another depression.
    Bernanke’s dissertation focused on the historical analysis of the causes of the Great Depression where real U.S. GDP decreased 29% from 1929 to 1933. Unemployment rates went from 4.2% in 1928 to 23.6% in 1932. By contrast, the great recession under Bernanke’s watch experienced a 3% real GDP decline from 2007 to 2009. In 2007, the unemployment rate was 4.4%, and it reached as high as 10% in 2009. Although the recession in 2008 was bad, comparatively conditions could have been significantly worse if not for Bernanke’s quantitative easing.
    If the Fed were not independent and instead had liberal oversight, there could be overly accommodative measures, which would have a tendency to be inflationary. On the other end, if the oversight was overly conservative, then it would constrain the Fed’s ability to use stimulative policies during recessionary periods, and recessions could become more severe. The independence that the Fed enjoys allows for appropriate economic decisions without political pressure. The fact that extremists on either end of the political spectrum did not care for Bernanke suggests he found the middle ground.

    http://www.federalreserve.gov/aboutthefed/bios/board/bernanke.htm
    http://www.forbes.com/pictures/mdj45edjll/fed-chairman-ben-bernanke-the-brains-behind-qe/
    http://economics.mit.edu/about/economic
    http://faculty.tcu.edu/jlovett/econ_data/Depression.pdf
    http://www.multpl.com/us-gdp-inflation-adjusted/table
    http://data.bls.gov/pdq/SurveyOutputServlet
    http://www.infoplease.com/ipa/A0104719.html

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