Paul Krugman on Ben Bernanke’s ‘Green Shoots’

BY Paul Solman  June 20, 2012 at 6:04 PM EST


Continuing our profile of economist Paul Krugman, we turn to a topic in the news today: the Federal Reserve. On Monday, remember, we featured Krugman on European austerity, with a response from Jacob Kirekegaard of the Peterson Institute for International Economics: Paul Krugman on Germany’s ‘Whips and Scourges’.

Tuesday, Krugman focused on Spain and Germany with critique from Terence Burnham: Paul Krugman on Europe ‘Doing the Unthinkable’.

Making Sense

We start Wednesday’s post by returning to the First Parish Church in Harvard Square, were Krugman spoke with NPR’s Tom Ashbrook, host of the daily show On Point, which originates in Boston. Ashbrook’s question (a few weeks ago) was about Fed head Ben Bernanke (read the transcript below).

We’ve been getting several responses to Krugman’s take on Bernanke. The first comes from Mark Gertler, an economist and professor at New York University who has authored papers with Krugman.

Response: ‘The Fed Can Do More’

Mark Gertler


I disagree with Krugman about monetary policy — I think he vastly overstates what the Fed can do now. While I agree with him on just about everything else, what just happened today is a good example of why things are so difficult for the Fed. The Fed announced a purchase of nearly $250 billion long maturity government bonds, and, basically, long rates did not move. With rates so low, it is difficult to push them down any further. So now it’s up to fiscal policy (unfortunately!).

We also checked in with Wayne Angell, a Kansas Republican politician, economics professor and farmer who served as a Federal Reserve Board governor from 1986 to 1994. He went on to be Chief Economist at Bear Sterns & Co., Inc. and now runs a consulting firm, Angell Economics.

Response: ‘Little Impact from Operation Twist’

Wayne Angell

The Federal Open Market Committee (FOMC) and Chairman Bernanke have focused their attention on lowering long-term interest rates. What they need to do is to unlock short-term funds by lowering the 25-basis point interest rate paid to banks for holding sterile reserves at the Fed.


The threat of stricter international regulation known as Basel III and regulatory intervention here in the U.S. has increased the perception of risk associated with expanding bank balance sheets. The 25-basis point payment for sterile deposits at the Federal Reserve with zero risk has incapacitated monetary policy.

Operation twist and quantitative easing has little effect. Krugman and others see this. It is time for an operational change at the Federal Open Market Committee.

It is time for an operational change at the Federal Open Market Committee.
–Wayne Angell

I have suggested to the monetary advisory committee for the FOMC that it is past time to try another tack: lower the payment for NOT extending credit. The power of monetary policy is to alter behavior in the world of credit. The 25-basis point payment, along with extremely low money market rates, enables banks to earn 1/4 percent a year from the Fed for doing nothing.

Paul Solman adds:

A bit of translation is in order. We have written often here on Making Sen$e about the 25-basis point interest rate to which Wayne Angell refers. It’s called the IOER — Interest on Excess Reserves — and indeed, as of the Fed’s last release, U.S. financial institutions (mainly banks) have $1.55 trillion dollars on deposit with the Fed earning this rate of interest. By contrast, in 2007, that number was a mere $12 billion. Much has been made of the Fed’s “exploding balance sheet” and all the new money the Fed has created (electronically) since the Crash began. The total is around $2 trillion. But as you can see, three-quarters of that new money has been redeposited with the Fed. Why? Because, as Wayne Angell points out, the Fed is paying banks those 25 basis points as interest, and what is safer for the banks to do with the money than store it at the Fed? Lend it to a business in today’s shaky economy? To a real estate developer? To me? To you?

This is why Angell argues that the Fed drop the IOER payment: because he thinks it’s discouraging banks from making loans that would rev the economy. Paul Krugman is on vacation. When he gets back, it will be interesting to see if he disagrees with Angell, or concurs.

TRANSCRIPT: ‘Ben Bernanke and Chauncey Gardner’

Video above.

Paul Krugman: When Ben Bernanke gave a speech in early 2009 about green shoots in the economy, it, I wonder if it was something subconscious going on because it was almost verbatim the speech in the movie ‘Being There,’ that Chauncey Gardiner gives about to the President about…

Tom Ashbrook: Blossoms.

PK: The blossoms will return in the spring.

Video clip of “Being There”

Chauncey Gardner: Yes, there will be growth in the spring!

Video clip of Ben Bernanke on 60 Minutes in 2009

Scott Pelley: Do you see green shoots?

Ben Bernanke: I do. I do see green shoots. Not everywhere…

Krugman: My former department chairman, now devoted, now demoted to running the world…

Ashbrook: The man who hired you.

Krugman: That’s right.

Ashbrook: You ungrateful wretch.

Krugman: Right. Well, I’m doing… No, I’m helping him.

Ashbrook: Yes.

Krugman: It’s an intervention on his behalf. Anyway it’s… But Ben Bernanke, actually, he has a board too, so there has to be… The Fed can, the Fed can signal, mostly what it can do is it can signal that it’s going to be in no hurry at all to raise interest rates, that it’s willing to allow inflation to rise some, which would help probably not by itself enough but combined with these other things…

Ashbrook: Well, he has said 2014.

Krugman: But that’s, that’s way too close. What he needs to have right now from the outside is someone making that case. He’s been getting all of the sniping at him has been coming from the right, from people who claim that he’s going to turn us into Zimbabwe and he needs somebody saying no…

Ashbrook: 10,000 percent inflation.

It astonishes me that given the reality of catastrophic unemployment, catastrophic long-term unemployment, people instead of being frightened of that are frightened about hypothetical inflationary breakouts which are nowhere on the horizon.
–Paul Krugman

Krugman: Right, turning us into a second Great Depression. How can I say this. It astonishes me that given the reality of catastrophic unemployment, catastrophic long-term unemployment, people instead of being frightened of that are frightened about hypothetical inflationary breakouts which are nowhere on the horizon.

Ashbrook: But you’re confident that the Fed can reel it back in on the other side?

Krugman: Yes!

Ashbrook: They have the tools. They have, Bernanke expressed some…So we don’t want to put at risk the credibility that we’ve built…

Krugman: Yeah, but he’s also said on other occasions that we would have no trouble controlling inflation. So, if we could wave away the politics, it could be done very quickly. In the real world, well, this is why we write books, right, to make a case, to pound on this so that people understand that none of this has to be happening. So that’s one thing but I’m not sure how…

Ashbrook: You’re going to have a great reunion with Ben Bernanke.

Krugman: I know, that’s going to be interesting.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions