Pavlina Tcherneva: No, Mr. Krugman, Bernanke’s Conundrum is Completely Different

By Pavlina Tcherneva, Assistant Professor of Economics at Franklin and Marshall College, Research Scholar at The Levy Economics Institute, and Senior Research Associate at the Center for Full Employment and Price Stability. Cross posted from New Economic Perspectives

Our mainstream colleagues keep banging their heads against the wall. “Why, oh why wouldn’t Chairman Bernanke do more to rescue the economy?” Today Paul Krugman took on this question again, arguing that Chairman Bernanke should listen to Professor Bernanke who had far more sensible ideas about rescuing an economy from a deflationary environment, as seen in his research on Japan during the 90s.

Krugman revisits a 2000 paper by then professor Bernanke, which many of us have scrutinized before, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” Krugman faults Bernanke for not following his own advice arguing that what he should do instead is 1) change expectations about the future by declaring and sticking to an explicit inflation target and 2) intervene even more aggressively in financial markets through alternative open market operations to deal with the nation’s massive unemployment problem.

Why Bernanke doesn’t do what he prescribed for Japan baffles Krugman who points to one of two explanations. The first was provided by his colleague Larry Ball, who recently claimed that Bernanke has become a victim of “groupthink” and has lost the ability to think for himself. The second is that the power lobby at the Fed and the political bullies in Congress are far too strong for the mild-mannered and soft-spoken Chairman, undermining his ability to act more aggressively.

In 2010, I wrote a paper Bernanke’s Paradox (JPKE version, April 2011) which examines his monetary policy prescriptions for Japan in detail. I have been asking myself the same question: why isn’t Bernanke following his own advice? But the answer I give is that it’s because he cannot, literally. Whatever policy options he believes to be genuinely effective actually depend on Congress and not on him.

The difference is that, unlike Paul Krugman, I actually read Bernanke’s paper from start to finish. See, what Krugman is missing is that Bernanke did not prescribe two policy options to deal with deflations (1. stick to an inflation target and 2. engage in alternative OMOs), but four.

I have discussed these in the paper above and in shorter blogs here and here. Here are the four options Bernanke recommends:

1. Commit to an inflation target and a long-term low interest rate environment;

2. Depreciate the currency through open market purchases of foreign currency;

3. Engage in non-traditional OMOs – including purchases of long term government securities and other private sector liabilities such as non-performing loans, commercial paper, corporate bonds, asset-backed securities and other;

4. Last but not least, finance various fiscal transfers (e.g., tax cuts) to boost consumption demand

Take the time to read Bernanke’s Japan paper and you will find that indeed he did follow this prescription as closely as he could, but he could not do so 100% because the core of the recipe lies in what Bernanke calls the fiscal components of monetary policy. Such fiscal components can be found in the Fed’s actions to depreciate the currency, purchase private sector assets, or finance tax rebates, all of which require an act of Congress or approval of the Treasury for the Fed to execute.

Of the four policy options above, Bernanke clearly prefers the latter – money financed tax cuts. Only the money drops that occur from deficit spending (e.g. via tax rebates) financed by the Fed are able to increase net financial wealth in the private economy, help with faster deleveraging, and hopefully boost aggregate demand.

So much ink has been spilled on Bernanke’s research on Japan and I am still amazed that the mainstream refuses to discuss the importance of these fiscal components in Bernanke’s work. They are the essence of monetary policy effectiveness, as Bernanke understands it.

Fiscal components of monetary policy, of course are a euphemism for fiscal policy proper. The reason why Bernanke calls them “components” of monetary policy and why the mainstream refuses to acknowledge them is because they are still blindly wedded to the idea that monetary policy is omnipotent in rescuing the economy from recessions. Well, it’s time to give up this old notion. How many years of low interest rates, aggressive QE1, QE2, Operations Twists, swaps, and $trillions and $trillions of lending do we need to recognize that these policy actions do not provide proper channels for dealing with the unemployment problem? In fact, in 2000 the Professor thought that:

Nonstandard open market operations with a fiscal component, even if legal, would be correctly viewed as an end run around the authority of the legislature, and so are better left in the realm of theoretical curiosities” (Bernanke 2000, p. 164)

But in the absence of Congressional action to fund aggressive fiscal transfers to the real economy, Bernanke left the ‘realm of theoretical curiosities’ and engaged in as many nontraditional OMOs as he could, some of which were of questionable legality.

Monetary policy just can’t do it alone. Fiscal policy must come to the rescue. Professor Bernanke understood this. Why he prefers tax cuts as opposed to any other type of fiscal policy is a function of his ideological preferences. But the bottom line is this—the way to rescue the economy is through aggressive fiscal stimulus where the Federal Reserve stands ready to finance it. That’s the substance of Professor Bernanke’s message, which has clearly eluded Paul Krugman and Larry Ball.

I titled my paper Bernanke’s Paradox, because I did see a conundrum in Bernanke’s writings, a different conundrum from the one Krugman suggests (that Bernanke seems to believe one thing as an academic but implements another as a policy maker). No, the conundrum is much deeper, much more important than what Krugman identifies.

Bernanke understands well that for monetary policy to be effective, fiscal policy must be aggressive (which the Fed always finances). Without bold Congressional action and a large fiscal stimulus package to boost demand and employment, nominal GDP cannot and will not rise to desired levels, no matter what the Fed does. Bernanke knows that despite his commitment to low interest rates and alternative OMOs, what he really needs is big fiscal components, but those can only come from Congress, not the Fed. Bernanke also knows that the US has infinite ability to finance these fiscal components, that there is no solvency issue and that the policy rate and both ends of the yield curve are under the direct control of the Fed. All of this is clear both from his academic writings and policy actions.

What I find absolutely paradoxical is that, despite all this, he still appears before Congress and makes ominous statements about the unsustainability of the US debts and deficits and their upward pressure on interest rates, failing to distinguish between nations like Greece which do not have their own currency and those like the US and Japan which do.

Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences. Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth. To the extent that increasing debt is financed by borrowing from abroad, a growing share of our future income would be devoted to interest payments on foreign-held federal debt. High levels of debt also impair the ability of policymakers to respond effectively to future economic shocks and other adverse events.

Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy. Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point. (Bernanke, Congressional Testimony, February 2, 2012)

This is the conundrum: either he believes (as indicated by his research of the late 90s and early 2000s) that deficits are sustainable and cause a crowding in effect where the policy rate is under the direct control of the Fed, or he believes that they are not (as in his Congressional testimonies). Bernanke simply cannot argue it both ways. And we know well that in practice the operational reality is the former. In sovereign currency nations as in the US, deficits are infinitely sustainable, do not crowd out, and do not put upward pressure on interest rates.

So yes, I too have been unable to resolve Bernanke’s paradox. How is it possible for someone to hold two completely incongruent intellectual positions? Either he has been intellectually dishonest when appearing before Congress fueling the deficit phobia of policy makers, or he has become intellectually lazy and has not taken the time to rethink the crowding out dogma he has learned in grad school in the face of his later academic work and practical experience, which point all evidence to the contrary.

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      1. river

        From the article: “Bernanke understands well that for monetary policy to be effective, fiscal policy must be aggressive (which the Fed always finances).”

    1. DrJim

      The Fed can accomodate or kill the stimulative effect of fiscal policy though – I think that’s what is being referred to here. If fiscal policy would otherwise be stimulative and the Fed tightens, then there is less stimulative effect. Some influential economists think this is almost always the case. Take Scott Sumner, who is given credit for putting NGDP targeting back on the radar screen. He thinks fiscal policy is ineffective, not for the silly and empirically unsupported reasons (like Ricardian equivalence) given by some economists, but because the Fed will always counteract it.

  1. F. Beard

    What I find absolutely paradoxical is that, despite all this, he still appears before Congress and makes ominous statements about the unsustainability of the US debts and deficits and their upward pressure on interest rates, failing to distinguish between nations like Greece which do not have their own currency and those like the US and Japan which do. Pavlina Tcherneva [emphasis added]

    Then let’s make it clear to Ben – let’s fund all future US deficits with new US Notes spent into existence without borrowing.

  2. Tim

    I’ve never seen a good explaination how devaluing a currency improves sustainability of a given debt load.

    I feel like I’m supposed to assume that devaluing the currency just hits the reset button and everything is suddenly ok again, that the population can now support the outstanding debt.

    People talk like once you’ve got your own currency that your now in a closed system where you control your fate.

    That ignores the reality of trade of resources that still operate in an open system (the global economy). Those resources respond to your devaluation accordingly (i.e prices go up) which reduces the populations unspent income available to be taxed to service the debt, without revolt.

    Currency devaluation has a strong bias in impacting the poor (virtually everything they spend there money on are basic resources priced by the global economy) whereas default has a strong bias in impacting the wealthy (who had the extra funds to loan to the government in the first place).

    Hence, I believe MMT is only a partial solution to a heavily indebted country. It should be implemented in parallel with partial default and longer term austerity that balances receipts and payments. Everything in moderation, just like a good diet!

    1. K Ackermann

      If you lent me a goat back when a goat would buy a dollar, then my debt to you at the time was worth about a dollar, but denominated in goats. If there was a sudden population explosion of goats – 10x – then a goat is now worth only about ten cents. That’s a good time for me to pay you back that goat.

      It’s also a good time for you to buy goats – you can get 10 for a dollar. I am damn competitve at ten goats for a dollar. You’d jump on the deal.

      I’d be slinging so many goats that I’d need help. I would have to pay the help more goats per hour because they are awash in goats, too. They’d probably work ten times longer for one of those dollars, though.

      You’re getting a good deal on goats, but it won’t last forever. Eventually we’ll have enough of your dollars that and we’ll reach parity again.

      1. Tim

        Thanks. So the benefit of currency devaluation is the increased productivity per unit of currency making that debt easier not just to maintain, but indeed to pay back. You must take advantage of the transient condition to put your house in order. Of course Keynes said that too and nobody much liked listening to that part of the story.

        I also agree with the other poster that theoretically if you devalue your currency it makes you more competitive in the global economy, however as we all know currency devealuation is sure looking a lot like race to the bottom right now, where the status quo of relative cost of labor isn’t changing much.

        I’m still pretty convince MMT is only a small part of the solution and still requires politicians to make the right decisions to be properly implemented, like any other components of a total solution, so it is no panacea.

        1. Procopius

          I live in Thailand, but my income is my U.S. Army pension and Social Security, which are in U.S. Dollars. What is this “currency devalutaion” of which you speak? I admit I long for the salad days when I was getting 40 Thai Baht for each of my dollars, but that dropped to about 32 to the dollar back in 2007. Since then it’s dropped to about 30.6 to the dollar, and fluctuates about 50 satang (1/100 of a Baht) up and down. It’s been very stable since Obama (may he contract scabies) was inaugurated. I notice the Euro hangs around 1.30 U.S. dollars. I don’t really pay much attention to other currencies, but I’m vaguely aware of them in terms of Thai Baht, and it seems to me there hasn’t been any devaluation of the dollar. From time to time I see comments like this, and especially “debasing the currency,” and I just feel baffled.

          1. freedserf

            The Thai government has reached the end of its rope with the devaluation of the dollar. As the Baht gained strength against the dollar (less baht required to buy a dollar), Thai products became very expense for people who use dollars. You understand this very well since you were using dollars. Your standard of living was falling but your Thai friends hardly noticed your discomfort, their standard of living was stable. Now however, the Thai government must also devalue the baht in order to keep their exports competitive. Have you noticed how the price of everything has gone up locally. All your Thai friends are feeling the pain now because the baht doesn’t buy what it used to. The Thai government has stabilized the exchange rate by devaluing the baht at the same rate that the US devalues the dollar. Everyone’s standard of living declines at an equal pace. Of course, this is for the “greater good”. Please let me know if you figure out how to become a member of the “greater” so that I may reap the benefit of this magnanimous policy.

    2. tiebie66

      I largely agree: a devaluation is a type of austerity – consumption is reduced and production increased. Thus it can effect a change in an economy by shifting to production over consumption in societies capable of making such a transition. Why is it thought of as a panacea? Hungary? Zimbabwe? Argentina? UK?

      1. SM

        You guys know a lot of poor people don’t have jobs, yes? You know that if the dollar was cheaper our imports would decline and would instead get replaced by domestic production and exports? Who do you think would make all that american crap? Do you realize a person without a job isn’t too concerned that chinese junk at walmart is 10% cheaper because, you know, they don’t have a job and can’t afford it anyways?

        Poor people are also more concerned that the amount they spend on healthcare to finance the lifestyles of the rich doctors in this country are out of control. That too is more important than 10% off chinese junk. Where is the concern for this?

        Do you think poor people would prefer another few million unemployed so that we get an additional 10% off chinese junk, or the other way around?

        1. spooz

          the high cost of healthcare mess is about Big Pharma, Insurance industry and Corporate health care, less about rich doctors.

          1. John F. Opie

            You forgot tort reform and liability reform: that stops unnecessary testing and brings costs way down. Without that, nothing else is going to work. You’re dealing with symptoms, not the cause.

          2. chitown2020

            Their greed could be their demise. I hope Obamacare gets axed after reading that Obamacare is really not about healthcare at all. It is about complete control of our infrastructure. The so called healtcare plan forces the microchipping of the people. The MSM has been silent about this. They plan on microchipping babies at birth. If you have been to a hospital lately this is not hard to believe. The nurses scan everything that they do. They scan your wristband and every drug they give you. Look around at all of tge IBM computers and GE equipment. It is Nazi Germany. This is beyond Orwellian. This is complete Corporate Government Control…TOTALITARIANISM. The MSM are traitors for not alerting the people.

          3. Procopius

            @John F. Opie: Sorry, but those states where they’ve passed “tort reform” and “liability limitation” (e.g. Texas) there hasn’t been any reduction in tests ordered by doctors. It seems the doctors order the tests because the insurance companies pay for them, not to protect themselves (that may originally have been the reason the insurance companies agreed to pay for them, but it’s not why the doctors keep using them). The panel established by the ACA to recommend “best practices” is more likely to reduce those unnecessary costs.

  3. JC Atwood

    You write that without “bold Congressional action and a large fiscal stimulus package to boost demand and employment, nominal GDP cannot and will not rise to desired levels, no matter what the Fed does”.

    The only people in this country who can make this happen would be overwhelming numbers of demanding voters. Voters currently clueless, suffering only more as the press ignores the big question. Only today, David Leonhardt wrote another “unemployment is a bit worrysome” post. Period. Not anywhere enough to get voters to overcome the free speech being sold, that is obscuring your message.

    Maybe you are right about Krugman not pointing to Congress enough (although he hammers on this almost constantly). But your difference with Krugman is truly academic, so long as Congress and the President do nothing to reverse our entirely reversible, and entirely DC-made disaster of unemployment sliding into recession, depression, or lost decades.

    Chairman Bernanke’s lapses, or downright intellectually dishonest abandonment of his life long study, is a particularly strong nail in the coffin of the death of the American Dream. Because his bully pulpit is wasted, while neither he, Congress, nor voters are demanding the fiscal stimulus that would save our economy.

    The press, Congress, and White House are ignoring you, Christy Romer, Paul Krugman, and anyone who points out that history has told us to stop doing what we are doing, how to stimulate to economic growth, and to start legislating long term financial reform.

    Why isn’t this DC-created, unnecessary, slow motion drive off a fiscal cliff the biggest news? Why do the press and politicians pretend we can ignore history, tighten belts and continue to pretend we’re number one? It’s the important question you refer to, a question Krugman would help you ask, if we could get the public to ask it, too.

  4. craazyman

    maybe he realizes that in theory there’s no difference bweteen theory and reality but in reality there is. I read that someplace, I didn’t make it up.

    it occurred to me riding the bus that the forms of cooperation that absorb money in a productive way have their own energetic structure that transcends money. So money is like the water that goes into the water baloon.

    you can juice the money but you can’t juice the structures. Just like you can throw paint on a canvas but you can’t make a rembrandt unles you have the organizational structure in your mind, beforehand. the org structure is the mystery. how and why people cooperate around forms of imagination.

    Now the org structure is a big baloon in china. and there’s no way to infuse that like something from the 1950s.

    I doubt Mr. Bernanke is an idiot or a fool. He probably just makes it up from day to day, like most of us and wonders when it will all make sense. It never will, hahaha, ever.

    1. Literary Critic

      They really shouldn’t let economists handle money. They will just do something irresponsible with it.

  5. Andrew not the Saint

    Sorry but I find this article fairly boring. It follows a polemic which doesn’t mention any of the really big shortcomings of the Fed:
    1) Ignorance of the levels of private debt on the economy
    2) Turning a blind eye on Wall St fraud
    3) Allowing Wall St extraordinary privileges (e.g. ZIRP)
    4) A dual mandate (often conflicting)

  6. Susan the other

    This was a good summary of how puzzled I was about Bernanke’s February congressional testimony. It was as if he elaborated on our deficit as a danger to private capital just to placate Congress. Maybe he is implying that capital doesn’t seem to be doing its job as it is. And Congress is at fault.

  7. jsmith

    “How is it possible for someone to hold two completely incongruent intellectual positions?”


    Look, ten years ago the elite told us a fairy tale about 19 hijackers that defied both common sense and science.

    To our faces, they told us what we saw over and over and over again was not what we saw and that pattern has made itself manifest in any number of ways since then.

    (BTW, for anyone interested check out how many bombs were really found at OKC on that day. For extra credit, research these facts: 1) Controlled Demolition, Inc cleaned up both the Murrah Building AND the WTC crime scenes and 2) Mr. Gene Corley, a structural engineer, just happened to lead BOTH investigations for both “collapses”. Just a coincidence I’m sure.)

    Has the author really, really taken the time to understand what the elite accomplished on those days?

    It goes beyond getting away with crime.

    It is the creation of a “reality” devoid of reason, rules, law, physics, rationality.

    So, when I read such musings as the above I quickly ascertain that the author shouldn’t really be taken seriously when she asks questions such as the one I started my post with, as she really doesn’t have a mature grip on the world we are now living in.

    You actually think any of the elite CARE if their reasoning doesn’t add up?

    You actually think they worry anymore if what they are saying may turn out to be false or wrong later on?

    You actually think Bernake spends a second thinking of his “inconsistencies”?


    1. jsmith


      Only by making these criminals care again about the consequences of their actions/decisions, will we as a society/species be able to move forward again.

      These “masters of reality” must be forced to deal once again with our reality: one of laws, common sense, justice and science.

      If/when they fail to do so, then we do what we do to anyone who has lost their grip on reality: we place them in institutions where they can’t hurt anyone else, namely, prisons and psych wards.

    2. Lambert Strether

      On Corley from the same WikiPedia article:

      Other projects he has led include an investigation into the April 1982 collapse of a highway ramp under construction, which killed 13 workers, in East Chicago, Indiana,[6] damage to the Los Angeles Civic Center and other buildings, following the 1994 Northridge earthquake,[7] damage to the Humberto Vidal Building in San Juan, Puerto Rico following a gas explosion, and damage investigation to structures following tornadoes in Kansas and Oklahoma.[8] Corley also investigated the collapse of a ten story parking garage under construction at the Tropicana Casino Resort in Atlantic City, which occurred on October 30, 2003.[9]

      Which of those projects were part of the conspiracy you vehemently yet vaguely allege? All? Some? None? In each case, why or why not?

  8. Hugh

    What I don’t understand is why anyone would expect consistency from our kleptocratic elites. If you drop the warrantless assumption that Bernanke is acting in good faith, there is no paradox. His actions, all his actions, have been about enabling and protecting the banksters. He has committed trillions, if not tens of trillions, to them and their enterprises. If you want to know what makes Bernanke tick, follow the money.

  9. Matt

    Right, because it’s not like Krugman just published a book pleading for more fiscal policy or anything…

  10. a crude interest

    Anyone who reads 2000 pages of a paper by Bernanke should have full professorship bestowed upon them.

  11. justanotherobserver

    Another day, another post on NK slamming Krugman.

    I mean really, WTF is up with that ?

    1. YankeeFrank

      For the umpteenth time, Krugman denies so much of what is going on in our society that even when he’s right he’s wrong. He denies the fact that speculation is responsible for the massive commodities bubbles that are starving, dislocating and impoverishing billions. He denies the massive loan fraud at the heart of the financial crisis. He insists our economic system can be modeled without banks and still believes that banks lend based on reserves. He misrepresents and maligns MMT, which has a much better grasp on how our monetary and financial system actually works. And he is still a globalism cheerleader, insisting that replacing good, well paying jobs making things of value with low-paying, low-skill service jobs is just a fine way to run an economy.

      Sure he’s a limousine liberal who “cares” about the poor and wants fiscal stimulus to “jump-start” the economy. But, just like any limousine liberal, he doesn’t care enough to honestly examine his prejudices and correct the flawed premises he works from. He cares much more for his reputation than he does for the well-being of the people of the USA. And to top it off, he defends Peter Beinart’s work on zionism, but refuses to stand up for what is right himself, so as to avoid the “buzz-saw” of the contemporary Jewish Israel-firster hit squads. It sums his position pretty well — too comfortable and cowardly to leave the confines of proscribed “liberal” dogma. He represents the failure of contemporary intellectuals to sacrifice even a bit of their “prestige” to commit to real change. He thinks he is brave because he is called shrill by those completely in the tank for plutocracy. And perhaps he is, by the current sad standards of American discourse. But his failure to call out the criminals who wrecked our system and continue to loot our economy serves to provide cover for them. If the left isn’t calling it criminal it must not be. He denies the responsibility that comes with his platform, just like Jon Stewart. They are two of very few visible members of the left, and by refusing to honestly speak about what is going on they allow the window of “respectable” discourse to continue its relentless move rightward. Sure he says some things I agree with, like how Paul Ryan’s budget is an immoral mess that would destroy our nation, rather than a centrist, responsible plan. And that’s good as far as it goes. But it doesn’t outweigh his failures. Not by a long shot.

      1. SM

        “Krugman denies so much of what is going on in our society that even when he’s right he’s wrong.”

        Yeah, this is what that other poster was getting at. This site has gone off the deep end because PK won’t show you guys the love you so deserve. I mean, i just read this article, and nowhere in it did it actually say that PK was wrong in what he said. If he said that japan should do both, and was well aware that the government controls one and their central bank controls the other, was he really saying that the central bank should do nothing? Doubtful. Or was he unaware that japan has a central bank and a government? Or did his paper fundementally make no sense? Not only that, even if this is what he said in his paper, he is entirely incorrect on this point, even if correct on every other point. PK, Dean Baker, and plenty of others point this out. There is virtually no harm in doing what Bernake prescribed, yet plenty of harm in doing nothing. The risk/reward analysis comes out on the side of action no matter how you crunch the numbers.

        But here the “PK is wrong even when he’s right” tripe is over the top. It’s funny that the policy prescriptions of MMT and Keynesians are almost identical a lot of the time, yet this war continues…

        1. YankeeFrank

          I didn’t mention anything about Krugman related to this particular post because I don’t really think its a big deal that he apparently didn’t really read all of Bernanke’s paper. Although I should add that he seems to have that problem a lot: misrepresenting the thoughts of others based on shallow or incomplete readings of their work (MMT being a particularly noxious example).

          And my comment about Krugman being wrong even when he’s right was, I thought, well explained in my comment, but apparently wasn’t. Krugman often aims in the right direction with his commentary but rarely takes it to its logical conclusion; or avoids certain obvious facts in order to protect his flank in one way or another. Sure he calls for more fiscal stimulus. But he doesn’t critique the holes in the US economy that will cause much of any fiscal stimulus to wind up offshore, thereby weakening the impact of such stimulus on the US economy. He ignores such holes because he is a cheerleader for globalization and refuses to change his mind despite the clear damage done to our society. He also insists we must finance money printing with debt so that we can pay rich people interest to use our own money. Because otherwise, inflation! So yes, Krugman is wrong even when he’s right. His economics is woefully flawed, being a phony Keynesian wrapping around neoclassical dogma, and his liberalism is of the effete, ineffectual kind that countenances all sorts of crimes against the people, making up for said crimes with what amounts to charity. I said this before and I’ll say it again: he actually pretends that the GFC wasn’t caused by massive banking fraud. How any reader of NC can be a Krugman cheerleader is actually a mystery to me.

          1. F. Beard

            He also insists we must finance money printing with debt so that we can pay rich people interest to use our own money. YankeeFrank

            That’s fascism – government privileges for the rich. One would think PK would be shy about being a fascist.

            Because otherwise, inflation! YankeeFrank

            Does not follow since the debt of a monetarily sovereign nation is ITSELF a form of money. Worse, it is a form of money that pays interest so the debt of a monetarily sovereign is even more inflationary that simple money printing.

            Another thing about the Keynesians is short term they are always for deficit spending but long term they claim it is unsustainable! You’d think they’d know by now that deficit spending IS sustainable and even necessary. Worse, they give ammunition to the Austrians and other balanced budget fanatics.

        2. Hugh

          Krugman is so far behind the curve that he doesn’t know there is a curve. Sure, he knows that we went off the gold standard in 1971 but most of his thinking is mired in the gold standard. Similarly, he criticizes, although that might be too strong a word, neoclassical economics, but his own conception of markets remains fundamentally neoclassical. Obama may not be his favorite Democrat, but Krugman is still very much a Democratic tribalist.

          Like many here, I cut Krugman slack for a long time, but Krugman only goes so far and no further. He doesn’t, as I call it, complete the analysis, and where he stops in his analyses is just short of questioning the Establishment and the elites of which he is a prominent member. When you see him do that enough times, you know that intellectual inquiry is never going to trump his class affiliations.

          Our times are defined by the great struggle going on between the 99% and the 1% who are looting them. Krugman’s understandings and misunderstandings of basic economics are at best irrelevant to that struggle. Fiscal policy is as meaningless as monetary policy if both are used as looting opportunities. But in so far as Krugman distracts us away from focusing in on an economic system based on looting, as long as he continues to propagate the lie that the system is sound and that all that’s needed is a little more regulation, a looser fiscal policy, and a few more Democrats, he’s doing the work of the 1%, helping to keep the rest of us misinformed, unfocused, and disempowered.

          One of the hardest things for people to do is to give up their conceptions of normality. But to understand the modern world, we need to grasp the abnormality of what has been happening for the last 35 years. We need to let go the presumption of good faith on the part of our elites. To do otherwise is to be constantly brought up short by a never ending parade of paradoxes, inconsistencies, and inexplicable events. Yet assume that our elites are acting in bad faith and the contradictions disappear. You may not like this. There isn’t anyone I know who does. But that’s the world we live in.

          Finally, with regard to bad faith, it is important to recognize that it is not understanding something is wrong and acting wrongly anyway. Good faith is not believing something is true and acting accordingly. All kinds of horrific crimes have been committed down through the ages by true believers. Bad faith is defined not by what one believes but what one should have known. The whole raison d’être of our elites and their privileged status is that they know more and better than the rest of us. So when over a course of decades, they show they are manifestly and repeatedly wrong and persist in their wrongness even as they greatly benefit from it, then yes, that’s bad faith and Krugman is very much a part of that, along with the rest of the economics profession.

          1. Anonymous Jones

            Dude, seriously, I just really think you gotta sit some of these out some times.

            You don’t know who’s acting in bad faith and who isn’t. You just don’t. I don’t know much, but I have a pretty good idea of what is impossible for you to know. And figuring this out, even beyond a reasonable doubt, seems to be well outside the sphere of your knowledge. You expose yourself when you over-generalize and apply your preposterous stereotype of human cognition and action based solely on someone’s perceived power, as if there is only one way to become an elite (possible but unlikely…)

            But yeah, bud, you’re right. No one is as ahead of the curve as you are. Everyone who disagrees with your kleptocracy idea (uh, dipsh*t, you have to have a coherent, consensus view of “property” before you can have a coherent, consensus view of “stealing”, your klepto- prefix) is just a shill or an idiot or acting in bad faith.

            Sure, some people act in bad faith, some people delude themselves with fantasies like religion, some people are just idiots, some people just make mistakes, and some people are the combination of some or all of the above. Forgive me if I remain skeptical of your ability to identify the types and the extent in people you’ve never met.

            The point is basically this…if Krugman is your enemy, you are so isolated and doomed that you are wasting your breath. Hey, you can waste your breath (or waste these illuminated pixels) all you want, but don’t expect us to take you seriously. You’ve boxed yourself so far into a corner that you might as well go and live in a cabin in Montana and become a graphomaniac. Not that I’m making a subjective judgment on graphomaniacs (or cabins in Montana)!

            Peace, brother…

          2. Anonymous Jones

            I obviously meant, “If you care about income inequality in this country at all and think Krugman is your enemy,…”

          3. Hugh

            Dude, occasionally you have to look reality in the face or all you are left with is fairy tales other people tell you for their benefit.

            If you engage in a game of coin toss and the person you are playing with wins 95 out of 100 tosses, you don’t need to know how they cheated. The mathematics tells you they did. We see this on a daily basis with our elites. Indeed one of their own popularized the phrase, “Heads I win, tails you lose.” But just because Krugman said this doesn’t mean it doesn’t apply to him as a prominent member of our elites as well. It’s merely ironical that it does.

            Krugman has been catching so much heat here lately because his economics and politics are mired in the same ideas he criticizes, and events are moving beyond his ability to paper over their intellectual inconsistencies and contradictions.

            You can hitch you horse to his wagon but Krugman is an intellectual deadend. It always surprises me how people can go from making reasonable assumptions to about what others know or don’t know to suddenly, when they feel threatened by some new idea, saying we can’t know anything about anything or anyone. Good luck trying to come up with some reasonable explanation of the world and how it works on that basis. But yes, we can know that Krugman is a deadend because some of us have been observing him for years and his thinking has not progressed during any of that time. Everyone can point to some column of his where he talked about depression or stimulus or unemployment but the point is he never built on any of these or used them to question his own fundamental assumptions.

            Krugman’s failure to do so is becoming increasingly obvious and his defenders of which I suppose you are one have an increasingly difficult task. My use of the concept of bad faith is my way of getting around the question which the failures of our elites raise: Are they stupid, incompetent, or criminal? I don’t care what Krugman knows or thinks he knows. I don’t care what he believes. I am only concerned with what he says and does and how that squares with his status as an elite expert. And in this view, he fails and not only fails but persists in and continues to profit from that failure. So yes, for me, that is bad faith. Events have proved him wrong. Many of the people around here, non-elites, have not only laid out where he was wrong but have come up with better analyses so he can not even say that no one could have known.

            You can continue to feel all warm and fuzzy about Democrats like Krugman who invariably end up backing those who are screwing us, but I for one am done with them. The limits of the progressivism of the Krugmans of this world is that some KY jelly should occasionally be applied to the process. If you think that makes him an ally, you are free to do so. I do not.

          4. Aquifer


            i tend to agree, but i also realize a case can be, and is perpetually being, made that these guys are just “doing the best they can” and maybe that it is the best THEY can do, which sort of brings me to the point of pragmatism.

            At what point does the “reason” for their actions cease to matter and one must concentrate on the results of those actions instead. If a person is bleeding and the person “tending” to him is failing to stop it – how necessary is it, and how much time should be spent in the effort, to decide whether the “tender” is incompetent or is evil before one simply pushes him aside and actually does something to stop the bleeding?

            I have seen multiple discussions about the “motivations” of our political “tenders” – back and forth, back and forth. And even discussions where the preponderance is on one side or the other, have even participated in them. But it seems to me at some point it doesn’t really matter what the motivation for the action is – the action itself is what must be changed and once the “tenders” have shown themselves incapable of changing, again for whatever reason, they must be replaced with those who will.

            And we do not have forever to wait “hoping” the “tenders” will change. There does come a point in hemorrhaging when too much is lost and system failure becomes irreversible. IMO we have waited too long already – time for debating motivation is over – time for replacement is at hand …

            We can toss the crooks in jail later if we find them culpable as opposed to simply dumb – first we must get them, whether evil or incompetent, out of positions of power …

          5. Hugh

            I agree, Aquifer. But in this case, the tenders are being richly rewarded for their ability to assess such situations. The extreme importance of stopping an arterial bleed is part of their basic knowledge set. Yet the bleed is left unadressed, even after it is pointed out to them. And then to top it off we are supposed to ignore that the tender just happens to benefit materially from the patient’s death or incapacitation. So yes, job one is stop the bleed, but that’s not going to make me forget the rest.

          6. Bryonie

            Anonymous Jones: “I obviously meant, “If you care about income inequality in this country at all and think Krugman is your enemy…”

            Aww, that’s so sweet. See, he doesn’t always defend the 1 percent, Anonymous Jones also cares about income inequality.

            bwahaha bwahaha bwahaha

          7. Aquifer

            Hugh @2:53,

            We cannot forget and we must be angry – but, i guess I would argue that there is something we must do first in a calm clear headed manner, that righteous indignation is necessary but it must be subordinated to the task at hand, and that if there is some way to harness and focus all the energy we spend and have spent for some time now on denouncing the miscreants on instead coming together to replace them with competent carers, we could make real headway – and it is folks like yourself who know how to write clearly and, IMO, present points well, who could help enormously in this effort …..

          8. Lambert Strether

            Hugh writes:

            Yet assume that our elites are acting in bad faith and the contradictions disappear. You may not like this. There isn’t anyone I know who does.

            You wound me. Deeply.

      2. Fiver

        Good post and good to see someone other than me who is sick unto death of John Stewart’s garbola.

        1. Fiver


          Just a suggestion: system ought to allow people to be able to respond in further rounds of comments.

          For instance, nobody can readily respond/comment on “Anonymous Jones” reply to Hugh, but rather must, like me with this post, respond to someone else’s (my own) prior comment and hope it is seen, but is not too confusing due to its location in the comment stream.

          That said:

          Agree with Hugh re Krugman in particular, and elites in general, though I take exception to restricting “bad faith” to the 1%. It’s gone far beyond that. We are talking about decades of cumulative moral/ethical rot. That of course does not mean every member of the elite, or any other segment of the population, is rotten – just far, far too many of them.

          To A. Jones: if you can’t see that the likes of Krugman are every bit as much the “enemy” as Obama, or Romney, or Bernanke, or Paulson, or Bush, or Blankfein, or Dimon, or Panetta, or Petraeus or….then you just do not understand how power in the US (and world) works.

  12. kris

    Fed board members including Bernanke are pure and simple government employees. The position of Fed member or Fed chairman is simply quite coveted for status competition between clueless economists. There’s nothing else into it.
    The Fed receives orders from WH and the Congress.
    – If both the congress and WH are held by the same party, all it’s easy, they always vote what they get told – (Fed voting record until republicans won the House)
    – If the power is split between Congress and WH, they just don’t know what to do and try to keep the balance in order not to lose their jobs and incomes along with the status- (Fed voting record after the republicans won the house by a landslide)
    Fed independence simply never existed practically, but even theoretically ceased to exist with the Accord of 1951

    1. chitown2020

      The FED is running this show via their owners at the Vatican. The UNITED STATES GOVERNMENT is a foreign controlled Corporate Government. Most of the Politicians are puppets for their owners at the Vatican. They have hijacked everything by monoploizing everything including America via their perps at the FED. They have been out to steal our Freedom and Independence since they shot Lincoln. Kennedy tried to restore our Freedom and Independence by issuing U.S. BANK NOTES and they shot him. Do a you tube search of the video entitled J.F.Ks speech about Secret Societies. Do a GOOGLE SEARCH of Does the Vatican own your mortgage? They have infiltrated everything by secret societies, secrets, lies and deception. One important thing to remember is THEY LEND NO MONEY…THEY ARE REALLY A GIANT FRAUD. All of their power is in the lies they can make us believe.

      1. YankeeFrank

        The Vatican? Really? NC has its share of nutjob conspiracy theorists but come on. Its not the Jews and its not the Catholics that run the show in the USA. So please stop before your rant turns into an outright racist screed against furriners.

        1. chitown2020

          Yankee Frank…I did not say anything about any race or religion. I am Catholic. Either you are a troll or you need to catch up on the truth. All roads lead to Rome. It is the hierarchy of the Vatican behind this monolithic conspiracy. Dont blow a gasket but the Black Pope, the Jesuit General runs the world via the White Pope. The Vatican is a global plutocracy. Google the words or you tube search them and Google the words Does the Vatican Own Your Mortgage? You might be surprised at what you find. Maybe you already know. The truth is not hard to find. The agents of the Vatican have infiltrated everythingn

      2. F. Beard

        I agree with YF. The Devil would be happy if the battle against banking (the system) devolved into a battle against bankers (people).

        For our struggle is not against flesh and blood, but against the rulers, against the powers, against the world forces of this darkness, against the spiritual forces of wickedness in the heavenly places. Ephesians 6:12

  13. chitown2020

    I watched the Bernanke show and his lying is just ridiculous. It just makes him look like a complete moron. Like when Obama said what Wall Street did was not necessarily criminal but reckless. Everyone knew he was lying. I thought that CNBC anchor in the audience looked ticked off like he wanted to tell Bernanke do I look stupid? They all look idiotic pretending to be serious. Its starting to look like a really bad b movie.

  14. tdraicer

    Actually Krugman has always supported fiscal stimulus. Krugman’s real flaw has been his failure to abandon Obama (despite repeatedly threatening to do so), undoubtedly because of his fear of the GOP. I think that refusal is wrong, short-sighted, and undoubtedly frustrating, but it would be better if we had a debate on that, rather than pretend Krugman doesn’t understand the need for stimulus or other such nonsense.

    1. Aquifer

      I think there is much truth in what you say – and i suspect that is why we are seeing more and more rather disjointed posts from guys like Krugman – stuff like this is all over the so called “progressive” media – the cognitive dissonance is reaching ever higher pitch. These folks realize that the Dems, including, or especially, fearless leader, are disasters but they have built their careers and lives around the concept of the Dem Party and cannot bring themselves to part with it even as the reality of the party diverges ever more from that concept. As the excrement builds in the bowl,they just cannot bring themselves to flush – but the necessity to hold their noses means their voices take on a hysterical Elmer Fudd quality ….

      Methinks once you get that, you can free yourself of any intellectual obligation you may feel to consider them seriously, can ignore them and go on with the necessary business of replacing them …

  15. JTFaraday

    I wouldn’t expect anyone who experiences no cognitive dissonance between the following two statements:

    – there is no limit on government spending (except inflation)

    – but NEVERTHELESS the government should give people cut rate minimum wage jobs where they need to take on debt anyway to make rent (while also eliminating current unemployment programs lest some wasteful welfare cheat eat bon bons in front of the TV for 6 months)

    to understand why Bernanke runs around flogging the national debt instead.

    If a society of government created minimum wage workfare impoverishment is really the means of “reducing unemployment” that is preferred by today’s self proclaimed cutting edge economists– out of all possible policy options– then an austerity promoting Bernanke really is their best friend and their top public relations man.

    Better to not claim you really have a bon bon shoppe if your heart is already dead set on dealing up another steaming plate of sh*t.

    1. reslez

      minimum wage workfare impoverishment…

      Beautiful strawman you’ve built there. Maybe your argument would hold up better against an actual opponent instead of a caricature, but I guess we’ll never know.

  16. Huggy

    “Why [Bernanke] prefers tax cuts…”
    Corruption is so rampant other forms of stimulus cause bubbles.
    eg Kids buy stupid stuff with parents’ money but buy stuff they value with their money.

  17. Conscience of a conservative

    Bernanke’s approach troubles me.
    First off every country seems to want to depreciate their currency. Something that is just not possible and can only lead to a curency war.
    Second that zero or negative inflation is bad, even though price stability is a Fed mandate. Price stability does not mean a constant low rate of change. Stable prices mean they don’t change. But worse is that when we hear talk of deflation we don’t discuss what that means. As Jim Grant points out there’s a huge difference between prices coming down to improvements in technology or lower costs of production vs a credit crisis where companies cannot finance their inventory and must dump product on the market.
    Third Bernanke derides price controls and talks of the virtues of free market pricing yet doesn’t allow the market to dictate interest rates(the price of money).
    And lastly it doesn’t seem to bother him one bit that people who live on fixed incomes or depend on pensions to generate a future return are getting taxed by Bernanke’s policy of negative real interest rates. Something that the rich can avoid as they have flexibility others do not, which is to refinance, borrow, or invest in the risk assets temporarily being pushed up by Fed policy. And most importantly he’s not prepared to admit he may not be in control of the forces he’s creating by the unprecedented moentary policy he’s been engaged in.

  18. b.

    “I too have been unable to resolve Bernanke’s paradox. How is it possible for someone to hold two completely incongruent intellectual positions?”

    Because his salary depends on it?
    The Fed is a schiz organization – employment and low inflation? – and the only people that will ever be appointed to it are those that proved they will always believe in these two mutually exclusive goals even before waking up, yet will not mistake the latter for relevant even after falling asleep. The ultimate test of the ability to lie to yourself – to construct the optimal reality for yourself – is to not be consciously aware of the disconnect between the misrepresentation you profess to believe in and the actions you are delivering.

    Hence neither Krugman nor Shedlock should be surprised that Confidence Ben would say something like: “We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years.” Observe:
    1) No lip service paid to employment, no need for a claim to credibility there
    2) A decade of frothing and bubbling accomodation did not in any way precede, lest cause, but simply followed from that period of credibility building
    3) Without that credibility, the Fed would not have been able to save the economy from the misallocations and frauds it facilitated and accommodated at every turn

    Krugman is proposing a policy that would hurt inbred wealth – sure, it would hurt the 99%, but the 1% have zero tolerance for any loss. Bernanke’s soul has been sold to the purpsoe of the protection of inbred wealth at all cost to the 99%. Inflation is not acceptable, inflation is failure, and failure is not an option. There is no paradox except for why The People continue to accept the existence of an institution – and the retainers that embody it – that is principally undemocratic, profoundly corrupt, and institutionally committed to harm the commons for the benefit of the rentier class. Bernanke, in his hollow, barren world, makes perfect sense. It is we who do not.

  19. Conscience of a conservative

    Bernanke has good reason to tie his fortunes to Obama. If the Republicans were to win both the Presidency and take the Senate there is a very real possibility of a re-write of the Fed’s mandate. Something to think about.

  20. Yancey Ward

    Bernanke also knows that the US has infinite ability to finance these fiscal components, that there is no solvency issue and that the policy rate and both ends of the yield curve are under the direct control of the Fed. All of this is clear both from his academic writings and policy actions.

    Sheesh, I keep seeing this from the MMT types. “Infinite” means there is no constraint whatsoever. But even the MMTers acknowledge that the government must tax to keep the value of the currency from spiraling downwards out of control. This ability to collect the taxes is the constraint. At least Bernanke understands this, even if his critics here at NakedCapitalism do not.

    1. F. Beard

      This ability to collect the taxes is the constraint. Yancey Ward

      No. The restraint is price inflation in the government’s money. It is conceivable that the Federal Government could spend without any Federal taxation and without price inflation in its money IF the amount spent was not too large relative to real growth in the economy.

      And once the counterfeiting cartel, the banking system is abolished, then it is conceivable that the Federal Government could eventually finance itself that way as the need for income redistribution declines.

      It all goes back to the banks.

    1. Fiver

      I’m looking for the usual treasures hidden in your posts, but damned if I can see anything this time.

  21. kabosht

    “Unlike Paul Krugman, I actually read Bernanke’s paper from start to finish.” Really…? That’s both cheap and silly, particularly since your whole point is “Bernanke called for other parts of the government to do things (fiscal policy), which they’re not doing, so don’t blame Bernanke for not doing the things he actually can do.” Fiscal policy is not in the Fed’s control; inflation targeting and other more aggressive unconventional monetary policy are. Krugman is quite rightly only blaming Bernanke for the things he actually has control over. Unlike you…

  22. kabosht

    And btw, Yves, why are we getting such a glut of shoddy, poorly reasoned material from Assistant Professors who write like mediocre grad students? Having been through grad school, I know, sadly, that these professors are plentiful, but you and your site have more than enough cachet to attract better talent. Just because these people are on board with MMT doesn’t make them good writers or good analysts. If you just want an MMT cult, fine, but your cred takes a hit.

    1. constant

      cheezsch, nothing worse than being caught, Ben
      your cred takes a hit
      Oops! Now, that’s embarrassing. Sorry for the inconvenience, but you’ve encountered an error. Our system has …

  23. felix

    Nobel prizes have become pretty cheap these days, I reckon. I’m looking forward to catch a glimpse of at least one of them in some second hand shop in Montreal this summer. And maybe I’ll buy…Aw, why bother.

  24. Fiver

    I find this piece really quite bizarre.

    The Fed and Bernanke have been an absolute disaster, not just for Americans, but for the public interest everywhere. Even the suggestion that the Fed should “do more” when it is perfectly evident only banks, Wall Street, and roughly the top 20% of Americans who are well-off have received any benefit at all from its flagrant asset-pumping “help” is rank in the extreme.

    But the argument is in any event superfluous – Obama is going to win; Bernanke will be the happy monetizer; Krugman will get his jobs stimuli – as short term and useless as prior efforts given there is NO overall aim of any kind other than padding as many intermediary pockets as possible; while the resulting currency wars intensify keeping Europe and Japan pinned down and bleeding away business to the US or China, itself with more problems than anyone but India. So slap on the Blinkers and start the party early.

  25. William Neil


    Thank you very much for this post, and for keeping an eye on what Bernanke and Krugman are saying today, compared to what they have written previously, and said yesterday.

    I attended, on April 10, at the Brookings Institution, the defense offered by the “conservator” of the federal housing programs, one Mr. DeMarco, who was placed “in the docket” by calls from the left for his firing, retirement, his crime being not using the powers of Fannie and Freddie to relieve the foreclosure crisis for the homeowners under his purview.

    His defense was based on,of course, a number of studies of different courses of action, mainly comparing principal foregiveness versus forbearance. Without getting bogged down in the details, I can say that his presentations all seemed to relect the micro-economic view of what happens “at the margins…” the marginal costs vs the marginal relief for the last increment ventured…

    So I got up and protested that the price drop in the nation’s housing market was as great or greater than that in the Great Depression, and the number in trouble, under water, also larger, yet we weren’t discussing anything on the scale of New Deal remedies, either directly in the housing markets, or in fiscal policies – such as guaranteed employment – or the “right to a job” programs that you and some of your colleagues are working on.

    This is of course, where Bernanke won’t go, either because that aspect of the New Deal-Great Depression has been forgotten or suppressed (repressed?)and/or because he knows the Center-Right consensus on economic policy in the Congress won’t ever go there either. One of the panelists who responded said the Fed was already doing this…clearly in his own mind what I was talking about is so far removed from possibility that he could give me that “reassurance.”

    This line of reasoning also raises the issues which William Greider did in his recent Nation magazine article entitled “The Fed Turns Left.” That was an eye-opener, and I think he is being far too optimistic, citing new fed studies and comments by a recent Board of Governor appointment, Sarah Bloom Raskin, urging greater scope and creativity in getting at the mortgage fiasco, and raising the issue of the frauds which got us into this tragedy as partial justification for greater scope.

    But I think you are correct in your read of the contradictions in Bernanke’s thought, and that Greider is reading too much, too optimistically into Fed actions. It is only because structural fiscal actions and legislative programs for full employment (beyond tax policies, but not exclusive of them) and foreclosure relief have been ruled out of the intellectual lexicon of both the Republican Right and the Democratic Center that Greider is left, sifting the Federal Reserve tea leaves and studies for the hope and policies he can’t find in the legislative realm of possiblity.

    And for readers who want to track how we got to this sorry state, where even the ghosts of Harry Hopkins, Frances Perkins and Harold Ickes have deserted the Democrats, I highly recommend Alan Brinkley’s 1995 book, The End of Reform: New Deal Liberalism in Recession and War.

  26. PeteyBee

    Look folks, its not complicated. Krugman’s job is to discover the truth and teach it to others. Used to be Benny’s job too but he graduated from that. Now Benny’s job is keep the whole system out of danger over the medium term (10-15 year time scale). If you think about it that way. the FED’s actions make sense.

    The two different jobs make your logical priorities different.

    1. William Neil


      Forgive me for not appreciating the majesty involved in professional economics, and the Federal Reserve. I was writing a brief on behalf of the 25 million or so under and unemployed – “Field Notes from the Lagging Indicators.”

      1. PeteyBee

        The unemployed, for now, are not a threat to the system. The possibility of a sudden and disorderly end to the financial bubbles of the last 15 years was. Therefore, Bernanke has done his job surprisingly well. so far.

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