Krugman: Harpooning Ben Bernanke

[ProSense]

Harpooning Ben Bernanke

Brad DeLong has the best piece I’ve seen on Bernanke rage among the hedge funders. His point is that the hedgies keep thinking of the Fed as if it were a rogue trader driving prices away from their natural value, like JP Morgan’s London Whale, rather than as a central bank trying to achieve full employment and target inflation. Hence their rage at the failure of bond prices to collapse the way they “should”.

I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied.

What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower).

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http://krugman.blogs.nytimes.com/2013/05/11/harpooning-ben-bernanke/

[MannyGoldstein]

1. Bernanke seems to be the only Serious Person not totally corrupt

Will this suckfest ever end?

[ProSense]

3. Nice graphic. n/t

[byeya]

2. First thing, Prof Krugman has always been kind to his Princeton collegue. Second thing, Bernacke

is one of the few Fed chiefs to give a little more than lip service to the Fed's twin charges: keep inflation in check while providing for full employment. Monetary policy is about all the Fed has going for it and Bernacke is doing pretty much what he can when he knows, and has said(in Fedspeak) the nation needs to be spending on jobs via infrastructure improvement something the Fed President can't do on his own.