Monday, December 7, 2009

The Sloppy Word Use of a Professor

Former Princeton University professor Ben Bernanke, who is the current Federal Reserve chairman, has been using some sloppy wording that intensified during the Q&A that followed his speech today before the Economic Club of Washington D.C.

At one point, in answering a question he said that the Great Depression was prolonged because of the Federal Reserve's "tight monetary policy", which he said was a period of declining money supply (He didn't mention interest rates at all.) Then in the next sentence he said the Fed was not making that "error" in monetary policy, pointing to the fact that the Fed has pushed interest rates low. But, since March of this year, Fed money supply has not been growing.

From a policy perspective, I think a no growth money supply is a good thing. It washes out the former distorted capital structure, but there is no indication that Bernanke believes this. Thus, his switch from calling money growth, monetary policy to calling falling interest rates, monetary policy has caused him to take the eye off the ball of what he is presumably trying to do, i.e. "get the economy going." In actuality, he is setting up the economy for a double dip recession. Not because he wants to further cleanse a distorted capital structure but because he is using the term "monetary policy" in two separate ways.

If he simply said, "In the 1930's the Fed let the money supply shrink, and we can never let the money supply stop growing." He would be in a panic now, but he, as has much of the profession, simply changed the meaning of "monetary policy" from what happens to money supply to what happens to interest rates. These are two separate things, one doesn't necessarily mean the other. Thus, without realizing the impact this change will mean to the economy, Bernanke has stopped focusing on the item he said caused the prolonged Great Depression, the lack of money supply growth. Indeed, in two separate sentences, one after the other, the Fed chairman used the term in two separate ways. This isn't just an academic debate. It has serious policy implications. How can a Fed chairman/former Princeton professor be so sloppy?


  1. (you don't need to approve this comment)

    i was thinking about this topic, and wrote up some thoughts here:

  2. Hi Robert,

    What do you think about Stefan Karlsson's recent post, "" , in which he argues that money supply is affected by money demand and therefore that currently stagnant M2 will not affect the economy for some time?