Bernanke & Macro cognitive dissonance

Former Fed Chair Benjamin S. Bernanke has just won the Nobel Prize. Mr. Bernanke left the Fed in 2014 and he is now a distinguished senior fellow at the Brookings Institution in Washington. He won the Nobel for his work on financial crises, including a 1983 paper that broke ground in explaining that bank failures propagate downturns and aren’t simply a side effect of them.

I am almost finished reading the book, " 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19," by Ben Bernanke.

This book describes, in great detail, every move made by the Federal Reserve from the 1970s to 2021. It was published on May 17, 2022 so it doesn’t cover the 2022 inflation or current Fed Chair Jerome Powell’s program to channel Paul Volcker to bring inflation back to the Fed’s target of 2%. Part of the book covers the Fed’s decision to target inflation at this level.

At the same time, I am reading “The Price of Time : The Real Story of Interest,” by Edward Chancellor. The author is a financial journalist who wrote a previous book about financial speculation.

“The Price of Time” is an excellent book which covers interest rates beginning with earliest human civilization. Lenders charged borrowers interest even before the invention of money. Ancient writing from 1700 BCE shows that lenders of barley seed at the start of a planting season charged the borrowers 33% interest to be paid after the harvest. (Apparently they knew from experience that this was a reasonable share of the increase from the harvest.)

The history of financial crises associated with low interest rates can be traced to the 1600s. Sequential bubbles and crises (including the famous Mississippi bubble of 1718 - 1720) coincided with unusually low interest rates which forced investors to speculate in risky schemes.

TINA (There Is No Alternative) to risky investments when safe investments (such as Treasuries and the equivalent) has happened over and over.

The main points of “The Price of Time”:

  1. When safe interest rates are below the growth rate of an economy investors speculate in higher-yielding, riskier investments. This has led to spectacular bubbles which led to financial crises over the centuries. (See also “Manias, Panics and Crashes,” by Kindleberger.)

  2. This is especially true when the real (inflation-adjusted) interest rate is lower than zero, when borrowers are being paid to borrow money.

  3. After the 2001 dot-com bubble burst, Fed Chair Alan Greenspan held the fed funds rate too low for years. That gave rise to the housing bubble of the mid-2000s.

  4. After the 2008 financial crisis, Fed Chair Bernanke held the real (inflation-adjusted) fed funds to less than zero in addition to Quantitative Easing to suppress longer-term interest rates. That gave rise to a stock market bubble which expanded radically after Jerome Powell’s monetary stimulus of 2020 - 2021. (I’m only halfway through this book so I don’t know yet if Chancellor also puts his finger on fiscal stimulus.)

  5. If low interest rates and monetary stimulus stay in the banks and don’t get into consumer hands there will be asset price inflation but not consumer price inflation. However, if stimulus gets into consumer hands faster than the rate of productivity growth there will be consumer price inflation.

  6. Targeting a specific inflation rate (price stability) has led to too-low fed funds rate in the past. The Federal Reserve did this in the 1920s.

I am having cognitive dissonance from “The Price of Time” because the evidence over centuries is convincing. Quotes from earlier bubbles and crises (such as Daniel Defoe commenting on the Mississippi Bubble) could just as easily have been written today.

The evidence is that the Federal Reserve blew these bubbles and then their “courageous” actions to save the economy were applauded.

As investors, we need to carefully follow the actions of the Fed. Will Powell actually increase the fed funds rate to a historical level of 2% over the inflation rate? In that case, the fed funds rate may stabilize at 4% if inflation drops to 2%. Or will he follow Bernanke’s book that claims the “neutral” fed funds rate has been falling over the past few decades? In that case, the Fed’s 2022-2023 medicine will be temporary and the fed funds rate will fall again.

Investors who have learned to expect bubble stock price increases may have to temper their expectations. Any increase in stock prices above the increase in real GDP is blown by excess monetary stimulus. We all love it but it’s unstable.


Powell wont get to the 2% over inflation for a more complex reason. There wont be a longer lasting period of disinflation.

Powell is not in Volcker’s position timewise. Powell is not needing create a longer term pressure against inflation.

The FED’s actions are not working well to drive down inflation and wont during this part of the cycle.

Addition, I really need to think this over. The demand period might be all about higher FF rates and higher taxation just to maintain a more modest inflation rate.

My guess is that Powell won’t be able to get down to 2% inflation because of political pressure to ease off the brake. And also, we may be entering a “debt doom” loop. By not raising rates, the annual deficits climb and debt becomes harder and harder to service due to inflation. Or by raising rates to curb inflation, interest due on the 130% debt-to-GDP rises and debt becomes harder and harder to service. This is what worries me.



The IRA will bring down inflation in 2023. Tax policy on the fiscal side matters more right now than monetary policy to bring down the inflation.

What are you talking about? IRA? Huh?

EDIT: Oh, you mean the latest spending bill. Or at least the second to latest spending bill before the student loan spend. I don’t see how any more spending will solve a problem that was caused, at least in part, by too much spending.

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IRA = inflation reduction act ??


Yes. And of course it is going to work…it’s in the name!


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:rofl: :rofl: :rofl:

He is right on the timing

For the record, yes, there is spending in the bill. There is also the ending of some other spending and the raising of revenue. On the whole, it is a net reduction in spending.

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C’mon. Do you REALLY think that the so called “Inflation Reducation Act” is going to actually reduce inflation?

Negotiated drug prices should help with that part. Not sure about the rest.


Have you studied public finance at all?

Just assuming there are lies in all of this is not workable in deciding what to do.

Ethereum is now at much greater risk of dumping with the rest of the market.

This is not bad news for me. The Opensea limitation in place for now on what I want to do will delay me for months. There are things I can do for income in the meantime from the project. Plus I can create the second project.

My partnership will go into discussions for the platform but all reason for financing the platform will be pushed off to late 2023, if not into 2024.

By summer 2023 I will have C# under my belt and be building my video game.

Entertainment is often a winner in a downturn.

That said there are still too many casinos.

Disney might be an early good place to park some money.

HEAR HEAR to this! Stop the crazy!

It is a boom and bust society.

I was boom and bust before the FED.

Wasn’t one reason the Federal Reserve was created was to ease the boom and bust cycles that happened earlier in the history of this country? As someone said already, if the Fed is doing its job three-quarter point rate movements will never be necessary. And yet here we are.

So what is keeping me in QQQ and not moving all that to VYM? Mainly that, possibly, the Fed gets its England-moment and reverses what is going to be an awful trend. Sure, if nothing changes QQQ will get clobbered. I’m hoping at some point we get some sanity in the Fed.

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The way the FED is set up working in some command of the US Treasury is the main reason for the FED.

In other countries the executive decides to print and all hell breaks out. The FED’s control over the monetary supply is separate from the executive.

There are people in the government and at the US Treasury and FED measuring the impacts of monetary and fiscal policy. The IRA is going to have a larger impact.

The UK has been riding on the Brexit when those who want it do not understand the benefit of it. Including being supply siders when the Brexit timing is for demand side economics. A place where the industrial base builds out again.

You are right if the FED was in one of those moments it would matter…and you would have heard the proverbial hitting the fan months ago. I am not talking the markets going down. I am talking a massive emergency.

That crisis might happen yet. But the FED is not the cause. Dont bet on risky stuff. That is the cause of it. Wood bets like a madman at the roulette table.