What Ben Bernanke would say if he stopped being polite and started getting real

Posted by Neil Irwin on March 20, 2013 at 11:03 am

This afternoon, Federal Reserve Chairman Ben Bernanke will face the press, sitting for one of his quarterly news conferences. But why wait until 2:30, when the press conference begins? We at Wonkblog are here to offer you a preview of sorts. We have five questions that ought to be asked of the chairman (and, if we know the Fed press corps, probably will be in some form).

This water tastes weird.

We have the most likely answer from the chairman, gleaned from long hours spent watching his past congressional testimony and speeches. And we have a different, more blunt answer that the chairman might wish to give if, for example, the clear liquid he sipped during the press conference was gin rather than water. Here’s what you might hear from Blunter Ben Bernanke.
Question: Mr. Chairman, as you know Cyprus has been in negotiations over a bailout package that would potentially tax all bank deposits, sparking new fears that the Eurozone crisis could worsen. How much risk do you see in that for the U.S. and global economies?
Probable answer: We are certainly monitoring the situation carefully and are in touch with our colleagues in Europe. And while financial strains have increased this week, the European authorities have made considerable progress overall over the last two years.
Less probable answer: It’s bonkers, isn’t it? I mean, after all this time and effort spent trying to instill confidence in European banks, NOW they’re going to undermine it with haircuts on deposits? Sheesh. I asked my friend Mario [Draghi] the other day, “What are you doing, man?” And he was like “Oh, don’t worry, we’ll figure it out. We always do.” And, well, I sure hope he’s right. But not much I can do about it.
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Question: There has been some debate among FOMC members over how long the QE3 program of buying $85 billion in bonds each month will continue. Is there a consensus on the committee as to when the purchases will stop?
Probable answer: The Committee will evaluate incoming information about the economy and calibrate our Large-Scale Asset Purchases, the so-called QE programs, accordingly.
Less probable answer: Look, I know you guys want me to stand up here and tell you exactly how long we’ll keep buying bonds. And that would be great if I could. But obviously that depends entirely on how the economy does as the year progresses and whether we’re making progress toward bringing down unemployment or not. Heck, depending on how much the sequester drags on growth, there’s a decent chance that I’ll be long gone and busy having Bob Barnett negotiate my seven-figure book deal before the Fed stops buying bonds.
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Question: Mr. Chairman, a number of your colleagues have raised concerns that the Fed’s easing policies are creating new bubbles in the credit markets, particularly for high-yield bonds and certain mortgage-related securities. How concerned are you about those possibilities?
Probable answer:  It is the case that in an environment of persistently low returns, incentives may grow for some investors to engage in an unsafe “reach for yield” either through excessive use of leverage or through other forms of risk-taking. My Board colleague Jeremy Stein recently discussed how this behavior may arise in some credit markets. But premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading–ironically enough–to an even longer period of low long-term rates.
Less probable answer: Look, I read Jeremy Stein’s speech, and he’s a smart guy. But are you really suggesting that we should raise interest rates so much that we choke off the recovery just because some pension funds are paying too much for junk bonds? That seems kind of nuts, doesn’t it?
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Question: Mr. Chairman, the Fed has repeatedly forecast that growth was just around the corner, only to subsequently mark down those growth forecasts when the expansion proves disappointing. How do you know you aren’t making that mistake again?
Probable answer: We have overestimated the pace of recovery for much of the last few years, for some fundamental reasons having to do with the time taken to achieve financial repair, the state of the housing market, and so on. But that being said there has been a certain amount of bad luck as well, from European volatility and so on. We are constantly refining our forecasting models to try to understand why we have been wrong in the past.
Less probable answer: OK, smarty pants. Why don’t you come out four times a year and predict what will happen to growth, employment, and inflation for the next three years. I have a few hundred economists busting their humps to refine the best macroeconomic model in the world. Yeah, we’ve been too optimistic the last few years. So we’re trying to learn from what exactly we got wrong and adjust our models accordingly. But guess what? The future is uncertain. That’s what makes it the future.
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Question: Mr. Chairman, your term ends in only ten months. Have you and the president had any conversations about whether you could be appointed to a third four-year term, or do you anticipate that January 2014 will mark the end of your time at the Fed?
Probable answer: I really don’t have anything to add from the last press conference. I am very much engaged in these difficult issues that we’re discussing today, and I have not been spending time thinking about my own future. So I don’t really have anything to add.
Less probable answer: Dude, after eight years of this, do you know how much I look forward to NOT feeling like it’s my job to keep the world economy from coming unglued at any moment? I can’t come out and say now that I’m gone next January, because these are still difficult times and I don’t want to be officially a lame duck for the next ten months. But read the writing on the wall, man.

 

Wonktalk: Ducks, horses and what Ben Bernanke thinks(The Washington Post)