By Jacob Wolinsky. Originally published at ValueWalk.
Following are excerpts from the unofficial transcript of a CNBC exclusive interview with former Fed Chair Ben Bernanke on CNBC’s “Squawk Box” (M-F, 6AM-9AM ET) today, Monday, May 16th. Following are links to video on CNBC.com:
The Fed’s Delayed Inflation Response Was A Mistake, Says Former Chair Ben Bernanke
Former Fed Chair Ben Bernanke On Inflation, ESG And President Biden
ANDREW ROSS SORKIN: Welcome back to “Squawk Box.” Former Fed Chair Ben Bernanke is out with a new book this week. It’s titled, “21st Century Monetary Policy: Federal Reserve from the Great Inflation to COVID-19.” In an exclusive TV interview, I spoke with Ben Bernanke at his home in Washington, DC. I started out by asking him about the comparison of the great inflation of the 1970s to where we are today and how he thinks about it if we’re, if he were in this seat now.
BEN BERNANKE: Well there are some big differences between the 70s and today and one of course being that the inflation in the 70s lasted for more than a decade. It was much higher than we have now so it was a, it was a worse episode. But I think the most important things, first of all, that the Federal Reserve has to take the lead. Arthur Burns, who was chair of the Fed in the 70s felt that other parts of the government, you know, should take the lead on inflation. Secondly, that you have to worry a lot about credibility and inflation expectations. The Fed’s credibility was completely shattered in the 70s. Nobody believed that the Fed was going to take action against inflation. And so, when Paul Volcker did, I mean he had a lot of credibility, but it wasn’t enough and that was part of the reason why the recession which followed his tightening was so much greater. And I think the third lesson from the 70s is that political interference with Fed policy can be very dangerous. In the 70s, Arthur burns again acted more or less as a member of the Nixon administration and Nixon wanted to be reelected in 1972 and so Arthur Burns said, well, we won’t tighten monetary policy then and that led to greater inflation. We have I think today both a more independent central bank and also I’m actually pleasantly surprised if you look at Congress and the President and so on, you’re not seeing a lot of people saying the Fed should not be doing anything about this inflation. There’s a lot of support for the fact that the Fed is tightening now even though obviously we see the effects in markets, you know, we’ll see the effects in house prices, etc. So those are some ways in which the current situation I think is better because we learned a lot from the 70s.
SORKIN: And does that mean that we’ve acknowledged that actually you said the Fed should lead this. Is it because there is no other tool?
BERNANKE: Well, in theory, the fiscal authorities could play a role. That is, this is what modern monetary theory says, you know, that by raising taxes and cutting spending and reducing aggregate demand and so on, the fiscal authorities could play the same kind of role as the Fed which basically reduce demand and get inflation down. Unfortunately, the Fed is just a lot more nimble and a lot better informed about markets and so on and it can respond quickly and it can provide guidance about its long run policy goals, etc. You know, for there are many advantages to fiscal policy, but nimbleness is not one of them. It takes a long time to come to agreement. only under very extreme circumstances does Congress really react in a powerful way so from a political economy point of view, I think the Fed really is the only game in town.
SORKIN: I asked Ben Bernanke whether he thinks that with transparency and the forward guidance that effectively comes with that, if it locks in the Fed, for example, the most recent case of the 50 basis point raise, rate hike.
BERNANKE: There’s no strategy that doesn’t have occasional downsides. I think the clearest case in most recent period is that the Fed said they weren’t gonna begin to raise rates until certain criteria were met, first of all, secondly, until they had QE had gotten to a certain point and they were going to taper first, etc, etc. So the forward guidance, I think, overall, on the margin slowed the response of the fed to the inflation problem last year to some extent.
SORKIN: So does that mean it was a mistake?
BERNANKE: Well, they were they had different. So this is a complicated question. The question is, why did they delay that? I think that why did they delay their response. I think, in retrospect, yes, it was a mistake, and I think they agree it was a mistake. There were a number of reasons for it. One of the reasons was that they wanted not to shock the market. They wanted to avoid, Jay Powell was on my board during the taper tantrum in 2013 which was a very unpleasant experience, he wanted to avoid that kind of thing by giving people as much warning as possible. And so that gradualism was one of several reasons why the Fed didn’t respond more quickly to the inflationary pressure in the middle of 2021. There were other reasons as well.
SORKIN: What do you think?
BERNANKE: Well, one of them was that in early 2021 after the American Rescue Plan was passed and this was something like $2.8 trillion dollars of new federal spending between the American Rescue Plan and the December program, you know, the Fed could have responded to that point but they looked around and said, well, look, there’s still a lot of slack because the unemployment rate was still close to 6%. The number of people working was still well below where it was before the pandemic. And so they they said that, well, there’s still a lot of slack in the economy, we should we should let this fiscal program do its job and bring the economy back to full employment. What we’ve learned since then is that because of the pandemic with a lot of people staying home, that the unemployment rate, for example, the number of jobs may not be a really good indicator of whether the labor market is hot or not. And so, they’re looking now at things like the number of job vacancies which show that employers are having a terrible time finding enough workers and that the labor market is is distorted. The other issue that they were looking at was the supply chain issue. You know, the pandemic has snarled supply chains around the world that has helped drive up prices. The Fed believed in the middle of 2021 that these factors would likely solve themselves over time that in other words that supply shocks were quote “transitory” and so that they didn’t need to respond to the early stages of inflation because it was going to go away by itself. That proved wrong. So they were they were a couple of, of issues I think that are related primarily to the pandemic itself and the way that it scrambled the usual indicators that made it harder for the Fed to read the economy.
SORKIN: We did get into a question about how he read the economy at that time.
BERNANKE: I wasn’t particularly on board with the view that the number of jobs was the right indicator of how tight labor market was because I knew first of all that immigration was low. I knew a lot of people were staying home not because they couldn’t find a job but because with the pandemic and Delta variants and so on raging, they weren’t looking for a job. But I I did believe that some of the inflation was coming from factors created by the pandemic including the supply chain problems through reduction in labor supply. The fact that people were shifting their demand away from services like restaurants towards durable goods like cars, and that was putting up the prices tremendously in those durable goods. So, we’ve seen big increases in car prices, for example. So I thought, I don’t know I didn’t have a specific timeframe in mind, but I thought that over this year that those things would begin to reverse. I still think they will reverse eventually but clearly they’ve been more persistent, more problematic than we, than we, I had thought.
SORKIN: And over the years former Fed Chair Ben Bernanke has written a lot about inequality. I asked him about the debate over a wealth tax.
BERNANKE: I’m not against taxing billionaires, but I think a better way to do it would be to raise capital gains taxes. You could, you could tax realized capital gains. I think an important thing what would be helpful would be to eliminate the provision that when you pass appreciated securities on to your heirs, the appreciation is not taxed at any time. So there are there ways to increase the tax burden on both the income and the wealth of rich people, which I think are much more, just more practical than than a straight wealth tax. And I know defenders of the wealth tax would disagree and there’s a great debate about that, but I don’t disagree with the objective but I think that you just need to find a method that will not be impossible to enforce.
SORKIN: Welcome back to “Squawk Box.” Former Fed Chair Ben Bernanke is out with a new book this week. It’s titled, “21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19.” In an exclusive TV interview, I spoke with Ben Bernanke at his home in Washington, DC and I asked him about what he thinks of the idea that it is hard for the Fed to say it out loud that it’s just trying to reduce demand and trying to make things right.
BERNANKE: Well, I think Powell can say that now because he has argued that we are beyond full employment. We’re not at full employment. We are at a point where work, where employers can’t find workers, where there’s two jobs available for every unemployed person. And so his argument is that we could cool things down a bit, raise the unemployment rate a little bit, reduce that ratio of vacancies to unemployed persons maybe to one to one let’s say without creating a lot of real hardship for workers in America so that you need for long run stability, you need to cool the economy down.
SORKIN: We also talked about whether the former Fed chair thinks the Fed is going to become if it hasn’t already become politicized politicized.
BERNANKE: I think at the moment that the Fed is pretty independent, and certainly nonpartisan.
SORKIN: But you do write about efforts that previous administrations have made to politicize—
SORKIN: The Fed and the pressures that have been felt.
BERNANKE: Absolutely. And I and I think the changes really began to some extent with the first Bush but mostly with Clinton. And since Clinton until Trump, presidents have been pretty, pretty good about letting the Fed do what it thought was necessary.
SORKIN: President Biden has said that inflation is his top domestic priority and has talked about higher taxes on the wealthy as a measure of something that he could do. Here’s what Bernanke thinks about President Biden or any elected official what they can do about inflation to this point.
BERNANKE: It’s fairly limited. I mean, I think it’s appropriate that the Fed is taking the lead and I think the most important thing that President can do is support the Fed chair and let the Fed chair do what needs to be done even if it’s a little bit painful. There’s things in this particular case that there’s things that probably could help on the margin. I mean the thing that the White House has done to improve supply chains, for example, work to improve public health so we don’t have another pandemic and the effects of that, you know, things that make critical goods like health and education cheaper, more efficient, it’s not gonna do much for inflation, but it would be good for people who are, you know, feeling like their money is not going far enough.
SORKIN: And given the price of oil today, here’s what he had to say about the ESG movement, a debate that we’ve had on this program a lot and some of the new ways that businesses have approached these types of investments.
BERNANKE: The fact that people are willing to do ESG investments does suggest that they’re interested in, in helping on that side, but I think real real progress is going to take not just private actions, while we should all do what we can to reduce our carbon footprints and so on, but real progress is going to take a collective effort that would involve, you know, other tools.
SORKIN: Do you think there’s real economic theory behind ESG?
BERNANKE: There’s always demand for divesting, you know, unpopular stocks, let’s say in university endowments and so on and it’s fine to show your concern about about the way some country is behaving or the way some company is behaving and so on. But when you divest, you’re basically just selling the stock to somebody else who doesn’t have quite the same concerns and the effects on the issuer of the stock tend to be fairly modest. So, I’m not saying it has no effect at all, but it’s it’s a more limited approach than either community level or personal level efforts to reduce say carbon, or even better social wide effort to take strong actions to meet carbon goals.
SORKIN: We also talked out with Bernanke about the chances of a recession. Here’s what he had to say.
BERNANKE: The more the Fed has to tighten in order to get inflation down, the bigger the chance of a recession and the more severe it will be. How much the Fed has to tighten depends in turn on what happens to these factors they can’t control like the supply chains and the commodity prices. So that prediction requires you to make a prediction not only about the Fed’s behavior but about a lot of other things the Ukraine war, etc. So it’s a very hard thing, very uncertain thing to say. I guess that I still tend to believe that some of these forces pushing up inflation like the supply chains, like the preference for durable goods or services and some of the commodity price increases gas prices and so on, that they will at least stabilize and begin to moderate sometime during this year which would mean that inflation will come down to some extent, not saying by itself, but without the Fed’s direct intervention. If that happens, the Fed would have to raise rates perhaps moderately above neutral. When they do that, they’ll slow demand. But as Jay Powell has pointed out, the economy is pretty strong. We’re not going into recession as often is the case with a troubled economy. In fact, the underlying economy as we recover from the pandemic is quite strong. We have a very strong labor market, for example, we have a strong financial system, we have strong balance sheets. So if if the inflation slows as I expect it ultimately will, although I’ve been disappointed about how slow that process is, than the Fed should not have to raise rates, you know, too far and what we would get that would be a slowing of the economy, maybe even a stall, but not a severe recession. The severe recession would only come if these other factors simply do not cooperate and in particular, the thing the thing people should watch most closely is inflation expectations. If inflation expectations as measured by breakevens in the Inflation-Protected and Securities market, as measured by surveys and so on, begin to move up in a significant way that people have lost confidence in the credibility of the Fed, the Fed will have to react much more strongly and the effects in the economy will be much more deleterious. And
SORKIN: And how concerned are you about that?
BERNANKE: For the moment, knock on wood. This is a big difference between today the 1970s. In the 1970s, inflation expectations were all over the place and nobody had any confidence in the Fed, that it would bring inflation back down. Today, most indicators suggests that people are still pretty confident that the Fed or maybe some combination of the Fed and the end of the pandemic will lead to more normal inflation in the future.
SORKIN: And we couldn’t have a conversation without talking about Bitcoin. Take a look at this Bitcoin right now down a little under 30,000 and in Bernanke’s new book, he writes about the potential of the digital dollar. So of course, I asked him to share his point of view on cryptocurrency these days. This is what he had to say.
BERNANKE: So Bitcoin and other currencies, cryptocurrencies whose whose value changes minute to minute, they’ve been successful as a speculative asset and people you’re seeing the downside of that right now. But they were intended to be a substitute for fiat money. And I think in that respect, they have not succeeded because if, if bitcoin were a substitute for fiat money, you could use Bitcoin to go buy your groceries. Nobody buys groceries with Bitcoin because it’s too expensive and too inconvenient to do that. We’re over the price of groceries, the price of celery varies radically day to day in terms of Bitcoin and so there’s no stability either in the value of Bitcoin. The main use of Bitcoin is mostly for underground economy activities and things that often things that are illegal or illicit. So I don’t think that Bitcoin is going to take over as an alternative form of money. It’ll be around as long as people are believers and they want to speculate in this but again, I don’t think it’s going to—
SORKIN: And you don’t, you don’t buy into the idea of it as being a store of value or some kind of version of digital gold.
BERNANKE: Well, as I said, it’s a speculative asset, but it’s, it’s one that whose underlying use value, gold has underlying use value. You can use it to fill cavities. The underlying use value of a Bitcoin is to do ransomware or something like that. So, one of the other risks that Bitcoin has is that it could at some point be subject to a lot more regulation and the anonymity is also at risk I think at some point. So, you know, investors in Bitcoin should be, should be aware of that.
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