As an indication of the pressure that’s still on the Fed chairman—and the respect that his organization has lost in Congress—Koo points out that he himself was invited to testify as part of the semiannual Humphrey-Hawkins testimony in which the Federal Reserve chairman reports on monetary policy and the state of the economy.
‘Mr Bernanke didn’t have to sit next to me and testify. But I was supposed to testify right after Mr Bernanke. But the fact that people like Barney Frank are bringing in outsiders for Humphrey-Hawkins testimony, when Humphrey-Hawkins testimony was supposed to be exclusively for the Fed chairman to explain every six months to the Congress, suggests that those people are not very happy with the Fed.’
But the session scheduled for February 10 didn’t take place because of a huge snowstorm. It was rearranged again without Koo, although he had already handed in his testimony. But it’s here that Koo makes the startling implication that Bernanke ‘adjusted’ his comments in the rescheduled testimony from his initial position to views that he knew better fit in with Koo’s.
‘When I listened to him this time around, I almost thought he read my testimony. He said nothing that contradicted what I said in that testimony and that led me to believe that he did read it. The other private sector participants, like John Taylor, are Washington regulars. But the fact that Barney Frank invited me from Tokyo—well, if I were Bernanke knowing how little respect [I] command in Congress, I’d read this Richard Koo's work to make sure I don't have to confront this guy’s work, because I might end up on the wrong side of Barney Frank.
‘His answers were much more attuned to what I've been saying all along. So I was very surprised. Especially when these Republican guys with nothing better to do were trying to force Bernanke to say let’s cut the budget deficit now…I was watching the whole thing on the TV here in my house in Tokyo and Bernanke wouldn’t be drawn into it. He kept on saying, “This program has to be a long-term program. The exit strategy has to be a long-term thing. Ten years from now we’re going to do this”. You know, that kind of tone. And that's quite different from what the guy used to say.’
For Koo, this is evidence that Bernanke is not beyond redemption. But he still has a huge task to restore the credibility of his organization and to maintain its relative autonomy. So from Koo’s perspective, the debate on central bank independence should actually focus on the Fed.
‘Compared to the BOJ,’ Koo says, ‘Right now the Federal Reserve is in far greater danger of losing independence.’
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Paul
Great topic and article. But money does work – suppose the BOJ “fixed” the yen at 150/$ and promised to buy all the dollars you presented at that rate. My guess is Japan would see a real burst in inflation + some decent growth for a while due to exports and import substitution. I doubt that changes much in the medium term, but money can work to generate inflation undoubtedly….
john
The entire problem with the western banking system is that the bank owns the government! It doesn’t matter who sits in the presidents seat if the central bank controls the money because if they really want to the central bank can collapse the economy and the politicians don’t get reelected! Politicians in theory at least have some responsibility to the people but not the fed or other central banks in the western banking system. It’s time the governments took back the power to issue money for the people and out of the hands of the banksters!
Dana Surmane
Watching Japan for thirty years has been troubling. I think one of the reasons that the U.S. is in so much trouble is that the stimulus money was essentially stolen — not used to get people working at all. The same sort of thing seems to always happen in democracies. As we all seem to be clumping us against the same fence, you begin to wonder what the next step really is. Anyway, thank you for giving Richard Koo a chance to air his intriguing views. Still, I think that the critical problem that he and most of the theorists have is in not being able to come to terms with the reality that no present government is capable of committing itself to an honestly administrated long-term stimulus or fiscal policy. With that much cash and/or tax benefit largesse available to politicians, it just serves to corrupt them faster. Sometimes we all seem to be heading toward the North Korean form of government and finance.
σ1
This is a great article and I will be sure to read the book. It tackles both of the great misconceptions about Japan – the relative efficacy of fiscal v monetary policy, and the “out of control” public debt.
I do have to say though that in the long run surely there is something to be said about the “quality” of fiscal policy. I understand that some “shovel ready” spending is necessary to ensure any given crisis does not spin out of control, but in spending public money the government should always be very mindful of where the long term efficiencies comes from – I think this has been the big failure of the LDP, and now the DPJ. The LDP was much more interested in the political implications of the use of public money and indulged in pork barrel politics – public benefit be damned. The DPJ does not seem so beholden – but I am not seeing any long-term, daring or coherent fiscal spending/innovation agenda just yet.
Kevin Cousins
Richard Koo’s book “The Holy Grail of Macroeconomics” is I believe the key to understanding the current environment. Read it together with McKinsey’s “Debt and deleveraging: The global credit bubble and its economic consequences” and you have an excellent framework for macro trading over the next few years.
Despite being easy to read, it may also be an important step forward in economic theory.
Agata
Thanks a lot for the advice. I will gladly read also the second book. Japan is good example that a new approach is essential. So time to get some knowledge on those new ideas which can become even more important in the future. Regards.
Agata
Very good article and really interesting point of view – nice to read something different. Now I really want to read Mr Koo’s book.
Barry Ritholtz
Fascinating article — thanks for the interview with Koo