Via email, Arin Dube dissents:
Why Berate Bernanke?: As months go by and the Fed refuses to "do" anything, some have become upset. I have a different reaction, and one that I think calls into question why people actually do get upset at Ben Bernanke and the Fed.
Let me begin with a simple question: is there any evidence that Ben Bernanke can do much to cure our ailments? I do not think that he can. But more importantly, I am particularly surprised that some self-avowed Keynesians seem to disagree (here and here). I would like to see one example -- one -- that anything like Quantitative Easing (QE) has ever worked. I would like to hear of one example -- one -- that trying to stimulate private demand by convincing folks that a future inflation is right around the corner has ever worked. Yes, I would like to see evidence -- ANY evidence -- that these strategies work, because I certainly cannot find any such evidence. Frankly, if old John Maynard were alive, I'd wager that he would find the idea that a central bank can get capitalists to invest in purchases of durable goods because inflation will be high some years from now to be as foolhardy as the idea that capitalists can be made to invest heavily by summoning the confidence fairy … for example by destroying the public sector.
So, no … I actually don't find it difficult to understand what Ben Bernanke is doing. He refuses to acknowledge the truth that QE or future expectations management is just not an effective strategy. He refuses to do so because acknowledging that fact would clarify that he is utterly useless in determining the welfare of those living the United States, which I happen to think he is … no fault of his own, mind you. It's because he can push on a string (monetary policy in present circumstances) as well as anyone else - which is to say not very well. Of course if he wanted to have a large effect (in magnitude, albeit with the wrong sign), he could follow his European brethren and raise interest rates in the midst of a downturn. And then he could prove to be much more than useless.
What I am less sure about is why self-avowed Keyensians think that this is not obvious. If I had to guess, I think it's because the New Keyenesian claptrap has led reasonable people astray. The dynamic optimization of the New Keynesian models has led even reasonable people to expect fanciful miracles from monetary policy. And sadly this has masked the fact that the expected-inflaiton fairy is just as unreal as the confidence fairy … and they fundamentally exist for the same reason … because someone believes in an Euler equation that is just plain wrong.
So, I respectfully disagree with Paul Krugman and Brad Delong - people who I read every day and generally find to be breaths of fresh air. Buying into New Keynesian machinery is NOT just dotting the i's and crossing the t's … it's buying into policies that work only within unreasonable models. Or perhaps - unreasonable parts of models you may find useful to make reasonable points.
Department of Economics
University of Massachusetts Amherst