"Federal Reserve Reflects on its History"

Bernanke says he's not trying to create inflation as a means of stimulating the economy:

After its big move to boost economy, Federal Reserve reflects on its history, by Neil Irwin, Washington Post: ...Fed Chairman Ben S. Bernanke and a long list of past and present Fed officials gathered this weekend for a conference on the history of the central bank...

That conversation, particularly a Saturday panel discussion featuring Bernanke, his predecessor, Alan Greenspan, and former New York Fed president Gerald Corrigan... Speaking at the "Return to Jekyll Island" conference sponsored by the Atlanta Fed, Bernanke argued that the steps are not as revolutionary as many observers in the financial markets and the news media have suggested.

"There's a sense out there that, quote, quantitative easing or asset purchases are some completely foreign, new, strange kind of thing and we have no idea what . . . is going to happen," Bernanke said, sitting on stage in a conference space that was once J.P. Morgan's indoor tennis court. "Quite the contrary - this is just monetary policy. . . . It will work or not work in much the same way that ordinary, more conventional, familiar monetary policy works."

Corrigan, who was a key lieutenant of Fed Chairman Paul A. Volcker and now a Goldman Sachs managing director, acknowledged some "uneasiness" with that approach.

"If you seek to nudge up the inflation rate," he said, "even with very, very low rates of capacity utilization in the labor market . . . is there a risk that getting inflation to 2 percent may turn out to be easier than capping it at 2 percent?" "That's the source of uneasiness that I wanted to register," Corrigan added.

Bernanke defended the action. "I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy," he said. "We're not in the business of trying to create inflation," Bernanke said. Rather, he said, the Fed is trying to avoid a further drop in inflation. ...

Since an increase in inflationary expectations is one potential way to stimulate the economy, Bernanke is "blocking one of the main channels through which his policy might actually work."

The "Greenspan Put" also came up:

To many Fed critics, a central failure over the past three decades has been the perceived willingness of the central bank to take action to prop up financial markets whenever they are faltering, a phenomenon known as the "Greenspan Put," which uses the term for an option that protects against an asset losing value.

The criticism is that by standing in to prevent precipitous declines in financial markets, the Fed made it appear that one could invest without risk...

Given that his own policies have helped prop up stock prices in the past year, Bernanke echoed the phraseology of some of his critics and referred to the phenomenon, almost sheepishly, as the "Greenspan/Bernanke Put."

Greenspan was unrepentant.

"If in effect the Greenspan Put is the notion which says you're stabilizing the system, then I hope so - that's what we're here for," the former Fed chairman said. "I don't really have an understanding of why that has become a pejorative term. . . . If I understand it, what we're doing is what we should be doing." ...

In looking through past comments on the Greenspan put, I found this from 2005:

...the broader question of whether the perception that the Fed will protect asset markets is causing overconfidence and excessive risk taking among investors is an interesting issue.  For some reason, I’ve been reminded lately of the overconfidence among policymakers in the early 1960s.  After the discovery of the Phillip’s curve and the belief that it represented a permanent inflation-unemployment tradeoff, policymakers were very confident in their ability to pick a particular point on the Phillip’s curve and it was widely believed that the stabilization problem was largely solved.  History teaches us that such overconfidence in any discipline is generally a bad idea, and the 1970s showed economists that humility is always a valuable trait.  Has a run of good luck caused a misperception of the risk of losses so that such overconfidence has emerged again?

I think it's safe to say now that it had. As for the Greenspan put, I had always argued there was no such thing, based partly on quotes like this:

Neither Mr. Bernanke nor his closest colleagues, some of whom served under Mr. Greenspan, believe there ever was a "Greenspan put," a reference to a contract that protects an investor from loss. Yet officials acknowledge the perception that the Fed has bailed out investors in the past. When the stock market crashed in 1987, Mr. Greenspan, then on the job for just two months, used aggressive open-market operations -- buying and selling government securities -- to pump banks full of cash...

What's best for the stock market isn't always what's best for the economy, and when there is a tension between the two, the economy should come first. While this is what I *think* Greenspan is saying above by redefining the Greenspan put to mean "stabilizing the system," it's disappointing to see him embrace the term without cautioning that the Fed shouldn't always try to prevent a fall in the stock market, and that it sometimes has to temper a stock market boom, e.g. by raising interest rates to prevent the economy from overheating, or by popping asset bubbles.