Dear Ben, It's Not 2007 Anymore by Krugman

The Federal Open Market Committee has spoken. It expects very high unemployment for at least the next three years, while it expects inflation to be below target. By any interpretation I can think of, the Fed therefore expects to fail to honor its dual mandate of price stability and full employment. To deal with this shortfall, it proposes doing ... nothing.

But that’s not what has me upset, since that’s been the way of things all along. What got me was Ben Bernanke’s response to a question about whether the Fed might adopt nominal GDP targeting, or more broadly change its policy framework in some way that might help us escape the Lesser Depression. And his answer was no, because the standard approach has demonstrated “its benefits in terms of macroeconomic stabilization”.

Oh, my. Look, here’s a crude calculation – the variance of the unemployment rate over the previous 10 years:

You can see the Great Moderation, which might have led the Fed to believe, circa 2007, that it had this stabilization thing under control. But now, after four years and counting of slump?

And anyway, we don’t want “stabilization” right now – we want an escape from a slump that is crushing our future. This is no time to be basing policy on hopes that one of these years we’ll find ourselves back in the Great Moderation.

I have always had the working assumption that Bernanke was being as dovish as he could manage given his board, that in private he understood just how much we need radical action. Maybe not – and that’s very bad news.

Yes maybe not. Joe Gagnon says that Bernanke would take the committee whichever way he thought was best even if Obama had filled the two vacancies with governors who agreed with Evans. Krugman is right about the "standard approach" not working. Bernanke himself admits it's not working. But then again he asserts price stability > trend growth or in other words the one percent trumps the 99 percent. So maybe the Fed needs to be democratized and reoriented to benefit the 99 percent and not just the one percent.