Your Speech Today
Jude Wanniski
December 2, 2004


From: Jude Wanniski  <        
To:      Ben.S.Bernanke@ * * * * *.GOV                                               
Subject: your speech today
Bcc: Poly

I of course read your speech twice and will read it again before our dinner. I congratulate you for taking the trouble to lay out the Fed's monetary deliberations, which opens up the discussion as it has thusfar been closed.

To me, the heart of your speech is the following:

"However, the argument that monetary policy should adhere mechanically to a strict rule, made by some economists in the past, has fallen out of favor in recent years. Today most monetary economists use the term 'rule' more loosely to describe a general policy strategy, one that may include substantial scope for policymaker discretion and judgment."

It would have been nice if you had said maybe the mechanistic rule is the only correct one, even though it has fallen out of favor for political reasons. The rest of your speech then turns out to be a "on-the-one-hand, on-the-other-hand discussion of the pros and cons of the incorrect policies, where you come down in favor of the forecasting approach instead of the feedback approach, although neither is optimal. I do agree that the Taylor Rule is dumb. Taylor is a nice fellow, but really should go back to school and take up engineering or law. (He helped cause the defeat of Bob Dole in 1996 with his screwed=up economics.)

Do you remember back to October 1979, the Jimmy Carter years, when the new Fed Chairman Paul Volcker announced a switch to Friedman's monetary targets? The price of gold was $240 one day and $850 a few months later. He used the "forecast" approach, saying the economists had forecast that 1980 would experience more economic growth than had been previously expected and thus would need more "money supply."  So the Fed began shoveling reserves into the banking system as if there were no tomorrow. So much for good judgement and discretion as opposed to a mechanistic automaticity.


PS  Gold declined today by a few dollars because of the decline in oil, which causes the business community to be encouraged and increase their demand for liquidity. Because there is no mechanistic increase in the supply of liquidity, the price of gold falls.