Bernanke v Chancellor: Duelling books reveal the clashes between central bankers and their critics
The Price of Time. By Edward Chancellor.
21st Century Monetary Policy. By Ben Bernanke.
There is a particular kind of critic of central banks who says that setting interest rates—and especially setting them low—is an unwarranted interference with the free market.
In a system of paper (and electronic) currency, however, policymakers have no choice but to set what economists call a “nominal anchor”, a peg that determines the value of money.
Decades of theory and evidence lie behind the modern approach of pegging interest rates with the ultimate goal of controlling inflation.
Yet nominal anchors are inevitably somewhat arbitrary because paper money has no inherent value.
The critics who label as artificial the low interest rates that have prevailed in the world economy in recent decades must therefore answer the question: low relative to what?
“The Price of Time” is the answer of Edward Chancellor, a historian and financier who has written a book by that name.
Humans prefer jam today to jam tomorrow.
Interest rates are the reward for deferring gratification, for renting out money that could have been spent today.
When rates fall too low, grave consequences follow: financial instability, higher inequality and pain for savers.
As he makes his case, Mr Chancellor’s panoptic survey of the history of interest, and what classical economists said about it, will not fail to dazzle.
The argument, however, is seriously flawed.
To see why, look to “21st Century Monetary Policy” by Ben Bernanke, who led America’s Federal Reserve through the global financial crisis from 2006-14 (and a fool in Mr Chancellor’s narrative).
His book is partly a historical account of the past half-century or so of policymaking at the Fed and partly a study of the effectiveness and desirability of unconventional monetary tools, such as quantitative easing, that have grown in importance after the crisis.
For the likes of Mr Bernanke, the ultimate determinant of interest rates is the global balance between savings and investment which, over time, exerts a magnetic pull on central bankers trying to hit inflation targets.
Rates have been low in part because desired savings have risen as societies have aged.
It was Mr Bernanke who, in 2005, suggested that a “global saving glut” might have been weighing on global rates.
Mr Bernanke’s framework is more compelling than Mr Chancellor’s, as low or even negative interest rates can co-exist with humanity’s natural short-termism.
Suppose someone has a wage income of 100 in their working life and zero in retirement.
Though they may not target a 50/50 split, they will save to avoid penury.
Lots of people building up a nest-egg—even one that is small relative to their working incomes—creates an imbalance that can, as a result of market forces, push rates lower than their discount rates.
“Justice is violated when lenders receive little or nothing,” Mr Chancellor writes.
He might as well rage against a population pyramid.