Another Take on Your Speech
Jude Wanniski
December 2, 2004


From: Jude Wanniski  <        
To:      Ben.S.Bernanke@ * * * * *.GOV                                               
Subject: Another take on your speech

Dear Ben.... This is a commentary on your speech today from one of my colleagues at Polyconomics. You will not get a much better critique as he is reads every word you and the other Fed governors produce.  I do think you referred to a gold rule, not a Taylor rule, but maybe I'm wrong. JW

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My interpretation of BB is that his reference to a "rule" in this speech
goes no deeper than the Taylor rule, and he makes the argument that the Fed
should not be bound to follow that single-minded rule all the time. By
comparison, I read Greenspan's objection to any "simple rule" as implying a
gold price target or gold exchange mechanism. Recall that BB gave his "gold
beast" speech in February, only a month after AG's remarks, imploring that
we can't go back to gold because it caused the Great Depression. BB didn't
want to make that argument again, so he brought up only the Taylor rule
which certainly does seem much too parochial to be the defining limitation
on Fed operations. After all, the Taylor cannot claim to achieve anything
with certainty, and most definitely not a stable dollar value as a gold rule
could claim.

So I think that discussion was window dressing. The Fed members (BB says) no
longer refer to any feedback based policy such as the Taylor rule, although
some FOMC members still do. Forecast based policy is already reality at the
Fed, and that is not going to change because they must use forecasting to
accomplish "risk management." If their forecasting identifies a risk, the
policy can automatically adjust to address the risk.

What type of "risks" are they looking to address? Potential banking distress
or other financial crises requiring injection of cash from the Fed under
terms that would not be permitted by a gold rule.

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