Central-bank policies may themselves contribute to the negative productivity, employment or output trends

See ‘21st Century Monetary Policy’ Review: Rosy Memories of the Fed:Former Federal Reserve chairman Ben S. Bernanke looks back over the central bank’s worth with satisfaction. by Joseph C. Sternberg of The WSJ. Excerpts:

"In a mercy to the lay reader, Mr. Bernanke sets out his argument mainly via historical narrative, rather than a string of data tables and equations. Some of this will be familiar to readers of “The Courage to Act,” Mr. Bernanke’s 2015 memoir. “21st Century Monetary Policy” has fewer personal anecdotes, but also some telling differences. Observers have noted, for instance, a shift in Mr. Bernanke’s interpretation of the legal limits on the Fed’s activities during the global financial crisis. He no longer insists that the law would have prohibited a bailout of Lehman Brothers, but instead suggests that it was a bad idea on the policy merits.

Mr. Bernanke also seems to have shifted his explanation of how policies such as QE are supposed to work. In 2015 he focused on QE’s suppression of longer-term interest rates as the main mechanism by which it would influence the economy. (Despite the massive expansion of bank reserves that QE creates, it might surprise you to learn that the Fed does not believe the expanded reserves actually have much direct effect on bank lending.) To this long-term-rate effect Mr. Bernanke now adds a more ephemeral “signaling” channel. The Fed’s massive asset purchases, he believes, are an indication to investors that the central bank is committed to low rates, thus deterring them from making contrary bets that might push market rates higher.

That this evolution in Mr. Bernanke’s views doesn’t on its face undermine his credibility could be explained by the fact that there’s still quite a lot that economists don’t understand about these policies and how they work—as Mr. Bernanke acknowledges. But it might also be a clue that something is awry in the economics behind Mr. Bernanke’s new approach to monetary policy. Or that his enthusiasm for the Fed’s new tools could be a tad premature.

It turns out to be the latter. A glaring omission from Mr. Bernanke’s book is any sense that central-bank policies may themselves contribute to the negative productivity, employment or output trends to which—as Mr. Bernanke and so many others believe—a central bank merely reacts.

Economists now are studying a wide range of plausible mechanisms by which this can happen. To cite three: Loose monetary policy can sustain unproductive “zombie” companies that divert human and capital resources away from more-productive firms. Complex interactions between monetary policy, bond markets and banks can favor larger firms capable of issuing bonds while squeezing smaller firms dependent on bank lending, although small firms tend to be engines of productivity growth. Low interest rates combined with flaws in the tax code allow companies to pursue sugar-rush profit hits by rejiggering their balance sheets toward debt and away from equity, rather than investing in longer-term innovation and growth. And on and on."

"the Affordable Care Act, or ObamaCare—doesn’t warrant a single mention"

"He observes that minority unemployment improved considerably since the QE era, and suggests that this and other important measures indicate that these monetary policies work. But that’s hard to credit when those improvements arrived relatively late in the cycle and he omits any discussion of other possible causes, such as the 2017 Tax Cuts and Jobs Act or Trump-era deregulation."