Bernanke’s explanation for the Fed’s actions in 2002 show exactly how monetary policy failed in 2008. In particular, Bernanke made the following three observations regarding 2002:
1. Monetary policy needs to focus on the macroeconomy, not specific sectors.
2. Monetary policy must be forward-looking, must target the forecast.
3. Monetary policy must be especially aggressive when there is risk of liquidity trap (which would render conventional policy ineffective.)
In 2008 the Fed did exactly the opposite. Between September and December 2008 the Fed focused on banking, not the macroeconomy, they adopted a backward-looking Taylor Rule, and they were extremely passive when the threat of a liquidity trap was already obvious.
BTW, the quote of the day comes from Sumner’s post as well:
Unlike [Arnold] Kling, the stock market does believe monetary policy has a near-term impact on the economy.
UPDATE: David Beckworth on why we should doubt the claims put forth in the speech.