Ouch! Professor John Taylor, creator of the Taylor Rule has written a Wall Street Journal op-ed calling out Bernanke's speech from a few days ago claiming the Fed's low interest rates did not affect the housing bubble (For details on the speech see: implausible deniability)
A major call out is the Fed spinning the formula:
In one alternative, which addresses what he describes as his "most significant concern regarding the use of the standard Taylor rule," he put the Fed's forecasts of future inflation into the Taylor rule rather than actual measured inflation. Because the Fed's inflation forecasts were lower than current inflation during this period, this alternative obviously gives a lower target interest rate and seems to justify the Fed's decisions at the time.
After spinning the Taylor Rule by putting in fictional data we have this additional call out:
Mr. Bernanke cites no empirical evidence that his alternative to the Taylor rule improves central-bank performance.
Gets worse, it seems after Bernanke spun the formula he claimed it shows way off results, which of course an improperly used theory will, trying to imply the Taylor rule is some sort of crud that isn't valid.
Here's a call out that implies Bernanke is at minimum cherry picking and at maximum lying about the affect of cheap money on housing bubbles:
Mr. Bernanke also said that international evidence does not show a statistically significant relationship between policy deviations from the Taylor rule and housing booms. But his speech does not mention that research at the Organization for Economic Cooperation and Development in March 2008 did find a statistically significant relationship.
Then the op-ed continues on to imply good ole' Ben might be justifying all of the above to actually create another bubble (my conclusion, not Professor Taylor) by trying to play Hocus Pocus with theory and formulas to discredit and minimize their use when setting monetary policy.
For background of the Taylor rule, read this article. The formula makes the unfortunate use of as a variable for Federal Funds target rate. Truly not good since is a recognized universal constant. Beyond my pickiness, one can see clearly Taylor's call out is more justified after reading the formula. Shame on me! I should call myself out in not digging into the mathematical details to realize earlier the major agenda and flaws from Bernanke's speech.
Big h/t to The Mess That Greenspan Made.