I'll say

Says Greg Mankiw:

The last thing we need is the perception that the Fed is caving in to political pressure. Such a perception, even if unfounded, would raise inflation expectations and make the Fed's job even harder.

Note to Congress: if inflationary expectations go up, the Fed has to raise interest rates in order to combat them. Thus, demanding that the Fed ease the money supply is actively counterproductive. Please stop.

Comments

The smart people have been saying exactly what your point is. As Barry Ritholtz said: Helicopter Ben just cemented his status as Wall Street's bitch yesterday. All that is missing is the leash and collar.

Posted by Joe Klein's conscience | September 19, 2007 9:01 PM

First of all, JKC is badly mistaken. "Helicopter Ben" is a little more competent to handle monetary policy than Barry Ritholtz. Ben Bernanke is doing a fine job and, contrary to Wall Street legend, he is well aware of the dangers asscoiated with an inflationary monetary policy.

Second, I hope Megan paid attention to Mankiw's other posting--the one that includes an excerpt from Robert Lucas's article. As the great Lucas wrote:

In the past 50 years, there have been two macroeconomic policy changes in the United States that have really mattered. One of these was the supply-side reduction in marginal tax rates, initiated after Ronald Reagan was elected president in 1980 and continued and extended during the current administration. The other was the advent of "inflation targeting," which is the term I prefer for a monetary policy focused on inflation-control to the exclusion of other objectives.

Lucas is right. The Reagn tax reductions (and deregulation) combined with a greater focus on fighting inflation planted the seeds of our current prosperity. Megan says she remembers what things were like in 1980--hopefully she also remembers just how bad things were economically.

Posted by Isocrates | September 19, 2007 9:39 PM

I already have friends who are saying they expect the feds to not only drop interest rates to help people buy more houses, they don't see a down side to overbuying on a house. Why? Because they believe the Fed is going to help them out so everyone spending more than they have won't tank the economy.

Way to go Greenspan and Bernanke...and the Clinton/Bush 16 years.

Posted by beneficial | September 19, 2007 9:44 PM

Maybe it is just one and done for Bernanke. I really hope so. Otherwise, it is time to take the bell bottoms out of the closet and relive the 1970s and early 1980s, toilet paper shortages and all.

Had Bernanke waited, he might have seen Congress come up with targeted solutions for those homeowners who were truly hoodwinked into mortgages they cannot afford. Instead, he engineered an across the board bailout of speculators, hedge funds, and Wall Street at the cost of inflation by moral hazard for the rest of us.

There is a silver lining. This will make the dollar even cheaper. Oil prices will have to go even higher for OPEC to get the returns it expects. In effect, we will have a carbon tax without the revenue passing through the sticky fingers of Congress.

Posted by Jim Linnane | September 20, 2007 5:08 AM

"a carbon tax without the revenue passing through the sticky fingers of Congress."

Yikes!

Instead, we'd have a carbon tax that goes right into the pockets of the oil producing nations...that seems like a bright move...

Bernanke knows more than you might think about how to soften the already hard crash in the housing market. All he's doing is undoing the foolishness of the last, oh, thirteen interest rate hikes we've endured. I think a little inflation is easier to swallow than a full-blown recession, or, god forbid, stagflation.

http://marketplace.publicradio.org/shows/2006/09/06/PM200609064.html

Posted by Jas | September 20, 2007 12:43 PM

Joe_Klein's_conscience: Not to sound like a Fed shill, but is that claim really justified? Bernanke dropped the FFR by 50 bps. He didn't buy up anyone's bad debt, guarantee insolvent hedge funds, etc. 50 ... friggin ... basis points. I would have preferred 0, but still, you have to admit, if Greenspan had been in charge, the FFR would probably be below 3% now.

Posted by Person | September 20, 2007 1:10 PM