Consumer price inflation was surprisingly high last month, coming in at a worrying 0.4%. The headline figure was driven by rising oil prices, to be sure--we hit $100 a barrel yesterday--but now core inflation, at 0.3%, is keeping a close tail on the headline number. Whether this represents the long-awaited trickling through of higher oil prices into other sectors, or excessive liquidity from the Fed, one can be sure that the central bankers are worried. For the first time in a long time, the central bankers may really have to choose between recession and dangerously accelerating inflation.
When I interviewed him last month, Austan Goolsbee pointed out that after Greenspan stepped down, and Bernanke was tapped for the chair, you saw a lot of monetary economists on our nation's more famous campuses who were clearly thinking "Why wasn't it me, God?" Now they're more likely to be thinking "Thank God it wasn't me." This is the time when central bankers start feeling, in the immortal words of Tom Lehrer, "about like a Christian Scientist . . . with appendicities."
It's pretty hard to be as ignorant as "B-52" Ben and Mr. Ayn Rand have been. There is a reason why there are rules and regulations. Greenspan didn't care to have the Federal Reserve perform oversight on mortgages(which is the Fed's responsibility). Ben hasn't helped anything either. When you have a political party that thinks rules are made to be broken(or in this case unenforced), the current mess is what you get. The bigger question to the monetary economists is what would they have done to fix the housing mess. Would they have put a halt to no-doc loans and the like? Would they have tried to slow down sub-prime lending? Would they tow the Bush line? Or would they make it be known that the government can't keep spending at the rate that it is?
Joe Klein's Conscience,
Do a little research into the roots of the sub prime debacle. It was partly encouraged by federal regulations (e.g., the Community Reinvestment Act) and pressure by federal regulators (beginning in earnest during the Clinton administration) to encourage lenders to lower standards in order to offer more credit to minority and lower-income communities, despite these groups often being higher credit risks. Fifteen years ago, the horror was that marginal lenders weren't being given enough credit, and the market responded. Now the lament is that they were given too much credit.
Another problem has been the erroneous belief -- shared by both Clinton and Bush 43 and others -- that home ownership is always a great thing. For lower-income home owners, it usually isn't, as the WSJ's Holman Jenkins eloquently explained last August, drawing on research from Carolina Katz Reid.
As for the CPI numbers, and the Fed: The Fed should continue to lower rates aggressively but get to its target rate quickly. Once they hit that rate (2%? 1.75%?), the Fed ought to start raising rates steadily as soon as the economic indicators improve. If it gets back on a tightening course by the end of the year, it should be able to deal with any inflation risks.