Ben Bernanke has a bit of a dilemma. On the one hand, he wants to be a credible inflation hawk, to keep expectations of inflation from doing bad things to the economy. On the other hand, he wants to reassure everyone that he's going to keep the liquidity in as long as necessary, to keep expectations of deflation from doing bad things to the economy.
So he did something rather clever. While leaving rates low, he specified under which conditions he'd raise them. The markets apparently didn't like it, because the stock market wants a central banker who never takes away the punchbowl. But it's exactly the sort of tenative quasi-step back towards tightening that we want in these delicate times.
If only Obama would do the same thing, I'd be much comforted.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
This is one of those moments at which the market's negative verdict serves as an endorsement of the underlying policies.
That's interesting. I remember hearing when he was appointed that Bernanke was going to try to be ultra-transparent on rates.
What is he going to do, say, "no Congress, I won't fund your largesse, raise taxes or something"?!?
He can play all the games he wants but ultimately he is simply the printer for the deficit state. No one has raised the possibility that the Fed could actually deny Congress the money it wants. It is the decisions made in Congress that determine the inflation rate.
Can't higher taxes be used to hold off inflation? If so, the Dems could use this position to assure the goldbeetles and dollar doomsdayers that they hear these concerns and are prepared to fight inflation by increasing taxes.
I HIGHLY doubt the Dems could successfully appeal to a group of people whose primary motivation revolves around a distrust of government.
Regarding the technicalities, I haven't studied this area so I could be way off base here, but isn't inflation just a way of saying "too many dollars relative to goods (with demand for the currency driven partly by the need to pay taxes with it, granted)?" If high taxes reduce investment and thus reduce economic growth, they'd reduce the quantity of goods produced relative to the number of dollars. True, taxes could theoretically be used to take money out of circulation (burning taxes collected) or to increase demand for dollars to an extent. But it seems doubtful that either of these would be enough to counterbalance inflation.
What would Bernanke going "rogue" even mean? He's supposed to be independent of the political authorities. That's the whole point. True, the Fed coordinates with Treasury and the politicals in the White House, but they're not supposed to be their stooges. Obama could try to switch him out for someone else, I guess, but his administration seems to have made the judgment that the economic and political costs of switching out the head of the Fed in the middle of a crisis like this would be too high for any incremental political benefits it might bring.
Ok, here's the excerpt in question, from Saramago's Baltasar and Blimunda:
…Bras, who is red-haired and has no sight in his right eye, it will not be long before people start getting the impression that this is a land of disabled men, some with a hump, some with only one hand or one eye, and to accuse us of exaggerating, when all believe that heroes should be handsome and dashing, lithe and sound of limb, that is certainly how we should have preferred them, but there is no avoiding the truth, and the reader should be grateful that we have not wasted any time counting up all those who are blubber-lipped stutterers, lame, heavy-jowled, bow-legged, epileptic, big-eared, half-witted, albinos, and dolts, or suffering from scabies, sores, ring-worm, and scurvy, then you would certainly see a long procession of hunchbacks and lepers wending its way out of Mafra…
Ops. Sorry, obviously I didn't mean to post this here.
Maybe not ... but I AM intrigued!
Hmm. Bernanke seems a little more verbose than Greenspan was.
Derek
I guess I'm more concerned by Chairman Bernanke's actions to date rather than his guidance for future direction.
http://www.chartingstocks.net/2009/03/chart-of-the-us-money-supply-1917-2009/
I'm with Scott Sumner. The market has been predicting low inflation. Bernanke should try to AVOID seeming like an inflation hawk. He should be doing an imitation of John Henry Bagshaw. Once we're back up to trend he can start seeming like a modest inflation hawk again.
From Larry Kudlow's article today:
http://kudlow.nationalreview.com/post/?q=NjU1ZWEwYTI4NWNlNzRmZDkxMDBjMTVmNjI2Y2IzZWQ=
"The financial-meltdown emergency is over. Yet the Fed persists in running an emergency money-creating policy with a zero target rate that is completely inappropriate as the economy moves into a mild recovery."
As they say ... read the whole thing.
"And it would be a shame if the GOP doesn’t take up the issue of the declining dollar. This is becoming an economic symbol of America’s decline."
I stopped when I hit that. Kudlow is a hack that links every wiggle in the market as some sort of market indication as "the market hates Democrats and love George Bush (or other Republican)"
"... the Fed persists in running an emergency money-creating policy ..."
The Fed is doing the only thing the Fed can do and that is to create "profits" for their member banks.
How else can they create inflation and save their member banks?
What would you have them do ... allow all banks to fail? Please explain how would that be helpful. So, they are loaning their member banks money at no interest. Those member banks are loaning it out at some interest - creating an instant profit for themselves, with which they are guaranteeing they can pay demand deposits.
That's fancy wording. All it means is that you can write a check and the check won't bounce. You can go to the ATM and withdraw your own money and it will be there.
The alternative is only the end of civilization.
The banks are bankrupt. All of them. Without the Fed's "money creating policy" (otherwise known as inflation) and Fed forbearance the banks would all be burned down tomorrow and the streets would be littered with the heads of the bankers. All of civilization would cease to function.
All the Fed is doing is buying time to shut down banks a few at a time, so's you don't notice. So far this year, over 115 bankrupt banks have been shut down. If they did it all at once, you'd panic - right?
The US has many thousands of banks, most of them tiny. 115 in a year isn't actually much above average, and at that rate it would take many decades to close them all. If the crisis lasts that long, we have bigger problems than bank failures.
Roubini says there is an asset bubble forming (already formed?) where low interest loans in US funds are being used to purchase either foreign currencies and assets, or equities. Another overleveraged high risk strategy. Any tightening of credit would start a downward trend as investors unwind risky positions.
Maybe that is what Bernanke was referring to and which investors reacted to.
Derek
Better title: Ben Bernanke whistles pas the graveyard