Credit & Debt: Bernanke And The Last War

Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee today. The full text of his remarks can be found here.

I have to take a moment and quote Jim Bunning's comments to Bernanke:

Sen. Jim Bunning (news, bio, voting record), R-Ky., who has expressed opposition to Bernanke's elevation to Fed chairman, raised concerns that the Fed will push up rates too high and hurt the economy.

Bunning, saying he was disappointed in Bernanke's leadership, maintained that "inflation is not out of control. The Fed is chasing an inflation monster that is just not there."

A commenter on Economist's View nails the white elephant in this particular room:

NYUK

An incisive comment, to which we should consider adding seemingly limited or no benefit increases, even falling benefits for all too many workers.

Absolutely. The reason why Bernanke is so afraid of the housing sector doing anything more than a moderate slide is because consumer spending is not being financed with real wage growth. For even the slightest uptick in wage growth, there's a chorus of investors blubbering about how it will drive down stock prices. Couple that with the most volatile forms of price increases--food and energy--not being included in the nearly-useless CPI, and the overstretched reliance on home equity to fund any spending beyond the necessities, and you've got a recipe for immolation.

Here's a review of a book Bernanke co-authored on inflation targeting that accurately sums up the Helicopter Ben mindset:

In other words, America's present affair with full employment is sure to end badly, with an acceleration of inflation leading finally to recession and unemployment. In contrast, the right strategy to fight inflation is to keep unemployment high enough all the time at its "natural" rate, or as low as joblessness can go without sparking inflation. A central bank distracted by the pursuit of economic growth and full employment is to be condemned, while a central bank that achieves price stability at the cost of chronic high unemployment -- as in Germany -- has done its duty. The European Central Bank, charter-bound to price stability whatever the cost, represents the pinnacle achievement for this school of thought. Meanwhile, the Federal Reserve -- unmentioned in the U.S. Constitution, obliged to report on unemployment -- must seem emasculated in comparison.....

Central bankers, like generals, are often accused of refighting the last war. But as the motives above suggest, this case is somewhat different. First, inflation targeting commits itself in principle to fight the last war -- the war against inflation -- as a way to avoid addressing the present threat -- unemployment. Second, inflation targeting allows central bankers to change tactics of the last war even though it has already ended. And third, it permits central bankers to assert that the inflation war is still raging, even when they are really planning to fight unemployment. These mechanisms are useful from a narrow public relations standpoint, but it is hard to see how they actually relate to economic performance, including the pursuit of low inflation.

The more I look at it, the more I think Bernanke is fighting the last war, and using the spectre of inflation to cover up the anemic gains in employment, the astounding reliance on false (i.e. non-wage) money to power consumer spending, and the excesses of price increases with no corresponding wage gains. And it seems we saw this coming, and chose to ignore it.

Posted at July 19, 2006 02:44 PM

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Federal Reserve Chairman Ben Bernanke before the Senate Banking Committee today. The full text of his remarks can be found here. I have to take a moment and quote Jim Bunning's comments to Bernanke: Sen. Jim Bunning (news, bio, voting record), R-Ky., who has expressed opposition to Bernanke's elevation to Fed chairman, raised concerns that the Fed will push up rates too high and hurt the economy. Bunning, saying he was disappointed in Bernanke's leadership, maintained that "inflation is not out of control. The Fed is chasing an inflation monster that is just not there." A commenter on Economist's View nails the white elephant in this particular room: NYUK "I find it disturbing that there is any inflationary pressure at all in the absence of rising (real) wages." An incisive comment, to which we should consider adding seemingly limited or no benefit increases, even falling benefits for all too many workers. Absolutely. The reason why Bernanke is so afraid of the housing sector doing anything more than a moderate slide is because consumer spending is not being financed with real wage growth. For even the slightest uptick in wage growth, there's a chorus of investors blubbering about how it will drive down stock prices. Couple that with the most volatile forms of price increases--food and energy--not being included in the nearly-useless CPI, and the overstretched reliance on home equity to fund any spending beyond the necessities, and you've got a recipe for immolation. Here's a review of a book Bernanke co-authored on inflation targeting that accurately sums up the Helicopter Ben mindset: In other words, America's present affair with full employment is sure to end badly, with an acceleration of inflation leading finally to recession and unemployment. In contrast, the right strategy to fight inflation is to keep unemployment high enough all the time at its "natural" rate, or as low as joblessness can go without sparking inflation. A central bank distracted by the pursuit of economic growth and full employment is to be condemned, while a central bank that achieves price stability at the cost of chronic high unemployment -- as in Germany -- has done its duty. The European Central Bank, charter-bound to price stability whatever the cost, represents the pinnacle achievement for this school of thought. Meanwhile, the Federal Reserve -- unmentioned in the U.S. Constitution, obliged to report on unemployment -- must seem emasculated in comparison..... Central bankers, like generals, are often accused of refighting the last war. But as the motives above suggest, this case is somewhat different. First, inflation targeting commits itself in principle to fight the last war -- the war against inflation -- as a way to avoid addressing the present threat -- unemployment. Second, inflation targeting allows central bankers to change tactics of the last war even though it has already ended. And third, it permits central bankers to assert that the inflation war is still raging, even when they are really planning to fight unemployment. These mechanisms are useful from a narrow public relations standpoint, but it is hard to see how they actually relate to economic performance, including the pursuit of low inflation. The more I look at it, the more I think Bernanke is fighting the last war, and using the spectre of inflation to cover up the anemic gains in employment, the astounding reliance on false (i.e. non-wage) money to power consumer spending, and the excesses of price increases with no corresponding wage gains. And it seems we saw this coming, and chose to ignore it.