Bernanke's Opponents

August 13, 2009

There’s yet another critical editorial about Fed Chairman Bernanke in today’s Wall Street Journal, entitled “No Exit” — as in no exit strategy.  Using a driving metaphor, the Chairman is faulted for not slowing the “money accelerator” to 160 miles per hour from 200 MPH and the paper insinuates that he is motivated by a desire for renomination. The folks at the WSJ never miss an opportunity to paint the Chairman as an unreformed dove steering America into inflation.

The irony of such criticism is that Bernanke came to the job with incredibly impressive academic credentials.  These include winning the South Carolina spelling bee at age 11, teaching himself calculus from a book as a teenager, near-perfect SAT scores, a Summa Cum Laude undergraduate degree from Harvard, an economics Ph.D. from MIT, and 23 years as a professor first at Stanford and then Princeton.  Before his first appointment as a Fed Governor in 2002, Bernanke already had a reputation as one of America’s top authorities on monetary policy and was a known expert on what went wrong during the Great Depression, a qualification that ought to be very useful at the current juncture.  For a brief time, he also chaired the President’s Council of Economic Advisors.  The main knock against him when he was brought back to head the Fed Board of Governors in early 2006 was the lack of market experience like his predecessor, Alan Greenspan.  But that hole in his resume is not especially relevant to the main recent criticism, which is one of poor judgment based presumably on a fuzzy understanding of classical economic theory and how changes in monetary policy impact economic activity and inflation.  Bernanke’s detractors cite his culpability as Governor in the overly easy Fed policy that promoted asset bubbles earlier this decade.  And yes, that policy was ill-conceived, but U.S. economic circumstances are now very different from then. 

The threat of inflation seems very distant and not nearly as high as the danger of removing policy support too early or quickly.  U.S. CPI inflation shows a long-term downward trend from 7.4% per annum in the 1970s to 5.1% per annum in the 1980s, 2.9% per annum in the 1990s, 2.6% per annum in the present nearly completed decade, and negative 1.8% in the latest reported 12 months. The 1930s in general and Japanese trends over the last twenty years seem to be more appropriate guides for judging how to run U.S. policy now than what happened in the United States in the 1960’s and 1970’s.  The policy mistakes made in the two appropriate precedents involved removing the punch bowl too soon, not too late.  The depression was a period of terrible deflation.  In Japan, consumer prices still lie marginally below their 1996 levels even though central bank rates there never rose above 0.5% in the period, and government debt ballooned to well above 150% of GDP.  On-year inflation is also negative.

Bernanke knows as well as anyone why it’s important for monetary policy to be forward-looking.  But 9.4% unemployment going on 10% dwarfs the inflation rate to a truly enormous extent.  For those who think the U.S. economy will expand less than 2.5% per annum over the next five years as I do, it does not seem correct to start re-prioritizing economic risks.  U.S. monetary policy looks about right at the moment in striking the balance between the needs to avoid inflation but to also promote positive growth.  I trust Bernanke’s credentials as being more worthy than those of his detractors, and that C.V. ought to count for something in deciding whether to cut the Chairman a little slack.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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