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Home Publications Blogs Beat the Press David Wessel Tells Morning Edition that Ben Bernanke Doesn't Know What He Is Talking About

David Wessel Tells Morning Edition that Ben Bernanke Doesn't Know What He Is Talking About

Friday, 10 September 2010 05:18

Wessel did not use exactly those words, but he told listeners that the only option that the Fed still has to boost the economy is to buy more long-term bonds. In 1999, when he was still a professor at Princeton, Bernanke wrote that, in similar circumstances Japan's central bank should deliberately target a higher inflation rate in the range of 3-4 percent.

This was an idea that was originally proposed by Paul Krugman and has more recently been suggested by Greg Mankiw, President Bush's top economic advisor, and Olivier Blanchard, the chief economist at the IMF. It would be interesting to know how Mr. Wessel determined that this idea is not a possible policy option.

Comments (16)Add Comment
How Mr. Wessel Determines X
written by Hugh Sansom, September 10, 2010 7:43
How does a Wall Street Journal economics editor determine what is and isn't possible? He goes to the Big Book of Right-wing Political Plays. #1 Never do anything Rich American Plutocrats don't like. Translation: Keep inflation low low low even if it means killing programs that would bump up inflation slightly and kickstart demand.
written by izzatzo, September 10, 2010 7:47
There's an Austerity Church in Florida somewhere with 50 members who say if Bernanke proceeds with a plan of intended inflation they will protest by burning $100 bills in a bonfire to demonstrate their useless value. The Fed warned the church that this would threaten the livelihood of holders of large amounts of debt.
why not another bubble?
written by pete, September 10, 2010 8:30
So another bubble is in the works, cool...just remember to get out at the peak this time. Krugman asked for a bubble while Shiller and Baker said we were in one. I guess he's a kid at heart and loves these roller coaster rides. With many companies now loading up with cheap long term debt, a 4% inflation should help out (until it is time to refinance). Of course, the treasury should also aim longer term so that the debt can be devalued too...These short run fixes are so tempting.
written by skeptonomist, September 10, 2010 8:56
Currently the nonsensical claim on the right is that the economy is being held back by businessmen's uncertainty about taxes and regulation. Evidently the counterpart on the "liberal" side is the claim that the economy is being held back by its uncertainty about whether the Fed will take steps to contain inflation if and when it threatens to exceed its current target (which was about 2% the last time I noticed).

What exactly would the Fed do differently if it increased the value of its inflation target? Are there supposed to be some concrete effects of this? If the effect is supposed to be on morale, exactly what decisions in the real economy would be changed by a higher inflation target (keeping in mind that inflation is now below the Fed's target anyway)? Both Dean Baker and Paul Krugman have argued (correctly, I think) that the problem with the economy is lack of demand - just how does increasing the inflation target boost demand?
written by fuller schmidt, September 10, 2010 9:19
Perhaps a higher inflation target greases the wheels for sufficient fiscal stimulus. And I doubt that Krugman ever had a pro-bubble stance, or that serious economists don't have the metrics for addressing inflation.
Get them to use the money
written by Marty, Brentwood, September 10, 2010 10:54
skeptonomist, banks and others are hoarding money, not lending it; credit is tight; if they know there's inflation in the offing and their holdings will be worth less in the future, they'll be motivated to lend it out now, stimulating spending and hiring people. Also, debtors get some relief in that their mortgages will be easier to pay off with cheaper money in the future.
written by Wes, September 10, 2010 11:20
> And I doubt that Krugman ever had
> a pro-bubble stance...
We have it in writing. One of his columns from 2005 (?).
Someone dug it up a few months ago and asked him about it. It was funny to see how he tried to explain it away.
written by skeptonomist, September 10, 2010 1:15
In principal inflation should stimulate housing and it may have done so in the past, for example in the post-WWII period. I bought a house for the first time myself based on an inflation calculation and made some money on it. But right now other things are probably more important for potential house buyers, such as their prospects of keeping their jobs. I don't think anyone is counting on future inflation as a positive factor in buying a house. Also, is it really a good idea to reinflate the housing bubble?

Inflation is generally an incentive to take on debt, but right now inflation, taxes and interests rates are secondary, in the minds of employers, to the fact that demand continues to look bad.

I have not seen any proposed mechanism by which the Fed can directly increase inflation at this point without taking over the bond markets and driving rates negative. Thus the above considerations come into play only in the case that inflation, for reasons not specified (and which Krugman, for example, has argued do not actually exist), actually increases and might cause the Fed to consider raising interest rates. In other words any constructive role for the Fed now seems to be a matter of disavowing any intent to change its policy in the case of hypothetical and unlikely events. Instead of just saying that the Fed now has no intention of raising rates "in the foreseeable future", should Bernanke be adding "cross my heart and hope to die"? If people don't believe "in the foreseeable future" why should they believe in a hypothetical increased inflation target, which the Fed could change any time it pleases?

I go into these things in some detail because I think this issue exemplifies the magical thinking that goes on in the minds of economists when it comes to monetary policy.
written by Eric, September 10, 2010 2:23
Is the goal of higher inflation to erode the position of creditors with respect to their debtors? If so, why not force write-offs and/or haircuts by mark to market, no more checks for Fannie/Freddie, killing HAMP/HARP etc.? Wouldn't it be better to get the process substantially over in the next 18 months as opposed to whittling away at it via inflation for 10 years?
written by pete, September 10, 2010 7:00
About the time Dean Baker where warning of the bubble:
written by pete, September 10, 2010 7:03
Sorry meant to write late 2001 PK asking for a housing bubble about the time when Baker and Shiller were warning of the bubble we had climbed into, straight up since 1996 according to Case Shiller.
Four years later, he said...uh oh we are in a bubble....
written by pete, September 10, 2010 7:04
Oh well...
It is difficult to get a man to understand something when his job depends on not understanding it - Upton Sinclair
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It is difficult to get a man to understand something when his job depends on not understanding it. - Upton Sinclair
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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.