April 6, 2009


The Radicalization of Ben Bernanke: He is throwing trillions of dollars at the financial crisis. What happens if his gambles don't pay off? (Simon Johnson and James Kwak, April 5, 2009, Washin gton Post)

Without a doubt, this crisis is now Ben Bernanke's war.

Bernanke has become the country's economist in chief, the banker for the United States and perhaps the world, and has employed every weapon in the Federal Reserve's arsenal. He has overseen the broadest use of the Fed's powers since World War II, and the regulation proposals working their way through Congress seem likely to empower the institution even further. Although his actions may be justified under today's circumstances, Bernanke's willingness to pump money into the economy risks unleashing the most serious bout of U.S. inflation since the early 1980s, in a nation already battered by rising unemployment and negative growth.

If he succeeds in restarting growth while avoiding high inflation, Bernanke may well become the most revered economist in modern history. But for the moment, he is operating in uncharted territory.

When he first joined the Federal Reserve's Board of Governors in 2002, and later when he became chairman in 2006, there was little reason to expect Bernanke to revolutionize central banking.

Actually, Mr. Bernanke's chief qualification for the job was his expertise on the catastrophic effects and institutional causes of the Great Deflation, an ideal background for a central banker in a deflationary epic. Unfortunately, he somehow managed to misinterpret the temporary and wholly artificial spike in oil prices for a sign of systemic inflation--a notion that flat wages were enough to refute dispositively--and boosted interest rates. This made rate-sensitive loans--of which there were an unusual number at that moment--too expensive for many marginal borrowers and exposed the real risk in the various derivatives that Wall Street had devised. Easy as it is to blame him for ignoring his own studies and following the inflation hawks--who've made this same mistake at least three times since Reagan and Volker quashed the monster--it is also the reality of the post that you're there to defend the lending interests, who don't mind deflation, since they get repaid in dollars worth more than they lent, and despise inflation, which sees them repaid in cheaper dollars. Any new chairmen--especially one whose concerns have been precisely the opposite--has to appease the constituency and prove his bona fides before he can start doing what he knows to be right.

Posted by Orrin Judd at April 6, 2009 8:24 AM
blog comments powered by Disqus