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Wednesday, June 4, 2008

Bernanke Admits to Perpetrating Failed Fed Policy

All right, he didn't actually come out and say that, but implicitly that's exactly what he just said.

Federal Reserve Chairman Ben Bernanke said policy-makers were concerned by signs of rising long-term inflation expectations but did not see a dangerous wage-price inflation spiral developing.

"Some indicators of longer-term inflation expectations have risen in recent months, which is a significant concern for the Federal Reserve," Bernanke said in a speech to graduating students at Harvard University.

"We will need to monitor that situation closely," he said, but added there was little sign a "1970s-style wage-price spiral, in which wages and prices chased each other ever upward", might be starting.

Now, starting in September, Bernanke went aggressively to cut the fed funds rate and since he has cut 3.5% over that time period. In fact, in two weeks alone he cut it a full percentage point. At no point during that aggressive rate cutting period did Bernanke ever issue dire warnings about potential inflationary periods ahead.

Now that he is done cutting rates he is issuing warnings about inflation. Of course, one of the main reasons we should be worried about inflation is because he cut rates so aggressively. This is exactly what I pointed out while Bernanke was cutting rates aggressively.

It appears we are now dangerously close to having recent history repeat itself in reverse. Back in 2000, Alan Greenspan began raising rates aggressively to counteract the creeping inflation he saw. As a result, his aggressive action put us into a period of recession. In fact, after aggressively raising rates for over a year, he spent the next two plus years cutting rates until they wound up lower, much lower, than where they were when he started. Bernanke's deputies have already hinted that the Fed may soon need to start raising rates again.

If the Fed chair ever raises or lowers rates and that action causes them to have to reverse course and ultimately bring rates back to where they were originally, that is a failed policy. Bernanke has just given the first sign that this is exactly where he intends to go. It should be nothing short of troubling to everyone that the Fed has made nearly the exact same mistake in reverse in such a short period of time. Bernanke's admission that inflation is a concern is an indictment of his aggressive rate cut policy. At no time during his aggressive rate cuts did Bernanke ever say that he was concerned about inflation. Now that he is done, he appears to have seen the results of his actions.

What's really troubling is the utter lack of criticism of what Bernanke himself admits is a failed policy.

1 comment:

funthea said...

I recently had a conversation with my daughter, who just graduated H.S. We spoke of Economics 101 and the laws of supply and demand and her understanding of them. After much prodding into the topic I deemed that she, in fact, seemed to grasp them fairly well.
I only wish MR. Bernanke and Mr. Greenspan had the level of basic common sense and the fundamental understanding of economics that my daughter learned in High School.