Wednesday, September 1, 2010

Bernanke: Apoplithorismosphobist-in-Chief

Last week the Federal Reserve Bank of Kansas City hosted its annual economic symposium at Jackson Hole, Wyoming. Various economists and central bank governors provided analysis on various topics of monetary policy. As is common the sitting Fed Chairman, presently Ben Bernanke, presented remarks covering "The Economic Outlook and Monetary Policy." While the entirety of his speech provides much grist to the commentary mill, I found the speech revealing in three different ways I'll be discussing for a few days.

In his speech, Bernanke, again affirmed (and I should say unsurprisingly so) that he is the quintessential deflation-phobe. As such, Bernanke is not our economic friend.

I've linked before to Mark Thornton's excellent article diagnosing the fear of deflation consuming so many Keynesian and Monetarist economists. Over the past several years, Ben Bernanke has revealed himself to have particularly acute deflation-phobia. Ben Bernanke is to be credited with convincing Alan Greenspan to step on the monetary gas in 2002-03 because of fears of deflation.  In November of 2002, then Fed Governor Bernanke presented an address with the title reminiscent of a 1950s sci-fi horror film: "Deflation: Making Sure It Doesn't Happen Here." In it Bernanke said we could not rule out the specter of deflation from rearing its hideous head, but never fear for the Fed has many ways of increasing the money supply to ward off falling prices.

Greenspan followed his advice a little too earnestly and oversaw a massive increase in the money supply.

We all know the rest of the story. Interest rates were held down too low for too long, capital malinvestment ensued and what has become the Great Recession began.

How did Ben Bernanke respond to the financial crisis that followed? Give him credit for acting as advertised. He oversaw the largest increase in commercial bank reserves in the history of the planet.

His remarks last week indicate we should expect more of the same. As almost an aside he implies that financial markets--not the market division of labor, savings and investment, or entrepreneurial activity--are the  foundation of the global economy. Given that presupposition, it is easier to understand why Bernanke is so driven to prevent any hint of deflation.

Bernanke essentially reiterated what he said in 2002. Assessing the current situation he says
Maintaining price stability is also a central concern of policy. . .At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.
Bernanke clearly is trying to calm those who also see deflation as the ultimate economic nightmare.
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.
He notes
[T]he FOMC (Federal Open Market Committee) will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.
Notice that Bernanke is not only afraid of absolute deflation, but also a fall in the rate of inflation. He uses the word disinflation five times. It is not enough that we ensure prices do not fall. In Bernanke's mind, price stability demands perpetually rising prices, albeit at a relatively low rate.

The upshot is that Bernanke is committed to inflation. It is almost as if there is no economic crisis more money cannot solve. In discussing Federal Reserve policy he reveals that he cannot even abide market driven "passive tightening" of the money supply that would occur if the Federal Reserve's securities portfolio were allowed to shrink as bonds it is holding came to term. He further affirms
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if  it proves necessary, especially if the outlook were to deteriorate significantly.
Like that of Paul Krugman, the case of Ben Bernanke reveals the true danger of deflation-phobia. It drives those in power toward destructive inflationism, all in the name of price stability. And inflationism is a recipe for a falling purchasing power of money and further capital malinvestment that prolongs the recessionary agony.

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