Monday, March 19, 2012

Bernanke, Inflation Hawk?

Roger Lowenstein has written a new profile of Fed Chairman Ben Bernanke for The Atlantic. It is deep and very much worth reading, even though, as Yves Smith has written, it is a bit hagiographic. The title, "The Villain," is tongue-in-cheek.

There is much to like here, but the following passage is the most interesting one. It suggests that, despite all the dovish moves Bernanke has led the Fed in making in recent years, he nevertheless has only a modest appetite for inflation.

...[A]fter talking with the chairman at length (he was generally not willing to be quoted on this issue), I think that, although Bernanke appreciates the intellectual argument in favor of raising inflation, he finds more compelling reasons for not doing so. First is the fear that inflation, once raised, could not be contained. The Fed creates inflation by adding reserves to the banking system (falling interest rates are the market’s way of registering the increasing plenitude of money). If so much money enters the system that wages and prices start ratcheting upward, the momentum can be self-perpetuating. “The notion that we can antiseptically raise the target and control it is highly questionable,” Bernanke told me. 

This is truly interesting, and important.

Of course, we need to be a little skeptical of the tendency Fed chairs have to proclaim what everyone wants to hear. The position almost requires it. Chairman Bernanke, in May of 2007, said as part of a speech at central banking conference, "All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Incidentally, I love the careful way Lowenstein refers to his off-the-record conversations with Bernanke. I do not agree with him on every point, but his work is always thoughtful and balanced. In the end, Lowenstein is a reporter who cares deeply about truth. A few months ago, I mentioned other work of his.