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Forum Post: Bernanke Call Krugman Reckless

Posted 5 years ago on April 26, 2012, 6:06 p.m. EST by Cweiss (-8)
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Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation “reckless.”

“The question is, does it make sense to actively seek a higher inflation rate in order to achieve” a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. “The view of the committee is that that would be very reckless.”

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke’s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan’s consumer prices fell 0.2 percent that year.

“While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,” Krugman wrote. “Higher expected inflation would aid an economy” because it would persuade investors and businesses “that sitting on cash is a bad idea,” Krugman said.

Bernanke, during yesterday’s press conference in Washington, denied that the FOMC’s policy contradicts his prior academic work. The chairman spoke in response to a reporter’s question referring to Krugman’s story, titled “Earth to Ben Bernanke,” published April 24. The article cited “the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.”

‘Completely Consistent’

“So there’s this view circulating that the views I expressed about 15 years ago on the Bank of Japan are somehow inconsistent with our current policies,” Bernanke said. “That is absolutely incorrect. My views and our policies today are completely consistent with the views that I held at that time.”

Krugman didn’t respond to telephone and e-mail messages to his publicist, Sarah Fogarty.

Bernanke said the main difference between Japan’s economic slump 15 years ago and the U.S. today is that Japan was in deflation and the world’s largest economy isn’t, with an inflation rate that’s close to the Fed’s objective.

The U.S. today doesn’t face a deflation threat, in part because the Fed expanded its balance sheet to $2.88 trillion through $2.3 trillion in bond purchases, Bernanke said. The FOMC yesterday raised its estimate for the personal consumption expenditures price index for this year to 1.9 percent to 2 percent versus 1.4 percent to 1.8 percent in January.

Inflation, Deflation

Bernanke said pushing the increase in prices above the Fed’s 2 percent goal would risk undermining inflation expectations and erode the central bank’s credibility as a force for stable prices.

“There are academics who have suggested that the Fed actively seek very high inflation for a couple of years,” said Laurence Meyer, senior managing director at Macroeconomic Advisers LLC in St. Louis and a former Fed governor. “Central bankers appreciate that credibility helps stabilize inflation and makes the real sector more stable. The costs of getting it back when you lose it are enormous.”

If the Fed can’t convince investors that it can contain inflation, “we would in fact have less rather than more flexibility to use accommodative monetary policy to achieve our employment goals,” Bernanke said.

‘Doubtful Gains’

“We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years,” Bernanke told reporters. “To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”

The Standard & Poor’s 500 Index rose 0.1 percent to 1,391.92 as of 10:16 a.m. in New York. Yields on benchmark 10- year Treasury notes slumped four basis points to 1.95 percent.

Krugman, who won the 2008 Nobel Prize in Economics, said in a blog posting on the New York Times’ opinion page yesterday that Bernanke’s response was “disappointing stuff.”

Krugman, 59, has previously proposed higher inflation to boost employment and criticized Bernanke in a Bloomberg News interview last year for not taking more aggressive action.

Bernanke, 58, joined Princeton, in New Jersey, as a professor in 1985, according to the central bank’s website. He was a member of the Fed’s Board of Governors from 2002 to 2005 and chairman of President George W. Bush’s Council of Economic Advisers from 2005 to 2006, when he took office as Fed Chairman.

“Krugman’s views are not closely related to the reality in which Bernanke is forced to operate,” said Anthony Karydakis, an adjunct professor of economics at New York University’s Leonard N. Stern School of Business and former chief U.S. economist at JPMorgan Asset Management. “One of them has the responsibility of steering the economy through treacherous waters and the other has the luxury of sitting in his office and sending articles to the New York Times,” Karydakis said.



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[-] 2 points by Middleaged (5140) 5 years ago

This is complicated and the article may have been written by someone that doesn't understand monetary policy or economics better than me.

My take is that there isn't enough money flowing in the economy for job hiring and state, local and even federal governments are cutting budgets. There fore we are in a period of Austerity in the USA.

  1. Street lights in cities have been shut off to save money.
  2. Cities have torn out pavement for gravel Streets to save maintenance costs.
  3. Emergency and other city employees have been laid off.

So what are the choices. Austerity means slowing down the economy and reducing the money flowing. I see the following choices.

1) Sell Government Bonds
2) Buy back Government Bonds
3) Economic Stimulus Programs to hire construction or government workers
4) Raise the Interest Rate for loans to slow down new loans or encourage consumer savings
5) Cut Taxes for Main Street
6) Cut Taxes for Wall Street and Corporate USA
7) Start program to subsidizes gasoline for both Main St and Corporate USA (Lowering the cost of energy for all)
8) Nationalize commercial banks and lower the barriers to getting loans for small businesses, recycling organizations, and alternative solutions for future energy.

If you set aside the discussion about what our current Inflation rate is from shadow statistics, then I think we can prove that consumers can't spend, we need jobs, and we have a period of government austerity. We can't be afraid of inflation. We need some stimulus. I would also like to encourage a higher interest rate for US Savings Accounts.

The real fear is that we will continue to have workers that don't contribute to the the economy or the GDP. I mean Wall Street financial managers, tax accountants, tax lawyers, and accountants that help corporations escape and avoid taxes.

Break up the TBTF Banks on Wall Street and force those executives to open their own bank. Let's create an environment that encourages manufacturing and protects our manufacturing with .5% tarrif and put a tarrif on any imports from countries that prohibit US imports.

I remember Greenspan never did anything. He just said we'll wait and see. Neoliberals created financial boon doggle. Neocons created war boon doggle. Bernanke and Greenspan are both Neoliberals who created, condonned, and espoused the financial crisis. Idiots.

[-] 0 points by hchc (3297) from Tampa, FL 5 years ago

Here's a good breakdown of inflation: http://thekwanbox.blogspot.com/2012_02_26_archive.html

[-] 1 points by Middleaged (5140) 5 years ago

Thanks. I like that page. I think the author knows more about banks, financial managers and economics that I do. I am familiar with MMT school of economics which is similar to the Autsrian school. However now I think I must be still confused or partially with Keynesian ideas.

It is probably Keynesian to intervien in the markets i.e. federal bailout of TBTF Banks on Wall Street. However talk to Greenspan, Bernanke, and Wall Street and they will claim to be Neoliberalist.

Someone was in a video or in the news recently saying look how certain players in politics or Lobbying cry foul against federal intervention, but then want bailouts or enforcement of laws against citizens in all states. Actually I remember now it was precivil war Southern Slavery Interests...

Yes, maybe we need a radical plan that would pay 4-7% interest to savings accounts in the USA. Clearly inflation has always been between 3-10% per year over the last 100 years.

Now your page linked clearly states we will lose our pension plans partly through both inflation and through negotiated lower values.

We can't escape inflation. But we could tighten down on non-value-added parts of the economy that increase risk and inflation. Then work to put money into the economy to build manufacturing opportunities or Economic Free Zones.

Clearly Investment banking increases risk and increases inflation and likely will require additional bailouts funded by the US Taxpayer.