No, Ben Bernanke Has Not Taken Sides

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I try not to start arguments with people who are way smarter than me, especially when we’re basically on the same side of an issue, but in my part-time capacity as Ben Bernanke’s English translator, I feel compelled to point out that Ezra Klein’s take on the Fed chairman’s press conference is wrong. Bernanke did not choose sides in the eternal debate between the hawks who want him to fight inflation and the doves (like Ezra–and me!) who want him to focus on unemployment. He chose not to choose sides. There’s a difference.

For all the complexities of monetary policy, the Fed always has three basic options: It can loosen policy to try to apply more gas to the economy and boost employment, it can tighten policy to try to apply brakes to the economy and rein in inflation, or it can do nothing. The Bernanke press conference was about as close as a Fed chairman will ever get to a clarion call, and it was a clarion call for inaction. He doesn’t want to loosen or tighten policy. He’s going to let the economy ride.

Ezra is understandably disappointed that at a time of terribly high unemployment and consistently low inflation, Bernanke is taking this wait-and-see approach. I’m disappointed, too. Bernanke obviously isn’t taking our side of this debate, even though he seems to agree with our assessment of unemployment and inflation. But the inflation obsessives who want Zimbabwe Ben to start raising historically low interest rates and withdrawing some of the unprecedented monetary stimulus he’s been pouring into the economy for the last two years are disappointed, too. Bernanke mouthed the usual Fed-chair pieties about keeping a close eye on inflation, but he didn’t take their side of the debate, either. He’s keeping interest rates near zero for an extended period, and he said he does not intend to let the money supply start to contract with his expansionary QE2 program ends in June.

Ezra and I also agree that Bernanke’s inaction is sending an unfortunate message to unemployed Americans; I went with “you’re on your own,” while Ezra chose “sucks to be you.” We see 9% unemployment as a national emergency, and we’ve noticed that the Chicken Littles who see hyperinflation around every corner have been wrong, wrong, wrong. But we have to remember that there are plenty of inflation hawks who see the Fed’s bloated balance sheet and the plague of easy money as a parallel national emergency. Not all of them suffer from paranoid delusions, and some of them are on the Fed’s governing board.

So Bernanke is steering a middle course.  He knows that he can’t keep interest rates at zero forever, and at some point he’s going to have to start addressing that bloated balance sheet.  He’s also skeptical that adding more liquidity to the economy through a QE3 or some other loosening strategy is going to create a lot more jobs. And yes, he’s obviously concerned about maintaining the Fed’s credibility as an inflation-fighter.  Maybe a bit too concerned, but he is, after all, a central banker.

Washington’s general passivity about the unemployment crisis is kind of enraging, and I’d like to see the Fed try to do more about it.  But it’s not like the Fed hasn’t done anything.  Bernanke has fired more bullets than any Fed chairman in history, and while I’d like to see him keep firing, I’m not quite as sure as Ezra seems to be that additional monetary stimulus would make a huge difference. It might be like pushing on a string. It might help boost bank profits without creating jobs at all. And maybe there would be real costs to firing the printing presses back up; I may not like the inflation crazies, but they do move markets.

In any case, Bernanke isn’t one of the inflation crazies. He’s probably closer to our side. But that certainly isn’t much comfort to the unemployed.  It really does suck for them.

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