When Its Time To Raise Rates, Will Bernanke Have The Stones?

Allan Meltzer: Bernanke's Keynesian Bet "Will End in Tears"

Dr. Allan Meltzer: Bernanke's Keynesian Bet "Will End in Tears"

An article in Bloomberg raises some very interesting questions and I though I’d open up the discussion on these three:

1.  Since Bernanke has clearly chosen Keynes over Friedman, pumping in liquidity with the belief that inflation will be held in check, will this “end in tears” as Fed historian Dr. Allan Meltzer believes?

2.  Is Hyper -Inflation inevitable, similar to what happened in the late 70’s, what with the Fed’s adding a trillion dollars in liquidity?

3.  Most importantly, will Bernanke’s Fed, which has now become a political instrument involved in bailouts, be able to fight political pressure over still-high unemployment rates and raise rates when its time to soak up extra liquidity?

It will be very difficult politically for Ben Bernanke to tighten money supply when it comes time to, because unemployment, a lagging economic indicator, will remain elevated.

In the 70’s, then-Fed Chairman Arthur Burns succumbed to Nixon‘s White House and kept money supply loose so that the administration could keep a lid on the unemployment rate.  That resulted in an inflation disaster which took years to cure.

Hopefully, Bernanke will be able to resist the pressure coming from Congress and Obama if and when consumer costs begin to rise, despite what the jobless numbers read at the time.

Any thoughts?

Full Story:  Bernanke Bet on Keynes (Bloomberg)

What's been said:

Discussions found on the web
  1. The Scrub commented on Apr 14

    I think it is too early to tell how this is going to end specifically…although I do tend to agree that the misery is going to continue for a long time and that a brick wall of pain awaits us right before the finish line.

    Whether that brick wall is hyper-inflation or something worse is going to depend a lot on who Obama is taking policy advice from in a year. Obama is very intelligent and shrewd, and if the Geithner Plan fails (like I think it will) I can see Obama maybe trying something different and that changes everything.

    Specifically regarding Bernanke, once he decided to politicize the Fed then, in my mind, he decided to keep the Fed politicized so long as he remains at the helm. That means Fed policy that will be guided by short term political calculations rather than long term interests. For him to all of a sudden pull back and start choking off a recovery will result in a lot of bipartisan calls for his head on a platter.

    After all, 2010 is an election year.

  2. The Scrub commented on Apr 14

    I think it is too early to tell how this is going to end specifically…although I do tend to agree that the misery is going to continue for a long time and that a brick wall of pain awaits us right before the finish line.

    Whether that brick wall is hyper-inflation or something worse is going to depend a lot on who Obama is taking policy advice from in a year. Obama is very intelligent and shrewd, and if the Geithner Plan fails (like I think it will) I can see Obama maybe trying something different and that changes everything.

    Specifically regarding Bernanke, once he decided to politicize the Fed then, in my mind, he decided to keep the Fed politicized so long as he remains at the helm. That means Fed policy that will be guided by short term political calculations rather than long term interests. For him to all of a sudden pull back and start choking off a recovery will result in a lot of bipartisan calls for his head on a platter.

    After all, 2010 is an election year.

  3. The Scrub commented on Apr 14

    I think it is too early to tell how this is going to end specifically…although I do tend to agree that the misery is going to continue for a long time and that a brick wall of pain awaits us right before the finish line.

    Whether that brick wall is hyper-inflation or something worse is going to depend a lot on who Obama is taking policy advice from in a year. Obama is very intelligent and shrewd, and if the Geithner Plan fails (like I think it will) I can see Obama maybe trying something different and that changes everything.

    Specifically regarding Bernanke, once he decided to politicize the Fed then, in my mind, he decided to keep the Fed politicized so long as he remains at the helm. That means Fed policy that will be guided by short term political calculations rather than long term interests. For him to all of a sudden pull back and start choking off a recovery will result in a lot of bipartisan calls for his head on a platter.

    After all, 2010 is an election year.

  4. Joshua M Brown commented on Apr 14

    true, and thats the worrisome part. Bernanke needs to be able to get tighter regardless of the unemployment picture.

    if materials prices start running, we could definitely be looking at a double-dip recession (high inflation plus weak employment)

    I guess we’ll see

    thx for reading
    JB

  5. Joshua M Brown commented on Apr 14

    true, and thats the worrisome part. Bernanke needs to be able to get tighter regardless of the unemployment picture.

    if materials prices start running, we could definitely be looking at a double-dip recession (high inflation plus weak employment)

    I guess we’ll see

    thx for reading
    JB

  6. Joshua M Brown commented on Apr 14

    true, and thats the worrisome part. Bernanke needs to be able to get tighter regardless of the unemployment picture.

    if materials prices start running, we could definitely be looking at a double-dip recession (high inflation plus weak employment)

    I guess we’ll see

    thx for reading
    JB