The road of excess leads to the palace of wisdom. - Wm. Blake

Monday, June 05, 2006

Is Bernanke Insane?

The situation down at the Fed is starting to remind me - in an unfavorable comparison - of Greenspan's greatest achievement. His willingness to drop interest rates in the mid-90s, thus getting literally millions off the unemployment rolls. Basically, standard economics post-1979 said that the natural rate of unemployment was around 6%, and that below that inflation was sure to skyrocket. Bravely, Greenspan recognized that various factors - probably most importantly the dawn of the high-productivity era - had changed the equation, and he set aside his mortal fear of inflation and let rates drop.

Now, ten years later, Bernanke has forgotten this, and in an economy where inflation is low and wage growth is lower, he wants to keep raising interest rates. Why? Because there are hints - mere hints! - that inflation may be rising. In an economy nowhere near full employment. In an economy where real wage growth - the driver of inflation for all goods not dependent on nature (crops) or international relations (oil) - is negative for most people. To fend of inflation - which is good for debtors, meaning the vast majority of Americans, and bad for creditors, meaning banks and credit card companies - he's willing to make a move that will lower already-poor wage growth, increase unemployment, and increase housing expenses for just about everyone who pays a mortgage, or would like to. It's hard to see this as anything but irrational fear (of inflation) combining with class politics of the worst sort.

We were told that Bernanke was an excellent choice for the Fed. Time will tell. But I'm worried.


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