Bernanke Will Be Effective Inflation Fighter: So say many

Many of the economists I read think Bernanke is the real deal: real smart and ready, willing, and able to serve as the US's chief inflation hawk. There are dissenters, however. Paul Kasriel [PDF] fears that Bernanke will focus on the wrong things in attempting to fight inflation. Kasriel says, "Rather than targeting the prices of goods, services or assets, the Fed would do better to target the quantity of credit it creates. …" Last November Doug Noland labeled Bernanke "The wrong man - and his deeply flawed analytical framework - at the wrong time. … A Bubble Perpetuator." Mike Shedlock too remains skeptical. We'll return to Shedlock later, but for now let's hear from others:

Brad DeLong : "… Ben Bernanke is smart enough to worry about all future possibilities--and both accelerating inflation and dangerous deflation are possibilities. It shouldn't take long before the markets realize this, even though the press corps doesn't."

James Hamilton: "… I recommend the most recent statement of our Federal Reserve Chair as some of the finest economic analysis you will find anywhere.

Stephen Roach: "…for the first time in a long time, America seems about to get a meaningful dose of monetary discipline. Ironically, it could be tougher on the markets than on the economy. For investors, that’s a painful wake-up call, to be sure. But in the end, it’s absolutely essential in order to put an unbalanced, asset-dependent US economy on a sounder and more sustainable course. Three cheers for Ben Bernanke! … Of course, he hasn’t really done anything just yet. The Fed could disappoint -- and end up being all bluster and no action. Or there is always a chance it’s too late -- that America’s imbalances are so advanced, the only way out is the dreaded hard landing. But in my new role as the optimistic pessimist, I am willing to give Bernanke & Co. the benefit of the doubt. … My reading of Ben Bernanke’s now-infamous 5 June statement is that he gets it. …"

Nouriel Roubini: "… a very good choice as he is someone smart, pragmatic, with intellectual and academic rigor but also with policy savvy and experience."

Brad Setser: "… Bernanke's academic credentials are second to none. … The fact that Bernanke "gets" the current global flow of capital and the fact that he recognizes that adjustment is not painless give me hope. Plus, Bernanke recently has been moving away from the extreme version of the savings glut thesis, even hinting that cuts in the U.S. fiscal deficit would help to reduce the current account deficit. …"

Mark Thoma: "… Bernanke is a much stronger advocate of inflation targeting than Greenspan…."

Now let's return to Mike Shedlock:

... By fighting to restore his reputation in the wake of a disastrous speech about the "helicopter drop" theory of fighting deflation, Bernanke is now overdoing it. The long bond and a yield curve that once again has inverted says that Bernanke is wrong. The time for tough talk (and action) on inflation was three years ago. Three years too late Bernanke wants to restore the Feds's credibility.

"Bernanke the Hawk" is the image he wants to portray. Let's see what happens to his credibility when the market forces him to reverse course. The more he fights that reversal the bigger the deflationary problem he will face. This could get real interesting. ...

One of Shedlock's readers offers up this perspective:

Bernanke (if he is smart) realizes that he has no choice but to continue hiking and sucking liquidity out.

- We've had 16 rate hikes over the course of > 2 years. The level of speculation right now is still very high. There is still a lot of liquidity sloshing around. The only way to kill it is to raise rates to near-Volckerian levels (at the risk of a deep recession).

- A lot of damage was done in the Greenspan years. Greenspan as a Fed chair was a disaster. But over the course of 20 years, Greenspan has managed to put the US back at significant risk of collapse and managed to squander away all of the beneficial effects of the Volcker-era. Greenspan has had a lot of assistance in this from the Bush administration, of course.

The only way to counter this is to squeeze liquidity out completely, kill off speculation and curb the insane American habit of borrow and spend. Yes, this will lead to a recession, possibly a deep one, but the alternatives (high inflation or hyperinflation) is much worse. The worst scenario is a disorderly dollar collapse.

- Yes. Housing is breaking. But I think housing would have broken regardless of Fed action, as we were in massive bubble territory there.

- If Bernanke does not continue hiking in the face of inflationary pressures, the bond market will collapse. Faith in the fed will be competely lost, potentially placing the banking system at grave risk.

Bernanke's communication skills leave a lot to be desired. It would be much better for him to keep absolutely quiet and just show that he will be tough on inflation by action.

I feel that rates are going to [go] much higher than most people expect. There just doesn't seem to be any other choice.
  LifeLongRenter | 06.09.06 - 12:49 pm

I am beginning to think that Bernanke will indeed check the overheating. But the proof of "real deal" claims will come if or when markets (housing and stock markets) begin breaking badly. Then we will see whether Bernanke will refrain from "helicopter money" infusions. I still think Bernanke will so refrain, given that hyperinflation isn't a good alternative, even just hyperinflation of precious metals, oil, etc. Then again I thought that Greenspan wouldn't let the Long Term Capital Management bunch off the hook. Yet he did, pretty much. Didn't he? Then went on to blow up all sorts of asset bubbles. What do I know?