Bernanke-Hawk or Black Hawk?
Before he became Fed Chairman, Ben Bernanke became infamous as a crazy inflationist willing to go as far as dropping dollar bills from a helicopter if necessary to safeguard the existence of price inflation, earning him nick names like Ben "Printing Press" Bernanke, Ben "Helicopter" Bernanke and Ben "Black Hawk" Bernanke. This was troublesome for Bernanke, because a reputation as a inflationist is -whether fair or not- not good for any central banker. In order to make maximum gains from its money creation, the public must not expect the price inflation it will create. If it is anticipated by the public, then the redistributional effects the Fed hopes to achieve will be small, while demand (and therefore central bank gains) for the newly created currency will be lower.
So, it is in the best interest of central banks to lower inflation expectations even while it is also in the best interest of central banks to maximize monetary inflation. These two interest are of course incompatible, which is why central banks must try to balance these two aims. When inflationary expectations are rising, as they are now, then the central bank will have to give priority to containing them, rather than its other aim of maximizing actual inflating of the money supply.
Given his reputation as an inflationist, and given that even so-called core inflation is rising now in America and given that commodity prices are soaring and that various indicators of inflationary expectations (including the spread between regular bonds and the TIPS) are rising, Bernanke now have little choice but to continue with the rate hikes, even knowing this risks sending the U.S. economy into a recession.
We should therefore not see the latest seemingly "hawkish" speech from Bernanke that have caused stock prices to tumble as an indication that Bernanke is really a inflation hawk. Instead, he is simply trying to do away with his reputation as a "Black Hawk" riding inflationist. Unlike some other "Black Helicopter" conspiracy theories, the one about the Fed being a inflation creator is really true (although at this point not by the actual physical mean of black helicopters).
Comments (4)
This is a true test of his nascent imcumbency at the helm of the Federal Reserve. The Fed Reserve created this mess, now they must deal with it. Bush used Fiscal policy to prime the pump in late 2001 early 2002, the Federal Reserve went overboard with rate cuts. Now is the time to pay the piper.
Published: June 6, 2006 3:03 PM
Perhaps the message didn't get out there for some people, that the piper must always be paid:
I have a feeling that somewhere out there, running around in short pants and playing nintendo, is the kid who is going to grow up and write the Neo-Keynesian book about The Second World Depression - in which it is concluded that the whole thing was the fault of Ben Bernanke for not inflating fast enough to offset the unfortunate and unexpected slump in aggregate demand for stocks and real estate ...Published: June 6, 2006 9:47 PM
P.S.
Unlike some other "Black Helicopter" conspiracy theories, the one about the Fed being a inflation creator is really true (although at this point not by the actual physical mean of black helicopters).
But they are using actual, physical helicopters to shower money (and/or spent uranium shells) on various cities in the Middle East and the Deep South. And they have plenty of armored cars and unmanned drones standing by if they run out of helicopters. Windows don't just break by themselves you know.
Published: June 6, 2006 9:53 PM
The rock of Sisyphus is rolling back down the hill.
Published: June 7, 2006 8:06 AM