"The Education of Ben Bernanke” is a must read cover story in today’s New York Times Sunday magazine. Author Roger Lowenstein deftly blends Federal Reserve history and economic theories into his profile of Chairman Bernanke.
Bernanke appears to chair the Federal Reserve Board in the same manner as he chaired the Economics department at Princeton University. Unlike Greenspan, his style is to let other members express their viewpoints and develop a group consensus.
Lowenstein points out that the last Fed Chairman from academia (Arthur Burns) also presided over a slowing economy plagued by inflation (one Saturn cycle ago).
Burns caved in to President Nixon, causing runaway inflation until Paul Volcker’s strong tightening turned things around. As Volcker says in the article, “Too many bubbles have been going on for too long. The Fed is not really in control of the situation.”
The overall theme of the article portrays Bernanke as so tied to his economic/mathematical models, that he could not see the financial train wreck in front of him in the housing and credit markets until after it occurred. Bernanke is "firmly opposed to the notion that central banks should raise rates to prick bubbles in the stock market or elsewhere." The article describes how Bernanke, like Greenspan, is a proponent “of the risk-management approach to central banking, which argues in favor of taking out ‘insurance’ to minimize even small risks.” Both were so concerned about the possibility of deflation that never occurred, supporting too low interest rates for far too long.
Bernanke’s favorite academic study is the Great Depression. Bernanke “believes that the Fed’s actions to cool off stock-market speculation in 1929 contributed to the Depression and was a grievous error.” Lowenstein states that “this view remains highly controversial.”
“Bernanke maintains that if the Fed is clear about its policies, the public will tailor its behavior accordingly. For instance, if the Fed can demonstrate that it has the fortitude to snuff out inflation, individual businesses will be less likely to worry that their costs will rise, and thus less apt to raise their prices.”
I think that alone shows the world not only how naïve Bernanke is, but how much he lacks credibility. He says one thing, but his actions – the direction of Fed funds – reflect another.
We are indeed at the end of the “Great Moderation”. Stagflation has already burst through our front door. Call Paul Volcker!