Post Gets the Whitewash Out for Bernanke

After Alan Greenspan, Ben Bernanke is more responsible for the economic downturn than any other person in the country. He was a Fed governor from 2002 to 2005 and then chairman of President Bush's Council of Economic Advisors from the summer of 2005 until he took over as Federal Reserve Board chairman in January of 2006. During this whole time he insisted that there was no housing bubble and that everything in the housing market was just fine. He fully supported Alan Greenspan in allowing the bubble to grow to ever more dangerous levels.

Therefore it is striking to see a front page Washington Post article tell readers that Bernanke has: "led efforts to make the Fed's bank oversight more effective and focused on broad risks to the economy that arise out of banks' decisions." This would like saying Bernie Madoff was working to ensure integrity in finance, without mentioning that he had pulled off the biggest financial scam in history. That is not exactly a complete picture.

The article also badly misrepresents the issues surrounded the risk of inflation. It tells readers that: "some liberal economists argue that the president should quickly appoint Fed governors who would be inclined to leave rates low for longer to try to get growth going again, even if it comes at the cost of mild inflation."

Actually many economists, some of whom are not at all liberal (e.g. Greg Mankiw, President Bush's chief economist), argue that the Fed should deliberately actually target a higher rate of inflation (3-4 percent), with the idea of lowering the real interest rate. Since nominal interest rates cannot be pushed below zero, the only way to make real interest rates as low as they should be given the severity of the downturn is to raise the inflation rate. The IMF has recently taken a similar position as well.

Therefore it is wrong to imply that there are only a few liberal economists who think the Fed should risk higher rates of inflation. Many centrist or even conservative economists have argued that it should actively promote inflation.

--Dean Baker

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