Stop Ben Bernanke

I know that there are a lot of people who think that Bernanke did the right thing, and I know that I am not one of them.

That being said, the real question is whether or not Bernanke is the right person for the path forward, and it is clear from his testimony before the Senate Banking Committee that he is completely unsuited to the task.

The fact is that it was clear from his earlier testimony, when he endorsed gutting Social Security, which was completely inappropriate for a Fed Chair, that he is a conservative (though not necessarily crazy).

But at the confirmation hearings, he was asked a very good question by, of all people David "Diaperman" Vitter.

Vitter did not come up with the question, Brad Delong came up with the question, and it's why he's on my blogroll, but it is a good question, and his response is telling:

Q: Why haven’t you adopted a 3% per year inflation target? [Note, the target is 2%]

Bernanke: The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

(emphasis mine)

When you translate this from Fed Speak, it reads as follows, "If inflation threatens to rise above 2%, I will slap it down, and I don't care if unemployment remains above 10% for the next decade."

We are in a liquidity trap, and the only way out of it is to create the expectation of inflation, so people worry about their money losing value and spend it.

That's Econ 101, and I believe that Ben Bernanke has written things to this effect too.