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Friday, October 28, 2005

Paul Krugman: New Fed Chairman Bernanke and the Bubble

Paul Krugman continues the discussion of the new Fed chair nominee Ben Bernanke (see nomination, inflation fighting, transmission mechanism, transparency, inflation fighting credentials, asset bubbles, televising meetings). First, Krugman is both surprised and grateful that the administration picked someone qualified for the job:

Bernanke and the Bubble, by Paul Krugman, NY Times: ... Mr. Bernanke is actually an expert in monetary policy, as opposed to, say, Arabian horses.

And as noted here, Bernanke is not known to be partisan. Bernanke's colleagues at Princeton, and Krugman is one of them, knew very little about his politics:

Beyond that, Mr. Bernanke's partisanship, if it exists, is so low-key that his co-author on a textbook didn't know he was a registered Republican.

Should I be happy he has kept his politics to himself? What is it we don't know? Is he a very quiet raging ideologue?

The academic [work]... is apolitical. ... there's not a hint in his work of support for the right-wing supply-side doctrine. Nor is he a laissez-faire purist who believes that government governs best when it governs least. On the contrary, he's a policy activist who advocates aggressive government moves to jump-start stalled economies. For example, a few years back Mr. Bernanke called on Japan to show "Rooseveltian resolve" in fighting its long slump.

What about his allegiance to Bush? I'm worried about that. Bush appointed him as a Fed governor, as chair of the Council of Economic Advisers, and now the nomination to be Fed chair. Won't he owe Bush his allegiance?

...Mr. Bernanke has no personal ties to the Bush family. It's hard to imagine him doing something indictable to support his masters. It's even hard to imagine him doing what Mr. Greenspan did: throwing his prestige as Fed chairman behind irresponsible tax cuts.

Ben Bernanke was chair of the Princeton Economics Department when you were hired, so you know Bernanke pretty well. You've assured us he's qualified, apolitical, and independent. Sounds good. Should I stroll away confident in our economic future, or are there additional concerns?

This isn't a comment on Mr. Bernanke's qualifications, although there is one talent ... that Mr. Bernanke has yet to demonstrate ... Mr. Greenspan ... has repeatedly shown his ability to divine from fragmentary and sometimes contradictory data which way the economic wind is blowing. As an academic, Mr. Bernanke never had the occasion to make that kind of judgment. We'll just have to see whether he can develop an economic weather sense on the job.

Since I made the same point about Greenspan here, I'd have to agree. Let's hope Bernanke has this talent as well. But even if he does, you still seem concerned. Is it related to concerns about Bernanke's qualifications or abilities as Fed chair?

No, my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And ... coping with that day of reckoning without some nasty shocks may be beyond anyone's talents. The fact is that the U.S. economy's growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

But hasn't Bernanke said there is no housing bubble, and that the global savings glut explains the international trade imbalance and the dangers there aren't as large as many believe?

...Well, soothing words are expected from a Fed chairman. He must know that he may be wrong.

If he is wrong, what should he do? Does he have what it takes to handle such events?

If he is, the U.S. economy will find itself in need of the "Rooseveltian resolve" Mr. Bernanke advocated for Japan. We can safely predict that Mr. Bernanke will show that resolve. ...

It's reassuring to hear such praise for Bernanke. It sounds like monetary policy is in good hands.

But that may not be enough. When all is said and done, the Fed controls only one thing: the short-term interest rate. And it will be a long time before we have competent, public-spirited people controlling taxes, spending and other instruments of economic policy.

That's not quite as reassuring. Brad DeLong and others are concerned about that too.

Update: Brad DeLong comments on Krugman.

    Posted by on Friday, October 28, 2005 at 01:00 AM in Economics, Monetary Policy, Politics | Permalink  TrackBack (0)  Comments (0)


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