In a recent post regarding hyperinflation, I criticized Ben Bernanke for believing that he knew enough to manage the economy. His confidence in managing interest rates and withdrawing excess money from the system is particularly galling. The criticism was not directed at Mr. Bernanke’s intelligence but at his hubris. No one is capable of doing what Mr. Bernanke claims he will do.
Caroline Baum is one of the few financial reporters worth reading. The Daily Bell obviously has a similarly high opinion of her. In this article they focus on a recent column of hers which dealt with the impossibility of Bernanke being able to do what he claims:
She writes: “There’s no canary in the coal mine to keel over, no fat lady to sing, no early warning system to signal imminent danger. Yet somehow the Federal Reserve will know when the time is right to exit from what it calls ‘the current exceptionally accommodative stance of policy’ to something a little less exceptional? How, exactly? What will tell policy makers the era of easy money is over?”
Of course, the Fed has no way of knowing these things. Anticipating the standard answer from the Fed (and other statist economists in general) she goes on to state:
“The Fed has econometric models that predict growth and inflation (they’re silent on asset bubbles). It relies on something called the output gap, or the difference between actual gross domestic product (hard to compute) and potential GDP (a moving target), to warn of inflation on the horizon … What it lacks is a track record that inspires confidence. For a group that refuses to acknowledge the key role monetary policy played in fueling the housing bubble (not to mention the Internet and tech-stock bubble before it), a group that advocates regulation, not preemption, as the cure, Fed officials want us to believe that this time they will get it right.”
Bernanke’s “fatal conceit” is that he appears to believe the nonsense that comes from his lips. Despite his bravado, we are on a hurtling toward a hyperinflationary depression. The Daily Bell concludes:
Of course, when price inflation begins to rage, Ben Bernanke and other central bankers will once again express astonishment that the system has failed. They will make excuses and blame “extraneous” factors. They will assert that their models need tweaking and that in the future this sort dysfunction will be remedied. They will learn from their mistakes, they will explain. But given the magnitude of the sums involved and the pain that will be caused by the kind of price inflation that is inevitably headed our way, we wonder whether such explanations will be enough this time around.
Baum has put her finger on what is wrong, but the bigger story is whether central banking itself will survive the full expression of the current business cycle. We tend to think not. It may be that bad.
