Ben Bernanke’s Credibility

Via Mark Thoma, Ben Bernanke makes the case for more power and autonomy for the Fed. He makes a number of good points. He also argues that the Fed’s “ability to take [emergency rescue actions] actions without engendering sharp increases in inflation depends heavily on our credibility and independence from short-term political pressures.”

It’s worth asking what might be going on right now if Bernanke had a bit less credibility. Suppose people were anticipating two percent inflation for 2010 probably rising the three or higher in 2011. Well, then it seems to me that prosperous folks (people who are employed in jobs that give them higher-than-average levels of disposable income and who were probably really freaked out six months ago about 401(k) losses and layoffs everywhere, but are feeling secure now that the situation has stabilized) would probably decide that in light of likely rising prices, it probably makes sense to take advantage of the discounts available right now. Maybe this Christmas is the time to upgrade to a Blu-Ray player and a TV with true 1080p display capabilities. Maybe it’s a good time to get the kitchen remodeled. Maybe you get extra generous with your gifts to the kids. After all, stuff is relatively cheap right now thanks to the weak economy, but Bernanke’s got no credibility and prices will be rising soon.

By the same token cash-rich businesses and very wealthy individuals are probably going to say that the super-safe investment vehicles they parked their money in back during the summer/fall of 2008 are suddenly looking not so safe. After all, they’re not safe from the inflation bug and Bernanke’s not credible. So there’s no real choice but to get out of all cash and treasuries and start loaning to businesses again.

Conveniently, what with prosperous folks going on their pre-inflation spending spree, there’s a need to start giving retail sales people more hours. There’s also more employment in transporting goods, in building trades, and to an extent in manufacturing. Business is perking up at the ports. And at the coffee shops and bars near the ports, and the truck stops along the highways. So the unemployment rate is falling, inventories are needing to be restocked, and those business loans are mostly paying off as people need to expand their activities to meet this surge in demand. All those sales fuel state and local tax revenues, so cops are working overtime again and the library is keeping longer hours. That’s more convenient for people, and also more income. Of course inflation is eating away at some of that income. But American households are pretty heavily indebted, so even a mere increase in nominal income makes debt service easier.

Basically, we’re on the road back to prosperity.

The problem, as I’m sure Bernanke would tell you, is that getting onto that road to prosperity by wrecking the credibility of American monetary policy would cause a lot of problems down the road. But the best way to avoid that is not to insist on two more years of grinding near-deflation and sky-high unemployment. The way to avoid that would be for Bernanke to observe that nominal GDP growth is way below its long-run trend and unemployment is ridiculously high and that he’s committed — credibly! — to catching up to trend and returning to something like a normal level of employment.


Americans still enjoy consuming goods and services, and Americans who’ve lost their jobs over the past 18 months — or who’ve left school and can’t find jobs — are just as capable of producing goods and services as they were 18 months ago. It’s absurd for us to be sitting around so blithely accepting of such a large proportion of the population sitting around idle.