Bernanke Calls Krugman "Reckless"; Krugman and Bernanke Both in Academic Wonderland Somewhere Deep in Outer Space

Paul Krugman is now so far into outer space with ridiculous economic proposals that even Helicopter Ben Bernanke recognizes Krugman's proposals as "reckless".

Bloomberg reports Bernanke Takes On Krugman�s Criticism Ignoring Own Advice

Federal Reserve Chairman Ben S. Bernanke took on Nobel prize-winning economist Paul Krugman yesterday and called his advice to reduce unemployment by boosting inflation �reckless.�

�The question is, does it make sense to actively seek a higher inflation rate in order to achieve� a slightly faster reduction in the unemployment rate, Bernanke said yesterday to reporters after a Federal Open Market Committee meeting. �The view of the committee is that that would be very reckless.�

Krugman, whom Bernanke hired at Princeton University in 2000 when he was chairman of the economics department, said in a New York Times Magazine article that the Fed should raise its 2 percent inflation target to cut unemployment. Such a policy shift would align with Bernanke�s comment in 2000 that the Bank of Japan (8301) should pursue faster inflation to escape deflation, he said. Japan�s consumer prices fell 0.2 percent that year.

�While the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers,� Krugman wrote. �Higher expected inflation would aid an economy� because it would persuade investors and businesses �that sitting on cash is a bad idea,� Krugman said.

The chairman spoke in response to a reporter�s question referring to Krugman�s story, titled �Earth to Ben Bernanke,� published April 24. The article cited �the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done.�

Bernanke said pushing the increase in prices above the Fed�s 2 percent goal would risk undermining inflation expectations and erode the central bank�s credibility as a force for stable prices.�

�We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we�ve been able to take strong accommodative actions in the last four, five years,� Bernanke told reporters. �To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.�

Krugman and Bernanke Both in Outer Space

The irony in this bickering is that both Krugman and Bernanke are economic failures. The idea that more inflation will help those mired in debt is preposterous. Japan attempted to halt deflation for 20 years and has nothing to show for it but a mountain of debt.

On the other hand, Bernanke brags about "30 years building up credibility" that the Fed simply does not have. The US has seen bubble after bubble, each with increasing amplitude and troughs, so Bernanke has to be on some sort of mind-altering drugs to talk of either credibility or price stability.

Perhaps his mind was altered by gamma rays from being in "deep academic space" for so long.

Price-wise, Bernanke is correct the US is in a state of inflation, and Japan not. I expect Krugman to counter with housing.

If one takes housing into consideration, inflation is well under the Fed's target as I pointed out in How Far Have Home Prices "Really" Fallen? HPI Upcoming Changes; HPI and the CPI

CPI Adjusted for Home Price Index (HPI)



The Fed kept interest rates at historic lows between 2002 and mid-2004. The last two rate cuts by Alan Greenspan were not justified at all, by any measure, and downright absurd considering the bubble brewing in housing prices vs. rent.
Allegedly the Fed held interest rates low to prevent "deflation". Instead it exacerbated "price deflation".

Clearly the Fed had no idea what it was doing, and still doesn't, (unless of course you believe this is a Fed conspiracy to deliberately screw the middle class). The result is bubbles and crashes of ever-increasing amplitude as the Fed chases its own tail. New bubbles have formed in the stock market and commodities right now.

Outer Space Policies

 Bernanke is trying like a madman to get banks to increase lending but Bernanke and Krugman both do not understand economic reality.

1. Banks cannot lend because they are still capital impaired, hiding losses yet to come, and holding assets that are marked-to-fantasy instead of marked-to-market
2. Consumers are busted and holding interest rates at 0% when prices of food and gasoline are soaring exacerbates the problem
3. There are few credit-worthy businesses that want to borrow in this environment 
4. The businesses that do want to borrow are not credit-worthy and banks would be foolish to lend to them
5. Boomers are headed into retirement with too much debt, too little income, too few assets and they need to save not spend. 
6. Real wages (discounting the decline in housing), are hugely negative, and forcing more inflation would be downright idiotic
7. The Fed can inject liquidity but it cannot determine where it goes. 
8. The Fed desperately wants home prices to rise and businesses to borrow, but instead food and energy prices have risen, and there is little hiring. Krugman wants Bernanke to do more of the same even though the same has already proven to be the problem.

Academic Wonderland, Somewhere Beyond Pluto

Quite frankly all eight points above are common sense ideas. However, neither Bernanke nor Krugman have real world experience. Both come from academic wonderland, well beyond the orbit of Pluto.

Clearly neither Krugman nor Bernanke have any solid grasp of the concept of debt-deflation. Neither understands boomer demographics. Neither understands why businesses are not hiring. Neither understands that debt eventually has to be dealt with, and it is the debt itself is the problem. Neither understands that inflation will destroy those without a job. Neither understands (but especially Krugman) that increased inflation will not guarantee more jobs.

Finally, I would like to point out that Krugman is totally clueless about the damage that public unions cause. We could get far more roads and bridges repaired, employing far more people for the same price,  while alleviating budget constraints at the same time if only we could get rid of Davis-Bacon and prevailing wage laws and end collective bargaining of public unions.

That my friends is the sad state of affairs.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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