Tuesday, August 25, 2009

Rule Bernanke, Bernanke Rules the Fed

With President Obama’s announcement on August 25, 2009, that he would nominate Fed chairman Ben Bernanke for another four-year term, two big issues will dominate macroeconomic discussion in the next few years.

The first is the so-called "exit strategy." To minimize the risk of inflation, when will the Fed begin to raise interest rates and withdraw much of the liquidity it pumped into the financial markets? Some distinguished economists and financiers warn that tightening monetary policy too soon risks another downturn; others warn that waiting too long risks inflation. We’ll find out if the Fed’s timing was right only after the fact. There is no way to run an experiment simultaneously testing the rival views.

The second issue is curtailing "staggering budget deficits" and the accumulation of a massive national debt. (Where is Jim Sasser when we need him?) The goal is to persuade political decision makers to reduce deficits by some combination of spending cuts and tax increases, two hot potatoes in Congress land. Good luck. Lecturing Members of Congress of both parties to control spending is akin to lecturing rats on the benefits of proper hygiene to control plague (acknowledgment to Brock Yates for the adaptation of his poignant phrase).

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