[Mb-civic] krugman

[Mike Blaxill]

 Bernanke and the Bubble
    By Paul Krugman
    The New York Times

    Friday 28 October 2005

    By Bush administration standards, the choice
of Ben Bernanke to succeed Alan Greenspan as
chairman of the Federal Reserve was just weird.

    For one thing, Mr. Bernanke is actually an
expert in monetary policy, as opposed to, say,
Arabian horses.

    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. The academic work on which his
professional reputation rests is apolitical.
Moreover, that work is all about how the Fed can
influence demand - 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. He even supported a
proposal by yours truly that the Bank of Japan
try to get Japan's economy moving by, among other
things, announcing its intention to push
inflation up to 3 or 4 percent per year.

    Last but not least, 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.

    All of this raises a frightening prospect.
Has President Bush been so damaged by scandals
and public disapproval that he has no choice but
to appoint qualified, principled people to
important positions?

    O.K., seriously, many economists and
investors feared that Mr. Bush would try to place
a highly partisan figure in charge of the Fed.
And even before the revelations surfaced about
cronyism at FEMA and elsewhere, there was
widespread concern that Mr. Bush would try to
select a John Snow type - a businessman whose
only qualification is loyalty - to run monetary
policy. The naming of Mr. Bernanke was a sign of
Mr. Bush's weakness, and it brought a collective
sigh of relief.

    Obviously I'm pleased, too. Full disclosure:
Mr. Bernanke was chairman of the Princeton
economics department before moving to Washington,
and he made the job offer that brought me to
Princeton.

    So should we all feel confident about the
economic future, assuming that Mr. Bernanke is
confirmed? Alas, no.

    This isn't a comment on Mr. Bernanke's
qualifications, although there is one talent,
important in a Fed chairman, that Mr. Bernanke
has yet to demonstrate (though he may have it).
Mr. Greenspan, for all his flaws, 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.

    No, my main concern is that the economy may
well face a day of reckoning soon after Mr.
Bernanke takes office. And while he is surely the
best politically possible man for the job (all
the other candidates I would have been happy with
are independents or Democrats), 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.

    It's true that Mr. Bernanke has given
speeches suggesting both that a "global savings
glut" will continue to provide the United States
with lots of capital inflows, and that housing
prices don't reflect a bubble. Well, soothing
words are expected from a Fed chairman. He must
know that he may be wrong.

    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.
In fact, Bill Gross of the giant bond fund Pimco
has already predicted that next year Mr. Bernanke
will start cutting interest rates.

    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.

http://www.truthout.org/docs_2005/102805M.shtml