Federal Reserve Chairman Ben Bernanke
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Krugman and his allies argue that the hawks are simply wrong, that there's no evidence of inflation on the horizon, that deflation is a much more serious threat, and that in any case, it's crazy to worry about mythical price increases sometime in the future when there's so much real joblessness right now. And Bernanke basically agrees! He doesn't want to tighten policy when the economy is so weak. He wants the Fed to prepare an exit strategy someday, but not anytime soon. He knows that deflation (by making a dollar worth more tomorrow than it's worth today) could be a disaster for exporters, job seekers and borrowers — including the U.S. government. He gave a well-received speech in 2002 about making sure deflation never happens here.
So Bernanke does, in fact, want to keep giving the economy gas. The question is what he could do to give it even more gas, since he's already jammed the traditional pedal to the floor. He could try to cut the interest rate on bank reserves parked at the Fed, but those rates are already down to 0.25%. The most potent ammunition he has left would be additional "quantitative easing," econo-speak for pouring even more cash into the banking system. The goals would be more liquidity, cheaper credit, and lower mortgage rates and other long-term interest rates that would make cash-hoarding less attractive.
But Bernanke is reluctant to do this. First of all, it's not clear that the economy really needs more liquidity (when banks and corporations are already sitting on boatloads of cash) or cheaper credit (when long-term rates are already spectacularly low). Trying to restore consumer demand or business confidence by forcing additional dollars into the financial jet stream could be like pushing on a string. This really is uncharted territory, and economists are not sure whether nontraditional methods that produced powerful results in chaotic times will have much impact now that markets have settled down.
Bernanke's deeper concern is that the potential blowback from additional easing — which would give additional girth to the Fed's balance sheet — could overwhelm any potential benefit. He's particularly afraid that markets might stop perceiving the Fed as a credible inflation-fighter, which could drive up inflation expectations and trigger all kinds of nasty side effects — including higher long-term interest rates that would defeat the entire purpose of the easing. Bernanke may not agree with the Larry Kudlow-style inflation hawks who routinely accuse him of weakening the dollar and "monetizing the debt," but he recognizes their influence with investors.
Would a little inflation be such a terrible thing? In fact, as Krugman as well as right-of-center economist Tyler Cowen have suggested, it could be a very good thing, not only for those exporters, job seekers and borrowers — and monetizing a bit of our immense national debt might not be such a horrible idea — but for the economy in general. If you know your money is losing value, you're a lot more likely to do stuff with it, whether you're a bank, a business or an individual. Economies hum when people do stuff with their money instead of keeping it in vaults or mattresses. And again, Bernanke basically agrees! As a scholar, he actually advocated explicit inflation targets, and his Fed has kinda-sorta edged toward a wink-wink-nudge-nudge target just under 2%. But inflation is still well below 2%, and he hasn't really tried to change that.
To a certain degree, Bernanke seems scared. He understands that a little inflation could, indeed, be a good thing, but he seems to view inflation as a tiger that is best left in its cage, because market perceptions and animal spirits can turn a little inflation into out-of-control inflation. He doesn't seem to think the presumably modest jobs boost from printing more money would be worth the risk to the Fed's hard-won inflation-fighting reputation. With so many ominous thunderclouds lurking — a lousy global economy, an unsustainable federal deficit, the rise of austerity abroad — he's afraid that if he opens another umbrella we might get hit by lightning.
So it looks like we'll keep getting wet.
Reasonable people can disagree about Bernanke's decisions, and I still believe he deserves the benefit of the doubt after his whatever-it-takes ingenuity helped avert Depression 2.0. That said, if he intends to keep doing nothing on the monetary side, I do think he should push Congress harder to do something on the fiscal side. If you parse his testimony, he seems to support short-term deficit-financed stimulus — things like food stamps, infrastructure projects and tax rebates — combined with a serious medium-term commitment to deficit reduction. But as I found out while my bosses were watching, he can be quite hard to parse. He ought to make it perfectly clear that another burst of fiscal stimulus could create jobs and boost growth. And members of Congress ought to listen.
Their bosses are watching too.