Paul Krugman asks; “What Would Professor Bernanke Do?” Â Dr. Krugman concludes that the Chairman should read some of his (Bernanke’s) old papers and pursue the policies that in the past he had supported. Â Krugman argues that such policies will ignite some inflation but will lower current unemployment. Â Dr. Krugman offers some decent but not real sharp insights for why Dr. Bernanke isn’t listening to his former self. Â Star Trek’s The Borg is implicated.
Bernanke chairs a group of very smart Federal Reserve economists who disagree sharply about how the macro economy works. Â Â I have little understanding of how they “know what they know”. Â How do they predict the consequences of any actions they take? Â What economic model of reality are they basing these predictions on?
You would have to be a very good game theorist to begin to understand the relationship between the Fed, Congress and the private sector right now. Â Fears of inflation Â and rising taxes retards real investment now. Â Â There is another game being played between Bernanke and Congress. Â Bernanke wants to see Congress reduce the deficit and address long run entitlements. Â He appears to blame Congress for creating “uncertainty”. Â His strategic choice over fighting unemployment or inflation depends on what Congress does and Congress’ legislation depends on the state of the macro economy. Â Complicated stuff! Â Â I worry that Bernanke is too aware of how future historians will write about him.
UPDATE: Â This NY Times article Â highlights the pressure group competition taking place within the Fed.