Paul Krugman asks; “What Would Professor Bernanke Do?” 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. Krugman argues that such policies will ignite some inflation but will lower current unemployment. Dr. Krugman offers some decent but not real sharp insights for why Dr. Bernanke isn’t listening to his former self. 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. I have little understanding of how they “know what they know”. How do they predict the consequences of any actions they take? 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. Fears of inflation and rising taxes retards real investment now. There is another game being played between Bernanke and Congress. Bernanke wants to see Congress reduce the deficit and address long run entitlements. He appears to blame Congress for creating “uncertainty”. His strategic choice over fighting unemployment or inflation depends on what Congress does and Congress’ legislation depends on the state of the macro economy. Complicated stuff! I worry that Bernanke is too aware of how future historians will write about him.
UPDATE: This NY Times article highlights the pressure group competition taking place within the Fed.