The Kroog Versus Helicopter Ben

Paul Krugman on Bernanke:

Right now, real interest rates are too high, on a PPE basis (that’s Proof of Pudding is in the Eating): the economy is clearly operating far below capacity due to insufficient demand. The cost of that insufficient demand is enormous — not just in dollars of wasted output, but in severe social and psychological damage to the unemployed.

While real interest rates are too high, however, the short-term nominal rate is as low as it can go. So there are only two ways real rates can be reduced. Either the Fed has to buy long-term assets, driving down the wedge between short and long rates — the Gagnon proposal, which comes out of Ben Bernanke’s own work — or it needs to raise expected inflation. Or it could and probably should do both.

But it is, in fact, doing neither. Why? Because of fear that the Fed would lose credibility as a staunch inflation-fighter.

Future economic historians will, I believe, see this as fundamentally absurd — as absurd as the inflation fears that paralyzed the Bank of England in the early 1930s even as the world went into a deflationary spiral. Yes, there may someday be a 1970s-type episode in which the Fed needs to fight inflation, not encourage it — but it’s a long way off. Furthermore, why on earth would we imagine that the Bernanke Fed, by showing itself willing to inflict gratuitous pain in 2010, would make it easier for whoever is running the Fed in, say, 2020 to control inflation then, let alone that the tradeoff of real pain now versus hypothetical pain much later, if it even exists, is worth making?

Anyway, as far as I can see nobody is even trying to assess these alleged tradeoffs seriously. Instead, the notion of an unchanging inflation target — not to be revised even in the face of the worst slump since the Depression — has acquired a sort of mystical force; it has become identified with the notion of Civilization, in much the way that a previous generation assigned mystic significance to the gold standard.

Ben Bernanke, we’re told, is a great admirer of Liaquat Ahamed’s Lords of Finance; so am I. All the more irony, then, that Ben has, without realizing it, turned into Montagu Norman.

Shorter Paul Krugman:  "Helicopter Ben has gone from Old School George Lucas to Midichlorian George Lucas, and I hope you like 10% unemployment as a result."

Now, I'm not a Nobel-winning economist, but even I see our problem is deflation, not inflation.  Ben wants to fight inflation so much he doesn't give a damn about social programs or unemployment.

That's a problem.