BEST OF DOUG NOLAND

November 1, 2005

And while there is some media banter with respect to the "dove" or "hawk" label, there is no question that Dr. Bernanke is An Impassioned Inflationist. As for fighting inflation: he’ll talk the talk – of course, and there will come a day when talk will not suffice. In the past, I have labeled chairman Greenspan both an Inflationist and monetary policy radical. Incredibly, Professor Bernanke takes these to a whole new, dangerous extreme….

I have no reason to doubt that Dr. Bernanke is a "kind and decent man," as such described by our President. He conveys an aura of integrity, and he is clearly extremely intelligent and a very hard worker. He is said to be a nice guy, and I like nice guys. I very much respect all of these attributes. And I do sense that his instincts are to be a straight-shooter. The nature of his new position, however, will demand a change, and it appears this process is well underway. He has no chance of becoming the master obfuscator, like his predecessor, or attaining Greenspan's amazing capacity to dodge every tough question and "never take a punch." Dr. Bernanke will provide an easy target. I am tempted to fault Dr. Bernanke for "being an academic," although it is more clearly stated that I view his background as a distinct handicap for presiding over this New Age of Wall Street Market and Speculation-based Finance in what I expect to be an increasingly hostile environment.

And I have my own theory as to Professor Bernanke’s stunning meteoric rise to prominence. As a disciple of Milton Friedman and as one of the leading academics in the field of post-Bubble reflationary monetary policies, he was a natural selection for the Fed when nominated in late-2001. It was the Greenspan Fed’s view that the U.S. economy had entered a post-Bubble environment, and there were some real advantages associated with procuring the esteemed academic research and analytical firepower to dignify their plan for less-than-admirable inflationary policies….

Take an hour or so and carefully read his April 2005 speech, "The Global Savings Glut and the U.S. Current Account Deficit." I can honestly say – with a conscious effort to avoid hyperbole – that it is one of the most flawed and suspect pieces of analysis I have ever read from a respected economist. And the subject matter is one of the most pressing issues that must be confronted by our policymakers. It actually does seem like he is oblivious to the fact that our intractable Current Account Deficit is foremost a reflection of unrelenting Credit excess, inflated asset prices, over-consumption and economic distortions. He is similarly oblivious to the reality that this "global savings glut," being accumulating by our trading partners, is largely IOU’s we created in the process of mortgage and asset-based borrowings. Yet, this line of reasoning is consistent with his analytical framework. From the preface of his book: "I believe that there is now overwhelming evidence that the main factor depressing aggregate demand [during the Great Depression] was a worldwide contraction in world money supplies. This monetary collapse was itself the result of poorly managed and technically flawed international monetary system (the gold standard, as reconstituted after World War I)." Dr. Bernanke has a troubling (Friedman-like)) penchant for looking outside the U.S. Credit apparatus, financial system and markets when it comes to identifying the true source of instability.

And from his 1995 article, The Macroeconomics of the Great Depression: A Comparative Approach: "To understand The Great Depression is the Holy Grail of macroeconomics… We do not yet have our hands on the Grail by any means, but during the past fifteen years or so substantial progress toward the goal of understanding the Depression has been made… To my mind…the most significant recent development has been a change in the focus of Depression research, from a traditional emphasis on events in the United States to a more comparative approach that examines the experiences of many countries simultaneously."

And from his March 2004 speech, Money, Gold, and the Great Depression: "Some important lessons emerge from the story. One lesson is that ideas are critical. The gold standard orthodoxy, the adherence of some Federal Reserve policymakers to the liquidationist thesis, and the incorrect view that low nominal interest rates necessarily signaled monetary ease, all led policymakers astray, with disastrous consequences. We should not underestimate the need for careful research and analysis in guiding policy. Another lesson is that central banks and other governmental agencies have an important responsibility to maintain financial stability. The banking crises of the 1930s, both in the United States and abroad, were a significant source of output declines, both through their effects on money supplies and on credit supplies. Finally, perhaps the most important lesson of all is that price stability should be a key objective of monetary policy. By allowing persistent declines in the money supply and in the price level, the Federal Reserve of the late 1920s and 1930s greatly destabilized the U.S. economy and, through the workings of the gold standard, the economies of many other nations as well."

I do agree with the notion that "ideas are critical." Unfortunately, our new Fed chief has some very flawed and dangerous ideas of how to deal with critical events that could very well develop early in his term. He should be talking restraint and the risks associated with attempting a "soft-landing." But he and his fellow Inflationists will have none of that. And while the stock market has already demonstrated its stamp of approval, the bond market and dollar could not quite shield their grimaces. There remains this dogged hope that a housing cool-down will damp inflationary pressures – allowing Dr. Bernanke to cut rates early next year. At this point, I wouldn’t bet that a moderation in mortgage Credit growth will significantly alter the inflationary backdrop. Inflationary pressures are becoming only increasingly pronounced and oblivious to little baby-step rate increases. The system beckons for an actual tightening of financial conditions, a development certainly not accomplished by a little restraint employed at the fringe of mortgage lending excesses.