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Friday, October 28, 2005

Krugman on Bernanke

by Calculated Risk on 10/28/2005 01:27:00 AM

Dr. Thoma excerpts from Dr. Krugman's most recent column: New Fed Chairman Bernanke and the Bubble

Krugman on Bernanke's recent comments: "...soothing words are expected from a Fed chairman. He must know that he may be wrong."

Excerpt (italics Krugman, other Dr. Thoma):

... my main concern is that the economy may well face a day of reckoning soon after Mr. Bernanke takes office. And ... coping with that day of reckoning without some nasty shocks may be beyond anyone's talents. The fact is that the U.S. economy's growth over the past few years has depended on two unsustainable trends: a huge surge in house prices and a vast inflow of funds from Asia. Sooner or later, both trends will end, possibly abruptly.

But hasn't Bernanke said there is no housing bubble, and that the global savings glut explains the international trade imbalance and the dangers there aren't as large as many believe?

...Well, soothing words are expected from a Fed chairman. He must know that he may be wrong.

If he is wrong, what should he do? Does he have what it takes to handle such events?

If he is, the U.S. economy will find itself in need of the "Rooseveltian resolve" Mr. Bernanke advocated for Japan. We can safely predict that Mr. Bernanke will show that resolve. ...

It's reassuring to hear such praise for Bernanke. It sounds like monetary policy is in good hands.

But that may not be enough. When all is said and done, the Fed controls only one thing: the short-term interest rate. And it will be a long time before we have competent, public-spirited people controlling taxes, spending and other instruments of economic policy."

That's not quite as reassuring.