The last post was purely the product of a rushing graduate student: trying to say something but nothing comes out. So this is a follow-up.
It is almost a consensus among economists that you need a Paul Volcker to tackle stagflation. By Paul Volker, I mean a hard-line central banker who can resist politicians ' pressure to "save the economy" and care only about inflation. However, the gradually accepted explanation of the cause of the Great Depression was that a tight monetary policy exacerbated and prolonged the Depression.
When Ben Bernanke was nominated as the chairman of the Fed, the media had quite a profile of the academic (Prof. Walsh, upon my request, spent a class discussing Bernanke's contribution as an economist). One thing The Wall Street Journal talked about Brenanke was his admiration of the great Milton Friedman and his great book on the American monetary history. Bernanke visited Prof. Friedman to pay his tributes and thanked him for correcting the long-held view that New Deal saved the U.S. from further slumping. In fact, both Prof. Bernanke and Frieidman believed the tightening credit of the Fed was the real culprit of the Great Depression.
Pulling the history class a little closer, we will find Bernanke's attitude toward the contemporary Great Depression-Japan's lost decade was no different: A central bank failed to pump the liquidity into the market when the economy was badly needing extra cash. Even when the Bank of Japan cried out loud that the nominal interest rate was zero and therefore BOJ was powerless, Bernanke still believed BOJ can depreciate yen to help the economy. He is very consistent on this aspect.
By examining his words and deeds, we can almost conclude that Bernanke believes he is fighting a severe recession in the making. Therefore, forget about the inflation for now and print more money! For me? I really hope he is wrong.
