Sunday, 24 January 2010

Mr. Bernanke as head deck-chair man

Brad DeLong has an interesting piece republished at SeekingAlpha, in which he engages in some "who's more in the know" sparring with fellow academic Paul Krugman on the Bernanke question.

Perhaps the most interesting point of the article, which fails to convince me on what his view of Bernanke really is, can be found in the following comment that he (i.e. DeLong) allegedly received from Fed officials in the pre-collapse years regarding the real estate bubble.
Of course we can't say "there's a bubble" or be reported as saying "there's a bubble." For a central banker to say "there's a bubble" is for a central banker to say "SELL! SELL!! SELL!!!" And financial markets where people have to worry that central bankers may suddenly say "SELL! SELL!! SELL!!!" are unlikely to function well. So we are off the record, right?...
It is indeed a sad reflection on the herding instinct of market participants (especially the prop trading desks?), that for any central banker to admit to the presence of a financial bubble is tantamount to issuing a SELL recommendation on most asset classes.

However, the problem increasingly is becoming one where cleaning up the messes left by burst bubbles is getting more and more difficult. Our ability to deal with the aftermaths may have reached the tipping point already.

While the benign neglect approach to monetary discipline prevails (based on the Ostrich school of Economics, not to be confused at all with any similar sounding approach), and there is a continuation of the reticence to remove the punchbowl until everybody has already started vomiting, conjuring up names to replace Mr. Bernanke and other FOMC dignitaries as Professor DeLong is keen to do, is a little bit like re-arranging the deckchairs on the Titanic.

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