Friday, March 16, 2012

Paul Volcker Warns Ben Bernanke: A Little Extra Inflation Would Backfire

For the second time, Paul Volcker, the predecessor of the incumbent US Federal Reserve chief Ben Bernanke takes the latter’s policies to task.

From Newsmax,

The U.S. economy is recovering "pretty well" and trying to juice it up by allowing a little extra inflation would be disastrous, said Paul Volcker, the former Federal Reserve chairman known for successfully reining in double-digit inflation.

"I think that is kind of a doomsday scenario," Volcker told an economic summit when asked if the Fed should foster higher inflation to stimulate faster growth.

Higher inflation would backfire by causing interest rates to rise. "You are not going to get any stimulus and you are going to make it much harder to restore price stability," Volcker told the Atlantic magazine conference.

I candidly don’t believe that Mr. Ben Bernanke is entirely clueless on the risks of the policies he has implemented. While part of these may have been ideology based, I don’t think this tells the entire story.

Mr. Bernanke, as an insider, may not just be working around economic and financial theories. My guess is that the directions of policymaking may have been substantially influenced by pressures from entrenched powerful interests group.


While Paul Volcker’s reputation has been built from his inflation fighting stance, I am not sure he would depart from adapting Bernanke’s policies if he is in the latter’s shoes today.

Circumstances during Mr. Volker’s time have immensely been different than today. There has been a vast deepening of financialization of the US economy where the share of US Financial industry to the GDP has soared. In short, the financial industry is more economically (thus politically) important today than in the Volcker days. Seen in a different prism, the central bank-banking cartel during the Volcker era has not been as embedded as today.

This is not to defend Bernanke, but to exhibit the divergence in the degree of political ties between US Federal Reserve and Wall Street.

Bailouts, Quantitative Easings, currency swaps and zero bound rates only reveals of the priorities of team Bernanke which have mostly been designed to protect the banking and financial industry.

And the only way to eradicate these cozy crony relationship which thrives upon policies that “privatize profits, socialize losses” is to end the Federal Reserve and the central banking system.

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