TCS Daily

Helicopter Ben or King Dollar?

By Larry Kudlow - August 25, 2009 12:00 AM

It's no surprise that President Obama re-nominated Fed head Ben Bernanke to a second term as chair of the central bank. It was the path of least resistance. Essentially, the president argued that Bernanke was the guy who kept us out of a second Great Depression. Okay, fine. But now we must ask: Is Bernanke the right guy to craft and pilot an exit strategy that avoids new inflationary bubbles?

In short, will he be Helicopter Ben or King Dollar?

It's a tough question that markets are puzzling over. Interestingly, there was very little change in stock and bond trading today. So the guessing game will continue. If Mr. Bernanke repeats his role as Alan Greenspan's bubbled-over, easy-money copilot between 2002 and 2005, we're in for trouble.

Stanford economist John Taylor wrote this up in his great short book, Getting Off Track. The dollar plunged while hard-asset prices (like housing, commodities, energy, and gold) soared. And then came the tightening that moved us from boom to bust. Is this movie gonna play all over again? Nobody knows.

On the other hand, if Mr. Bernanke adopted a financial-and-commodity-market price rule — using inflation-sensitive, real-world price indicators like gold, commodities, bonds, and so forth — the so-called exit-strategy outcome from the easy-money rescue of the banking system over the past year might have a much happier ending.

But looking at Bernanke's record and numerous speeches, he really seems more like a Republican Phillips-curve advocate who targets the unemployment rate in a false trade-off with inflation. This means he will likely overstay the Fed's easy-money welcome, and that future inflation and interest rates are going up.

I have never heard Mr. Bernanke proselytize for a stable-dollar currency value of money. Never. Of course, like any central banker, he says he's for price stability. But the question remains how to get there and what model to use. Supply-siders like myself strongly support a price-rule model, where markets tell government what to do. But all too often it seems like Mr. Bernanke — who has been out there buying Treasury and mortgage bonds in a futile attempt to control their yields — prefers the model where the government tells markets what to do. This is a loser, as we have painfully learned in the past.

Paul Volcker watched gold in the '80s. So did Alan Greenspan for most of the '90s. But I don't think Mr. Bernanke watches gold at all. And I don't think he worries much about the fate of the dollar.

Let me not pre-judge Bernanke's second term. The Fed chair has done a good job over the past year in moving the financial system towards recovery. But I think the ultimate question remains: Helicopter Ben or King Dollar?

This article first appeared on Kudlow's Money Politic$.


and my take is...
...because he promised to print more money-on-demand than Mugabe ever could get his central bankers to do if Obama so demands it.

Bernanke is turning out to be Arthur Burns II

"Economics historian Bruce Bartlett gives Burns poor marks for his tenure as Fed chairman because the inflationary forces that began in 1970 took more than a decade to resolve. "The only disagreement among economists is whether Burns fully understood the mistakes he was making, or was so wedded to incorrect Keynesian theories that he didn't realize what he was doing. The only alternative is that he was under irresistible political pressure from Nixon and had no choice. Neither explanation is very favorable to Burns. Economists now recognize the Nixon era as Exhibit A in how the adoption of bad economic policies in pursuit of short-term political gain eventually turns out to be bad politics as well."


Off topic: President to control the interenet. Where is the outrage?
"The new version would allow the president to "declare a cybersecurity emergency" relating to "non-governmental" computer networks and do what's necessary to respond to the threat. Other sections of the proposal include a federal certification program for "cybersecurity professionals," and a requirement that certain computer systems and networks in the private sector be managed by people who have been awarded that license. "

If Congress thinks the health care town halls were hell, wait until this hits the fan.

The harder they squeeze, the more that slip through.

Government attemtps to stifle communications fail
"Gutenberg's printing press would of course have just the opposite effect. His press would be remembered as the sine qua non of general literacy, the fuse that lit the Protestant Reformation, the Enlightenment, and our modern, secular world. Under the impact of Gutenberg's machine the church would disintegrate in Northern Europe, but Gutenberg would end up bankrupt and a money lender would seize his invention claiming it as his own. Luckily for Gutenberg historians eventually unraveled the actual [End Page 8] story and Gutenberg, not an investor named Futh, was resurrected as the hero who made the machine that changed the world. Otherwise we would be living at the end of the Futhian, not the Gutenberg, era. Anyone interested in this story should read the Gutenberg Revolution by Jon Man, now out of print, a wonderful brief account of Gutenberg and the machine that changed the world.'

Pandora's box has been opened.

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