TCS Daily


No Solid Gold Performance from Bernanke

By Larry Kudlow - December 3, 2009 12:00 AM

Fed head Ben Bernanke got hammered today during his reconfirmation hearing in front of the Senate Banking Committee. Jim Bunning was Bernanke's toughest critic, followed by Richard Shelby, Jim DeMint, and yes, Chris Dodd, the beleaguered committee chair who in all likelihood will be defeated in Connecticut next year.

But unfortunately no one directly asked Bernanke why the current gold price has surged to over $1,200, and what that might mean for future inflation and the U.S. economy.

The Wall Street Journal editorialized this morning that "the country needs a new Fed chief." The editors went on to say that while the Fed chair knows how to ease money, there's no evidence during his tenure as Fed chief (or formerly as Alan Greenspan's copilot) that he knows how to make money sufficiently scarce in order to protect the dollar and prevent inflation.

Surely the steadily depreciating dollar and the surging gold price are bad omens for the future economy. In fact, inflation rates have been edging higher in recent months and will likely continue upward in the months ahead. Import prices channeled through the weak dollar have been rising. So while many of us hoped the Fed chair would be forced to address the gold question, he never did.

Bernanke did respond to questions on the declining dollar exchange rate, but as he always does, he insisted that it doesn't matter as long as inflation is low. Huh? If you print more dollars than the rest of the world requires, surely this means too much money chasing too few goods. And as Art Laffer has pointed out, the exchange-rate mechanism is itself a transmitter of higher domestic prices.

Time and again Bernanke argued that the Fed was not to blame for the ultra-easy money that created the housing and commodity bubble which got us into this soup in the first place. He insisted that bankers were to blame for their "risky" lending policies, and he acknowledged that the Fed should have been tougher as a bank regulator.

But the point that escapes Bernanke is that negative real interest rates and excess money-creation trigger a chain of consequences throughout the financial system. Mistakes were made left and right that might never have been made had the dollar been sound and the inflationary bubble never appeared.

In effect, you get what you pay for. The Fed paid for easy money, and we all got the recessionary credit-crunching consequences of the Fed's mistake.

By failing to heed the message of financial and commodity prices, future Fed decisions are likely to be just as flawed as past ones. It isn't that Bernanke lacks the brains. It's that he's employing the wrong monetary model. Targeting the unemployment rate means always erring on the side of ease. On the other hand, targeting market-price signals would get us back to the financial and economic stability of most of the 1980s and 1990s.

The economy is improving, however slowly. And market-price indicators are telling the Fed to curb its balance sheet and let its target rate float upward. Regrettably, until the dollar and gold vigilantes punish the central bank even more, Bernanke will continue to stubbornly resist this message.

Heck, even Tiger Woods fessed up and came clean. Now it's time for the Fed chief to do likewise.


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

as solid as jello
Nobody bothered to ask him why the price of gold is so high because they already know the answer. And they don't mind because those guys also like fiat money, thus they are just as much a part of the problem as he is.

There should be no Bernanke and no FED.

The Creature from Jekyll Island
Did you see what that Senator Bunning actually said to Bernanke?

He ROYALLY ripped him a new one. He never even had to mention gold, if you ask me. All his other points were damning in that they are the REASONS why gold is soaring.

And to prove for an absolute fact that he knew what he was talking about, he closed his Bernanke/Fed barbecue with the phrase:

“Your Fed has become the creature from Jekyll Island.”

If any of you have studied the Fed and, especially how it came into existence. You'll know what that reference means.

The rest of you who don't, just Google 'creature of jekyll island' and wise up.

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