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Ben Bernanke sees “Stagflation” ahead

When he stands in his kitchen one morning in Washington, DC, drinking a glass of light-flavored water, Ben Bernanke is wearing a gray suit, a button-down shirt, no tie and a pair of Brooks sneakers. He looks far beyond the time in the Federal Reserve, where he was president for eight years in what – until recently – was considered the most precarious economic moment of the last half century.

But the coronavirus pandemic and its economic impact – the decline in overnight employment combined with a supply of money that has not been seen in history and now, apparently, current inflation – has made Mr. Bernanke think. And write. Mr. Bernanke has been in a kind of self-imposed quarantine and written a book, “21[ads1]st Century Monetary Policy: The Federal Reserve From the Great Inflation to Covid-19,” which will be published on Tuesday.

Mr Bernanke describes the book as “academic”, but at the moment it may be a uniquely practical book as the public tries to better understand the forces of the Federal Reserve and Congress to push or slow down our economy in the middle of a supply chain. crunch and sky-high demand. The book itself by the former chairman of the board is an example of the cross-currents that unfold in our economy: “Given the interruption in the supply chain, this book took six months to go from the final manuscript until it was shown in the store,” he said.

Mr. Bernanke, who wrote the book “When it became clear that I was not going to travel much and that we were home for a while” in the early days of the pandemic, gives a story about the Federal Reserve – his own Master’s thesis was about the crash in 1929 and its aftermath, which he says provided valuable lessons for how he reacted to the recession in 2008. However, his focus this time is not on 2008, but on the 1970s, which he suggests is the closest. analogous to what is happening in today’s economy and what can happen next.

He hopes that Jay Powell, the current central bank governor, can help curb inflation without resorting to the extreme measures taken by former Fed leader Paul Volcker in the 1970s or sending the economy into recession.

But he also suggests that it is possible the nation may be in a period of “stagflation,” a word that Mr. Bernanke says was invented in the 1970s.

“Even under the benign scenario, we should have a declining economy,” he said. “And inflation is still too high, but declining. So there should be a period in the next year or two where growth is low, unemployment is at least slightly up and inflation is still high,” he predicted. you can call it stagflation. “

He is particularly aware that current inflation can quickly become a political issue – possibly putting the Federal Reserve at the crossroads for the public – in a way that even unemployment does not provoke. “The difference between inflation and unemployment is that inflation affects only everyone,” he said. “Unemployment affects some people a lot, but most people do not react too much to unemployment because they are not personally unemployed. Inflation has a societal impact. “

His focus this time, however, is not on 2008, but on how the Federal Reserve has reacted to various economic scenarios over more than a century, and toured readers through the reins of various Fed chairs such as Alan Greenspan. Readers are likely to be particularly focused on Mr. Bernake’s analysis of the 1970s, which may be the closest analogue to what’s happening in today’s economy.

Mr Bernanke appears to be somewhat concerned about the credibility of the Federal Reserve in the public consciousness, especially given the aggressive approach he took in 2008 and the fact that Mr Powell continued during the pandemic. “I had this fantasy conversation in my head between Jay Powell and William McChesney Martin, where I think Martin would probably have had a stroke or something because of the different things that intervening chairs have done,” he said, referring to Mr. Martin, the leader. of the Federal Reserve from 1951 to 1970.

In the book, Mr. Bernanke discusses how he sought to strengthen the reputation of the Federal Reserve’s independence by making it more transparent, including holding press conferences. “In everyday life, we judge the credibility of promises more from the reputation of the promise makers than from the exact words they use,” he said. “The same principle applies to central bank promises. Central banks’ credibility depends in part on the personal reputation and communication ability of key decision-makers, but since decision-makers cannot irrevocably bind themselves or their successors, institutional reputation is also important. Because of concerns about institutional reputation, decision-makers have an incentive to follow through on promises, even those made by their predecessors. “

Bernanke left the Fed as chairman of the board in 2014, but he has remained in Washington, where he is a fellow at the Brookings Institution and senior adviser to the investment company Pimco. He said he preferred not to have to make the decisions that Mr. Powell is now facing, or to endure the hours of congressional testimony in which his decisions were questioned.

Instead, he prefers to think about the role of a small removal and the ability to pontify on political issues he used to avoid.

When asked if he thinks student debt should be forgiven, his trademark break has disappeared: “It would be very unfair to eliminate. Many of the people who have large amounts of student debt are professionals who will go on to make lots of money over the course of their lives. So why should we favor them over someone who did not go to college, for example? ”

Or how about the Federal Reserve changing its inflation target? No break either. “Inflation target should not be used as a short-term tool, you know? If you raise the inflation target to 3 percent for a short-term purpose, why not 4 percent, or why not 3.5 percent, or why not create a band, or whatever? »

The good news is that Mr. Bernanke is not worried about a 2008-style crisis. He is concerned about house prices and says that they have “increased a lot, like 30 percent in the last two years”.

“There is something that needs to be monitored,” he said, but unlike in 2008, “the mortgages lent to buy these houses are generally much higher quality than the subprime loans 15 years ago.”

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