Questions Bernanke should be asked

October 26, 2005|By JAY HANCOCK

QUESTIONS the Senate Banking Committee should (but probably won't) ask Ben Bernanke, the economist nominated to replace Alan Greenspan as head of the Federal Reserve:

Mr. Bernanke, you are an eloquent enemy of traditional inflation, as measured by the Consumer Price Index. But what about the so-called NEW inflation - stocks, homes and other assets that soar in value even as global competition keeps traditional, store-shelf inflation tame?

Will you try to identify "bubbles" in these asset markets and pop them with steep interest rates for the greater good?

Do you know irrational exuberance when you see it?

Greenspan has turned the Fed, once the monetary equivalent of Skull and Bones, into a much more open institu- tion.

When he took over, the Federal Open Market Committee's minutes and transcripts were official secrets, and even interest-rate changes were shrouded in murk. Now the Fed immediately announces rate changes. It publishes FOMC minutes a few weeks later and full transcripts five years later.

Is this a good thing, Mr. Bernanke? Will you keep it up?

As Fed boss you will effectively preside over a $50 trillion global economy that is based almost entirely on government-issued paper money backed by government's promise to issue more paper money. Perhaps in jest, you have suggested distributing this money to the populace from helicopters should you deem it necessary.

Are you REALLY the inflation fighter you claim to be?

Is a healthy economy all about jobs? Or is it about gross domestic product?

This column once reported that, out of six members on the semiofficial Business Cycle Dating Committee, you were perhaps most reluctant to declare that a recession started in March 2001.

Sure, the country lost 35,000 jobs that month, 297,000 the next and in excess of 600,000 more by summer's end. But you figured it might not be a recession yet because GDP, fueled by debt-happy consumers, was still growing.

Your colleagues disagreed, focused on the job trauma and voted March 2001 as the official recession starting point. Please explain.

The Federal Reserve System holds a monopoly on money creation. Like most monopolies, the Fed is a bloated haven of luxury and inefficiency.

Do you believe the Fed's work force of 20,000 and its operating budget of $1.6 billion could be trimmed and the proceeds directed into, say, Medicaid?

Can consumer inflation ever be a GOOD thing, even temporarily?

Could it help businesses that have struggled for years to increase prices and give employees raises, for example? Could it help people on fixed incomes who have been plastered by low CD, annuity and other interest rates, which are tied to low inflation?

Could it help a certain North American superpower inflate its way out of $8 trillion in national debt?

You are the country's best-known advocate of "inflation targeting," in which a central bank such as the Fed announces it will aim for a specific consumer inflation range over a specific period of time. Yet almost nobody in Congress, the Treasury or even the White House is enthusiastic about the idea, which critics fear would tie the Fed's hands in a crisis.

Would a Bernanke Fed adopt inflation targeting unilaterally? If Congress resists, what's Plan B?

In the uncertain days of 2002 and 2003, you were perhaps the most worried of all your Fed colleagues about deflation, a persistent fall in prices that can poison an economy.

Many economists believe the deflation threat has not disappeared. Since steep and quick interest-rate cuts are your preferred deflation antidote, some analysts suggest you will be eager to raise rates extra high in relative good times.

That way, they figure, you'll have plenty of room to ease should it become necessary.

Does this increase the danger of raising rates TOO high and causing what you fear most?

Words such as these often emerged from the mouth of Mr. Greenspan, your predecessor.

"But, as I have noted previously, while time preference may appear to be relatively stable over history, perceptions of risk and uncertainty, which couple with time preference to create discount factors, obviously vary widely, as does liquidity preference, itself a function of uncertainty."

Do YOU speak English, Mr. Bernanke? As a second language, perhaps?

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