As you no doubt know, Ben Bernanke gave an interview tonight on CBS 60 Minutes. Let me stress once again, as I have in the past, that I consider Ben Bernanke one of the most genuinely nice guys among elite economist I have had the good fortunate to meet. He has no reason to remember me, but we actually spoke several times when he visited NYU and he answered my questions about his studies on the Great Depression and monetary policy. He tolerated my questions and always talked to me, not down to me. And I certainly don't view him in his capacity as the Fed Chairman as engaged in some grand political conspiracy to make his friends rich and the rest of us poor. I view his "mistakes" as a result of intellectual error. His scholarship on the Great Depression is rigorous and carefully done. But his focus was on the 1930s, not the policy errors of the 1920s that caused the problems. He read Friedman, perhaps he would have been wise to have read Hayek.
I have increasingly come to the opinion that the data that individuals are pointing to as an example of the down-turn in 2008 is merely the manifestation of the market correcting for the previous distortions caused by the policy error of the manipulation of money and credit of the previous period. The claims that we must be pro-active as the system adjusts translates into a demand to be pro-active to prevent the market correction. In short, the demands to engage in monetary expansion to counter-act the downturn are in effect a demand to reinflate the previous credit induced boom.
But that is not what I want to focus on, though I know my position is controversial even among my peers in Austrian economics. Instead, I want to focus on the segment of Bernanke's interview where he dealt with the question of inflation and deflation. Bernanke --- as a good student of Milton Friedman --- wants to be known as an inflation fighter but ultimately he fears deflation far more than he worries about inflation. At one point in this segment of the interview he actually says in response to a question about inflation that he could stop inflation in 15 minutes.
His intellectual framework minimizes the costs of inflation, and his understanding of public administration minimizes the difficulties of policy making. Bernanke doesn't see the point of Hayek's "tiger by the tail" analogy with regard to inflation, and I don't think he buys the political difficulties that the legacy of Lord Keynes left us that Buchanan and Wagner identify in Democracy in Deficit. Bernanke's emphasis in the interview was the costs of doing nothing, but he doesn't really address the costs of what was done. I don't expect a man in his position to do so in an interview on CBS. But he is such a sincere man, that I actually think his private views and his public views are not so divorced from one another. His is not an error of malfeasance, but one of intellectual error. That intellectual error includes an overconfidence in the ability of Fed powers to keep inflation in check with a single policy decision that takes 15 minutes to implement, as well as his assessment that in fighting the deflationary spiral the tools of monetary policy can be used optimally to keep an economy from collapsing. He has read Miltion Friedman on the Great Depression in depth, I suggest a close reading of Friedman's review of Abba Lerner's The Economics of Control, where he warns about thinking about public administration and policy making as if it was in a vacuum. Bernanke insisted in the interview that the Fed was completely independent of politics, and was in fact an institution of benevolent social control with the public interest as its only purpose.
But what if this form of sincere but ultimately arrogant progressivism is the ultimately source of policy errors?