CNBC host Larry Kudlow is a throwback to a 80s supply-side conservatism, which has maintained that any interference in the free market is damaging, and inflation is the primary evil against which the Fed should be on guard.
Throughout the economic crisis, he’s criticised the lax policies of Bernanke.
Here in late November he wrote for The National Review Gold Slams Bernanke, worrying that a sagging dollar would lead to inflation, against which Bernanke had no good defence.
Mr. Bernanke just doesn’t get that inflation-sensitive market-price indicators — like rising gold, oil, and commodity indexes, and the falling dollar exchange rate — are trying to signal higher future inflation. Instead of listening to markets, he is determined to fight them. This is a losing battle. Instead of a market-price rule (anchored by gold) we have some sort of Bernanke fine-tuning rule. It’s not working.
Just last September he slammed the futility of QE3 in a piece for Investors Business Daily:
Bernanke’s QE3 is an unlimited Fed effort to buy mortgage bonds with new cash. The plan — which starts immediately — envisions $40 billion of bond purchases and money-creation per month, coming to $480 billion over the next year. And there are no limits to these purchases. These operations are open-ended. This could last for years — maybe in perpetuity — until job creation shoots way up and unemployment comes way down.
Nothing like this has ever been used by our nation’s central bank. The Fed’s balance sheet, which has ballooned from around $800 billion to $2.5 trillion under Bernanke, will go to $3 trillion, or $4 trillion, or who knows how high?
But here’s the rub: More money doesn’t necessarily mean more growth. More Fed money won’t increase after-tax rewards for risk, entrepreneurship, business hiring, and hard work. Keeping more of what you earn after-tax is the true spark of economic growth. Not the Fed.
These anti-Fed views have generally been very much in line with the Tea Party-infused GOP, which has been very sceptical towards Bernanke and aggressive monetary policy.
But following the election of 2012, and the improvement in the economy, the fever is breaking a bit, and a new strain of thinking on monetary policy is infecting the mainstream right.
And today in The National Review, Kudlow makes a stunning admission. Ben Bernanke might have been right all along.
Kudlow’s piece draws on the hot school of “Market Monetarists” who draw on the work of Milton Friedman to endorse the idea that the best Fed policy is one that pursues a Nominal GDP target.
This idea, that the Fed should pursue a stable Nominal GDP path has fans on Wall Street (Goldman’s Jan Hatzius is one) academia (Scott Sumner, David Beckworth, Michael Woodford) the Federal Reserve (Janet Yellen, the likely next Fed chair has all-but endorsed it), and various corners of the media (Ramesh Ponnuru, Ryan Avent, and Matt O’Brien).
Kudlow isn’t totally sold on it yet, and he’s still worried about gold prices and King Dollar, but he writes:
…if I have this story right, the market monetarists want the central bank to enforce a nominal GDP growth rule, which will avoid both deflation and inflation, and thus give fiscal incentives breathing room for a more rapid job-creating expansion.
I don’t agree with Bernanke’s unemployment target or his criticism of lower government spending. But I confess that he may have the monetary-stability story more right than I originally thought.
If gold remains soft, and King Dollar steady, perhaps the former Princeton professor deserves a little more credit. He may have gotten that story right.
A big share of the credit here for this shift definitely goes to Jim Pethokoukis, who has been using his perch at AEI to school conservatives about monetary policy, and to debunk the idea that Bernanke is some crazy reckless dove who is not worried about inflation at all.
In fact, Pethokoukis is holding an event tomorrow at AEI featuring Ryan Avent, David Beckworth, and Scott Sumner on revamping the Fed and the idea of market monetarism. You’ll be able to watch it live online at noon, and hopefully get a glimpse of new monetary ideas on the right that aren’t all about hard money.
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