Will Bernanke Grow a Spine In Time To Stop Inflation?

Steve Hanke argues in Forbes that Paulson, Bernanke et al. have set the economy on a disastrous course by debilitating the dollar and institutionalizing inflation. By setting rates too low, Hanke believes that the Federal Reserve, far from cushioning economic downturns, exacerbates them by distorting savings and consumption rates:

With interest rates artificially low, consumers reduce savings in favour of consumption, and entrepreneurs increase their rates of investment spending. And then you have an imbalance between savings and investment. You have an economy on an unsustainable growth path.

By pumping the economy full of excess liquidity during natural downturns, the Fed only sets us up for the next collapse.

The current U.S. financial crisis follows the classic Fed pattern. In 2002 then governor Bernanke set off a warning siren that deflation was threatening the U.S. economy. He convinced his Fed colleagues of the danger. As former chairman Greenspan put it, “We face new challenges in maintaining price stability, specifically to prevent inflation from falling too low.”

And we know how this story ends: Accelerating inflation. The Federal Reserve and Treasury Department has made it clear where their loyalties lie. Now the only question is how bad they’ll let things get.

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