I’ve been wondering for months now, why Ben Bernanke would want a job where he must put out a wildfire with a garden hose. The answer: he developed a new fire fighting method and is dying to try it out.
Let me explain. Greenspan gave Bernanke a big mess. A stock market bubble that was put out by creating an even bigger housing bubble. The fallout is expected to be a big recession, or a deflationary spiral, depending on which economists you follow.
Eric Janszen’s comments today at iTulip is some excellent analysis on the deflation argument. As I was reading it today, and perusing his quotes from Ben’s helicoper speech, it suddenly dawned on me that Ben took this job because he knew exactly what he was walking in to: a collapsing real estate bubble, leading to deflation.
This would be his opportunity to put into practice what he so diligently researched in his doctorate program, and what he lectured on many years before. What greater thrill for a researcher than trying the experiment he has only written, talked, and dreamed about.
According to Janszen, after the real estate bubble collapses, and deflation sets in, the government will start printing money and buying real estate. Then the Fed will devalue the dollar to limit deflation.
Now, Ben’s dream job begins, as he gets a chance to put into practice what he so far has only talked, written, and dreamed about: rescuing an economy from a deflationary spiral.
PowaySeller, I read Bernanke’s book, “Essays on the Great Depression.” It’s a very tough read, and I only understood parts of it. The proper sequence of events is that we’ll have inflation, first: we run trade (consumer) and government deficits, and finance such via printing of money, now. Only when one or both of those change — reduced demand for consumer products/services and government services — will we run the risk of deflation. Consumers will slow down consumption as interest rates raise. But Federal spending shows no sign of abating, with the war with Islamic Fascists, Medicare, Social Security, etc. So, yes, we theoretically run the risk of deflation. But, such will require a greatly reduced level of spending by government, and I just don’t see that happening (though I wish it would!).
I presume that historians will view Greenspan in a poor light, having presided over rabid growth in the money supply and household debt.
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