- What Will Bernanke Do?!

What Ben Bernanke wants to see happen isn’t really in dispute, the only question is how effective will he be at reaching his goal.

What he wants it’s the same thing the rest of us want; a growing economy with slightly positive inflation. This will cast him in the role of the great savior, and his legacy will be assured. But it’s obvious to many people, maybe even him, that his odds of getting that in the immediate future are quite small. The housing market is in free fall, unemployment is not, and Congress has been spending and borrowing like there is literally no tomorrow; and burning his boats in the process. So what will Ben Do? In a word, he’ll talk.

This should come as no surprise. In his heart, Ben is an academic so he’s used to talking. He views a public debate as a way to flesh out ideas and examine consequences before making a decision. The only problem is that while he’s still an academic at heart, he’s no longer one in practice. Like most academics, he’s unaccustomed to his words having any real consequences of their own, but in his role as Federal Reserve chairman that’s very much the case. So while he and his people dither about and argue and chat and cajole and persuade, all in the too public eye, the markets vacillate from euphoria to Armageddon and back in the space of minutes.

So what will Ben Say today? Well he’s been trying to ‘split the difference’ and the markets (and the Editorial boards) have been punishing him for contributing to uncertainty. So my bet is that he’ll lean on the side of pro-inflation today. Because he knows that even if inflation gets a little hot, he can always turn off the spigot. It gives him more control over the future; more options for controlling the outcome. He knows that if we fall into deflation, either through catastrophic deleveraging (quickly) or through a Japanese style malaise (slowly) there will be little he can do about it. And in the process his legacy will be destroyed.

Ben is going to try to keep his options as open as possible, and at this point he has more options on the pro-inflation side than he does anywhere else. The only question that remains then is how committed is he to his view, and how incompetent is he at expressing it. For a guy who has made his way in the world (like all academics) by avoiding being pinned down, I’d say not too terribly much of the first, and a little too much of the second. I think he’ll lean toward a pro-inflation policy, but not enough to cause anyone to be certain. On the whole it will be more difference splitting, and too much public chatter.