When All You Have Is a Hammer

By Anthony Gregory, The Independent Institute
Jun. 07, 2011

Fed Chairman Ben Bernanke is troubled by the unemployment rate that has crept back upwards, and the "frustratingly slow" economic recovery. And so what does he propose? More of the same, of course. More liquidity and a base interest rate kept near zero.

You see, this is practically the only tool he has: monetary stimulus, which is another word for inflation, if we define this in terms of a rising money supply rather than rising prices, the latter of which is properly seen as a natural consequence of the former. Everyday Americans would be forgiven if they believe we already have price inflation. Surely all sorts of goods--gas, other energy-related products, food, gold, silver--have been priced at overall higher levels in the last few years. At least it appears that way. The dollar does seem to buy less than it used to, and when Americans are having trouble finding work or seeing their incomes cut, one could reasonably argue that the problem is not insufficient little monetary “stimulus.” Bernanke assures us--or is that warns us?--that “the upward impetus to overall price inflation will wane” soon enough, that inflation is not “broad-based or ingrained in our economy.”

In late 2008 and early 2009, there were calls by establishment economists, politicians, commentators, and others to “do something” to make the recession stop, fast. Robert Higgs spoke in behalf of many of those of us who believe in the free market more than the wisdom of politicians, especially whose only remedy to these kinds of problems involves pumping more money into the economy one way or another--a cure that seemed awfully like the cause of the disease. Higgs argued that instead of a monetary stimulus--or a fiscal one, for that matter--the power elite should simply do nothing and let the market handle it. Those of us who thought economic correction was necessary and perhaps the government and Fed had already done enough were brushed aside as being unrealistic or cruel. Why, if the central planners did nothing, we would be facing 9% unemployment, we were warned.

Two and a half years later, we still have such high unemployment. The economy is “recovering” “slowly,” even according to the same folks who predicted a speedy improvement once the allegedly (but in reality not at all) laissez-faire Bush Republicans were replaced by the activist Obama Democrats. Coupled with Obama’s fiscal stimulus, Bernanke’s monetary stimulus would finally lead the way to our economic salvation.

Unfortunately, in political life, those who favor more state power over the economy virtually never concede they were wrong. When they do, the lesson learned is always the reverse of what would seem to be appropriate. Bernanke famously said to Milton Friedman of the Great Depression: “You’re right, we [the Fed] did it. We’re very sorry. But thanks to you, we won’t do it again.” That is to say, now we know better--in particular, now we know that the Fed of the 1920s and 30s was supposedly so “tight” in its monetary shenanigans, leading to insufficient liquidity, and so in the future we won’t make that mistake again but will instead prime the money and credit pump relentlessly until the bust reverts back to boom. In the case of his predecessor, Alan Greenspan, the supposed admission of humility was also an inference that we need more central planning after all, not less: Greenspan admitted to having “found a flaw” in free market thinking,” to having “made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.” This last statement resonated through the liberal media in late 2008 and is seen as all we need to know that free markets are folly, for if even Alan Greenspan, supposed champion of free enterprise, concedes that the government has more of a role to play, it must be true--putting aside his having been the chief bureaucrat in charge of monetary central planning, mind you.

This is of course akin to the idea that the problem with the Vietnam war was “we cut and run,” and the problem with the first Gulf War was “we pulled out.” It is never a problem that the government gets so involved in the first place, messing things up inevitably because it is institutionally incapable of doing anything else. No, no, no.

Nevertheless, Bernanke now realizes that the economy is still in a slump, and thank goodness he knows what the solution is: More central bank inflation. That is, after all, what he was hired to do. It is convenient for him that without his wisdom, not only would the economy be in even worse shape than it is, but there would be no hope of it coming back to life in full force. Indeed, it is good for him that he has this important job that he is so well positioned and qualified to fulfill, for, as I hear, the job market isn’t so hot these days, and we all know how degrading it is for a political master of his own universe to stoop to the level of the rest of us and compete in the private sector.