<http://www.econbrowser.com/archives/2008/02/bernankes_tight.html>
And a Pentagon Papers analogy:
<http://www.nakedcapitalism.com/2008/02/bernanke-tightrope-fantasy.html>
[....]
The only defense Hamitlon can find for the central bank's actions is that it may be deliberately stoking inflation to erode the value of America's debt overhang.
Hamilton gave an excellent presentation at the Jackson Hole conference that (among other things) argued that interest rate policy would be ineffective in dealing with the credit crisis and that more emphasis needed to be placed on institutional reform. Despite the fact that the reasoning is unassailable (and confirmed by the failure of repeated rate cuts to stop the seize-ups afflicting important sectors of the market), Hamilton's prescription (and others like it) have been ignored.
Oddly, this conundrum reminds me of the situation that led Daniel Ellsberg to release the Pentagon Papers. Ellsberg was perhaps the best informed person in the US about Vietnam; he had been there for both the Department of Defense and the State Department, and unlike most US operatives, had spent considerable time on the ground, including under fire.
Like many people in the intelligence community (he worked for Rand), he believed if he could only get the ear of the President and get them to understand what a hopeless exercise Vietman was, they would withdraw. But reading the Pentagon Papers, which gave the history of the US involvement from the inside, showed Ellsberg that every Administration involved in Vietnam knew full well that the US would not succeed. The Presidents had not gotten optimistic briefings; quite the reverse. Yet even though they knew this was a costly and doomed enterprise, they refused to withdraw, deeming the prestige of the US to be at stake.
I wonder if a similar dynamic is at work here, that the Fed in fact appreciates full well the nature and depth of this crisis, yet is following a conventional and futile pattern of action because to do otherwise would be to admit the Emperor has no clothes.
[end]
Shane