- The Washington Times - Tuesday, December 8, 2009

Federal Reserve Board Chairman Ben S. Bernanke got hammered during his reconfirmation hearing in front of the Senate Banking Committee last week.

Sen. Jim Bunning, Kentucky Republican, was Mr. Bernanke’s toughest critic, followed by Sen. Richard C. Shelby, Alabama Republican, Sen. Jim DeMint, South Carolina Republican, and yes, Sen. Christopher J. Dodd, the beleaguered Democratic committee chairman who in all likelihood will be defeated in Connecticut next year.

Mr. DeMint has put the Bernanke confirmation floor vote on hold until the Senate votes on the Federal Reserve Sunshine Act of 2009, to allow for a Government Accountability Office audit of all Fed lending and Federal Open Market Committee (FOMC) policies.

By the way, it now takes five years for the full content of the FOMC policy meetings to be released, and the GAO audit would reduce this to six months. That would still leave the central bank independent, but it would certainly give taxpayers a clearer picture of the central bank’s operations.

And why shouldn’t Mr. Bernanke hold a press conference directly after the Fed policy meetings, just like Jean-Claude Trichet does after the European Central Bank meetings?

A little sunshine certainly wouldn’t hurt Mr. Bernanke’s approval ratings. According to a new Rasmussen poll, only 21 percent of voters favor Mr. Bernanke’s reappointment as Fed chairman, while 41 percent think President Obama should name someone new.

But back to the hearings. It was unfortunate that not one of the committee senators asked Mr. Bernanke why the gold price recently surged to around $1,200, and what that might mean for future inflation and the U.S. economy.

The Wall Street Journal editorialized this week that while the Fed chair knows how to ease money, there’s no evidence during his tenure (or while he was Alan Greenspan’s co-pilot) that he knows how to make money scarce enough in order to protect the dollar and prevent inflation. (Echoing the polls, the Journal editors concluded that “the country needs a new Fed chief.”)

Surely the steadily depreciating dollar and the surging gold price are bad omens for the future economy. In fact, inflation rates have been edging higher in recent months and will likely continue upward in the months ahead. Import prices channeled through the weak dollar have been rising. So while many of us hoped the Fed chair would address the gold question, he never did.

Mr. Bernanke did respond to questions on the declining dollar exchange rate, but as he always does, he insisted it doesn’t matter as long as inflation is low. Huh? If you print more dollars than the rest of the world requires, surely this means too much money chasing too few goods. And as Art Laffer has pointed out, the exchange-rate mechanism is itself a transmitter of higher domestic prices.

Time and again Mr. Bernanke argued that the Fed was not to blame for the ultraeasy money that created the housing and commodity bubble which got us into this soup in the first place. He insisted bankers were to blame for their “risky” lending policies, and he acknowledged that the Fed should have been tougher as a bank regulator.

But the point that escapes Mr. Bernanke is that negative real interest rates and excess money-creation trigger a chain of consequences throughout the financial system. Mistakes were made left and right that might never have been made had the dollar been sound and the inflationary bubble never appeared.

In effect, you get what you pay for. The Fed paid for easy money, and we all got the recessionary credit-crunching consequences of the Fed’s mistake.

By failing to heed the message of financial and commodity prices, future Fed decisions are likely to be just as flawed as past ones. It isn’t that Mr. Bernanke lacks the brains. It’s that he’s employing the wrong monetary model.

Targeting the unemployment rate means always erring on the side of ease. On the other hand, targeting market-price signals would get us back to the financial and economic stability of most of the 1980s and 1990s.

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