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Letter to the editor

Turns out Bernanke isn't so conservative after all

In the clash of the economy titans, Ben Bernanke found a way to steal the publicity thunder from Alan Greenspan's book tour: chop interest rates by a half point.

Former Federal Reserve chairman Greenspan had been clogging the airwaves, pumping his new book The Age of Turbulence that hit bookstores on Monday. But his successor is getting top billing, largely because Bernanke confounded the expectations he helped set.

The former Princeton economics professor had seemed intent on building a reputation as a conservative inflation fighter. In recent weeks, he fed that image by asserting that the central bank wasn't in the business of bailing anyone out of the mortgage, or any other, mess.

Bernanke said investors had to accept their losses and the Fed doesn't do bad-bet rescues. And he indicated that unlike Greenspan, he didn't intend to use monetary policy to restore confidence in the marketplace. That lever would be reserved for use only when the economy was in trouble.

That wasn't the Bernanke who showed up at last week's Fed meeting. Instead, he made a surprise takeoff, showering big money on the economy in an attempt to contain the mortgage- and credit-crisis fallout by cutting the federal funds rate 50 basis points to 4.75 percent. It was the first decline in the key overnight bank lending rate since June 2003.

So why the big turnaround?

It is true that employment declined in August for the first time in four years, indicating that weakening credit conditions and the housing collapse have started to spill over into the wider economy.

At the same time, we aren't in a recession and other economic indicators aren't flashing red. Retail sales and manufacturing are mostly holding up, even though the tightening of credit has set off turbulence in financial markets since mid July.

Maybe the Fed knows more about the risk of a recession than the public data lays out, but even its statement explained it cut rates as much to pre-empt an economic slump as to stem investors' jitters.

While stock investors cheered loudly for the Fed's rate cut, no one should assume that the sugar rush that governments gave the markets will stay sweet for long.

By knocking down rates, Bernanke could be fueling some big fires. The move may re-ignite the debt-mania, setting us up for a nasty hangover later.

Then there is the inflation question, with lower rates knocking down the U.S. dollar. That makes imports more expensive and increases pricing pressures.

Last week, Bernanke chose a new flight path. Nothing was conservative about it; neither are the potential consequences.

[Last modified September 25, 2007, 00:15:26]