Monday, July 2, 2012


Over at Mainly Macro they have a great discussion of what, exactly, Ben Bernankie means when he talks about the "credability" of the central bank.

In short, it comes down to this: the central bank can either control inflation by throwing people out of work with tight money (like in the early '80s), or by threatening to do so. Obviously we'd all perfer the latter option, but it only works if people believe the Fed has the balls to use the former option. This is what the much valued "credability" that Bernankie keeps talking about is: a tool to let the fed do its job without actually creating unemployment.

In fact, since credibility is a tool to prevent actual unemployment, the only reason to justify damaging it would be to avoid, you know, ACTUAL UNEMPLOYMENT.

Seriously Ben, letting unemployment rage to preserve your credibility is like not calling the fire department because they might get your house wet. Yes they might damage some of your precious stuff, but that's only because it's currently on fire.

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