Best Business Commentary

What worries Bernanke?

Surely Ben Bernanke “and his colleagues remember what happened in the 1970s,” says Allan H. Meltzer in The Wall Street Journal. The Fed’s “mistaken behavior” in that period, spurred by political pressures, led to “inflation and stagnant growth: stagflation.” Although Fed officials “repeatedly promised themselves” they would work to lower inflation, those “promises were forgotten” when unemployment ticked up. Bernanke indicated to Congress he would similarly put recession concerns before inflation. If the ’70s taught us anything, it’s this: “A country that will not accept the possibility of a small recession will end up having a big one.”

Bernanke is probably looking a little farther back, to the 1930s, says Peter Coy in BusinessWeek.com. Before becoming Fed chairman, his academic work was on the Great Depression. “Oddly enough,” the Depression “posed a similar dilemma” between growth and inflation. The parallels are “inexact,” but when the newly formed Fed should have cut rates aggressively in 1929, it “kept them high and even raised them” in the “mistaken belief” that inflation was the bigger risk. Whatever Bernanke does now “won’t be completely satisfactory,” but if he follows his Depression-shaped “intuitions,” you’ll see more rate cuts ahead.

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