Timely reminder of controversies over money and inflation from Paul Krugman, just in time for my MBA macro class

Some background: On the eve of the Great Recession, many conservative pundits and commentators — and quite a few economists — had a worldview that combined faith in free markets with disdain for government. Such people were briefly rocked back on their heels by the revelation that the “bubbleheads” who warned about housing were right, and the further revelation that unregulated financial markets are dangerously unstable. But they quickly rallied, declaring that the financial crisis was somehow the fault of liberals — and that the great danger now facing the economy came not from the crisis but from the efforts of policy makers to limit the damage.Above all, there were many dire warnings about the evils of “printing money.” For example, in May 2009 an editorial in The Wall Street Journal warned that both interest rates and inflation were set to surge “now that Congress and the Federal Reserve have flooded the world with dollars.” In 2010 a virtual Who’s Who of conservative economists and pundits sent an open letter to Ben Bernanke warning that his policies risked “currency debasement and inflation.” Prominent politicians like Representative Paul Ryan joined the chorus.Reality, however, declined to cooperate. Although the Fed continued on its expansionary course — its balance sheet has grown to more than $4 trillion, up fivefold since the start of the crisis — inflation stayed low. For the most part, the funds the Fed injected into the economy simply piled up either in bank reserves or in cash holdings by individuals — which was exactly what economists on the other side of the divide had predicted would happen.

via Conservative Delusions About Inflation – NYTimes.com.

About mkevane

Economist at Santa Clara University and Director of Friends of African Village Libraries.
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