Lest anyone think Bernanke is not one of the good guys, in relative terms, every central bank committee has at least one guy who thinks we need to raise interest rates 2% right now. (Like the unemployed don't even exist...)
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Bernanke Must Raise Benchmark Rate 2 Points, Rajan Says
By Scott Lanman and Simon Kennedy - Aug 22, 2010 7:01 PM
Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund’s former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed.
Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, say Rajan and William White, former head of the Bank for International Settlements’ monetary and economic department. After Europe’s debt crisis recedes, Fed Chairman Ben S. Bernanke should start increasing his benchmark rate by as much as 2 percentage points so it’s no longer negative in real terms, Rajan says.
“Low rates are not a free lunch, but people are acting as though they are,” said White, 67, who retired in 2008 from the Basel, Switzerland-based BIS and now chairs the Economic Development and Review Committee at the Paris-based Organization for Economic Cooperation and Development. “There will be pressure on central banks to follow an expansionary monetary policy, and I worry that one can see the benefits, but what people inadequately appreciate are the downsides.”
He and Rajan will have the chance to make their case at the Fed’s annual symposium in Jackson Hole, Wyoming, this week. In 2003, White told attendees central banks might need to raise rates to combat asset-price bubbles. In 2005, Rajan, 47, said risks in the banking system had increased. They were met with skepticism from then-Fed Chairman Alan Greenspan, 84, and Governor Donald Kohn, 67.
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http://www.bloomberg.com/news/2010-08-22/bernanke-must-raise-benchmark-2-points-in-prescient-rajan-s-latest-warning.html
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Krugman's response (Semi-wonkish. More at link.)
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August 23, 2010, 10:42 am
Making It Up
Paul Krugman
According to Bloomberg, Raghuram Rajan is now getting specific: he wants Bernanke to raise the Fed funds rate by 200 basis points in the face of 9.5 percent unemployment and inflation under 1 percent.
Let me try to explain what bothers me about this sort of thing, aside from the fact that it would be an utter disaster for the economy: it’s the way Rajan — and many other economists — seem to be making up new doctrines on the fly to justify their policy prejudices.
I’m all in favor of innovative thinking. But my view is that what you say about policy at any given time should be based on some kind of model — and furthermore, you should be willing to apply the same model to other situations, not make it a one-off used to justify what you happen to favor right now.
My writing on policy in this crisis has been based on the same model of macroeconomic policy I use in normal times; it’s just that the situation is different. The quick-and-dirty version looks like this:
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http://krugman.blogs.nytimes.com/2010/08/23/making-it-up/#more-12027
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