Helicopter Ben or King Dollar?

It’s no surprise that President Obama re-nominated Fed head Ben Bernanke to a second term as chair of the central bank. It was the path of least resistance. Essentially, the president argued that Bernanke was the guy who kept us out of a second Great Depression. Okay, fine. But now we must ask: Is Bernanke the right guy to craft and pilot an exit strategy that avoids new inflationary bubbles?

In short, will he be Helicopter Ben or King Dollar?

It’s a tough question that markets are puzzling over. Interestingly, there was very little change in stock and bond trading today. So the guessing game will continue. If Mr. Bernanke repeats his role as Alan Greenspan’s bubbled-over, easy-money copilot between 2002 and 2005, we’re in for trouble.

Stanford economist John Taylor wrote this up in his great short book, Getting Off Track. The dollar plunged while hard-asset prices (like housing, commodities, energy, and gold) soared. And then came the tightening that moved us from boom to bust. Is this movie gonna play all over again? Nobody knows.

On the other hand, if Mr. Bernanke adopted a financial-and-commodity-market price rule — using inflation-sensitive, real-world price indicators like gold, commodities, bonds, and so forth — the so-called exit-strategy outcome from the easy-money rescue of the banking system over the past year might have a much happier ending.

But looking at Bernanke’s record and numerous speeches, he really seems more like a Republican Phillips-curve advocate who targets the unemployment rate in a false trade-off with inflation. This means he will likely overstay the Fed’s easy-money welcome, and that future inflation and interest rates are going up.

I have never heard Mr. Bernanke proselytize for a stable-dollar currency value of money. Never. Of course, like any central banker, he says he’s for price stability. But the question remains how to get there and what model to use. Supply-siders like myself strongly support a price-rule model, where markets tell government what to do. But all too often it seems like Mr. Bernanke — who has been out there buying Treasury and mortgage bonds in a futile attempt to control their yields — prefers the model where the government tells markets what to do. This is a loser, as we have painfully learned in the past.

Paul Volcker watched gold in the ’80s. So did Alan Greenspan for most of the ’90s. But I don’t think Mr. Bernanke watches gold at all. And I don’t think he worries much about the fate of the dollar.

Let me not pre-judge Bernanke’s second term. The Fed chair has done a good job over the past year in moving the financial system towards recovery. But I think the ultimate question remains: Helicopter Ben or King Dollar?