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More (or Less) on Mr. Bernanke

Inflation and Speculation

by SETH SANDRONSKY

Voicing what the Associated Press termed "now largely a consensus view," Mr. Ben Bernanke, the new chairman of the Federal Reserve Board, has said low inflation is the key to growth of the U.S. economy and job market. OK, but how does this policy apply to the nation’s inflationary market for housing?

It is widely agreed that the Fed’s policy of low interest rates has kept credit cheap. By contrast, the European Central Bank has pursued a more restrictive monetary policy.

Unlike the ECB, the Fed’s policy has kindled the record U.S. building and mortgage refinancing booms on the watch of Mr. Alan Greenspan. Against this backdrop during the past 30 months, the rate of inflation has outpaced the growth rate of hourly earnings in the U.S.

The flood of low-priced imports from abroad, mainly China, has helped to make this stagnation of wages less obvious. China’s central bank has also lent the U.S. money with which to buy these imports. Supply and demand can work in strange ways, indeed.

At the same time, many U.S. wage earners have shouldered additional debt with their inflated home prices, as the market for home-mortgage loans expanded to $8 trillion. Compare that debt with the estimated $7 trillion of paper wealth wiped out in the crash of stock prices as the current decade began. The near similarity in amounts contains a crucial difference, of course.

People live in homes. Nobody resides in a paper stock. Yet inflation affects both assets that rise and fall in price and, crucially, can be used for loans to boost the buying power of businesses and consumers.

In his initial testimony to Congress, Mr. Bernanke spoke of a slow versus fast decline for U.S. housing prices in the future. His hoped for "slow landing" of his low-inflation agenda is expected to help stabilize the over-all increase in the prices of goods and services. Presumably, this will shield companies, households and investors from inflationary harm to their wages and investments, while sparking growth.

Home-price inflation has been the exception, a hallmark of the Fed prior to Mr. Bernanke’s arrival. In fact, monetizing the market value of an asset that shelters human beings has off-set stagnating household income and wages in the U.S. As Mr. Bernanke publicly commits to a policy of low inflation, one wonders what will replace rising home prices as a stimulus to the U.S. economy, the world’s largest.

It is doubtful that cutting the federal government’s deficit spending is the answer. Such a fiscal policy would harm the nation’s working populace by removing money from circulation. They would be left with less income to spend on food, shelter and transit, all other things being equal.

Real people–creditors and debtors, manufacturers and retailers–will live with the actual unwinding of America’s inflationary housing bubble. Given the size of the U.S. economy, the ripples from this eventual deflation of the housing market will test the leadership of Mr. Bernanke.

SETH SANDRONSKY is a member of Sacramento Area Peace Action and a co-editor of Because People Matter, Sacramento’s progressive paper. He can be reached at ssandron@hotmail.com