Why Won't the Fed Inflate?

Kevin Drum has a roundup of commentary from many smart commentators I admire.  They're hardly alone; everyone hates the Fed!  Why won't they get us out of this mess?

Here's one possibility: because many of the people who are now complaining that they are too tight, are the same ones who until very recently were loudly complaining that they were too loose during the last recession.  There's been a pretty vibrant cottage industry in placing the  blame for the housing bubble squarely on the frail shoulders of one Alan Greenspan.  He is a convenient villain for liberals, who hate his politics, and conservatives, who hate the sort of technocratic institution he represents.  Blaming Alan Greenspan allows liberals to dodge uncomfortable questions about the unintended consequences of government intervention, and conservatives to dodge uncomfortable questions about whether free markets can produce really, really bad outcomes.

All this Fed blaming puts the political independence of the Fed more at risk, and it makes the Fed folks antsy.  Ben Bernanke probably doesn't want to end up having to do the humiliating round of mea culpas that Greenspan had to.  That's probably going to give him, and the other members of the open market committee, a slightly deflationary bias.  Especially since there are some very smart people making this sort of argument, and hey, what if they're right?  Maybe the Fed wasn't serious enough about inflation!

Obviously, I recognize that there are lots of factors at play.  They always believed, as far as I could tell, that their policy of stealth bank-recapitalization would take a while, but was the only politically possible way to get adequate funds into the banks; absent disaster, they may just want to wait and see how it works out. Non-traditional monetary policy may be harder to undo, may have more unintended consequences, and might, at this point, send a confidence-weakening signal about where the Fed believes the economy is headed.  It's also clear that a substantial number of folks at the Fed think what's wrong in the economy right now is not, in fact, particularly amenable to their remedy--they need massive stimulus to budge the unemployment needle only a little.  Maybe they're wrong but it's not strictly crazy, given that we've had massive stimulus, and budged the unemployment needle only a little.

But I do think if you have been lustily berating the Federal Reserve for causing the housing bubble with its inappropriate reaction to the last recession (and its stubbornly lingering unemployment), then you probably shouldn't also be berating them for not being loose enough this time around.  There is no such thing as a perfect Fed; it's always going to err on one side or another.  You said you wanted a Fed that didn't err on the loose side; now you have it.  This is what that looks like.