Sunday, September 28, 2008

Helicopter Ben

Federal Reserve Chairman Ben Bernanke got his nickname when, during a 2002 speech to the National Economist Club in Washington D.C., he referred to a statement made by Milton Friedman about dropping money from helicopters. Friedman’s helicopter drop scenario was theoretical one. In it, he imagined what effects the new flood of money would have on the demand for goods and services and the prices of those items. In Bernanke’s speech, he attempted to explain why deflation would never happen here (he probably convinced himself).

Deflation is the economic boogeyman. It’s the nightmarish monster that stalks economists and central bankers in their sleep. Inflation can usually be managed and contained. Deflation, if left unchecked, spirals out of control and, like a black hole, sucks in almost everything within reach. Fortunately, when it’s spotted, deflation is attacked with (hopefully) overwhelming force. Unfortunately, the fear of not snuffing it out in time tends to cause central bankers and policymakers to (sometimes wildly) overshoot the anti-deflation target. The re-flation sometimes turns into hyper-inflation.

Ben Bernanke’s Essays On The Great Depression, published in 2000, is an interesting (and sleep-inducing) read. Whether you like him or not, Ben Bernanke is an expert on the subject and his position is clear. The financial system is being flooded with liquidity. Helicopter Ben may literally earn his nickname. I hear the turbine engines winding up. The rotor blades are beginning to spin. Try not to get your head chopped off.


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