Bernanke’s WSJ editorial did little to assure his critics. He went to great lengths to explain the various tools they have for contracting the money supply. But for many skeptics, the issue is not if The Fed has the tools to tighten or not. It’s whether they’ll use them when the time comes. Putting on the brakes on the economy is a hard decision to make, and getting the timing right is near impossible. The Fed has been behind the curve for most of its history. No reason to expect a different outcome this time (how’s that saying go?).

Why should we believe that they’re going to yank the rug out from under the “recovery”? We shouldn’t. Reflating the bubble has been done many times now, and  nobody wants the bubble-cycle to end on their watch. It’s understandable, since the adjustment would probably be rather unpleasant. But at least we’d start the necessary process of rebuilding our financial system.

At this point, inflation, even if uncomfortably high, is almost surely viewed as by the Fed and politicians as preferrable to a major correction (though they won’t admit to it).

Now let’s hear from some people much more credible than me. Here are excerpts from Bill Fleckenstein and Mike Shedlock’s reactions to Bernanke’s editorial:

Bill Fleckenstein (subscription only, well-worth it though):

There’s no point in reprising the exit strategy, because when it comes to monetary policy, there is none. Effective and prudently conducted monetary policy is not about technique. It’s about having the vision or foresight about what to do; and then, more importantly, having the will to implement whatever the right policy is (usually to tighten credit or slow the growth of money). A group of men who can’t see a stock- and then a real-estate bubble building obviously don’t have any vision.

Bernanke’s verbiage was just a whole lot of hot air (though I did get a chuckle out of a Bloomberg headline that quoted him as urging “prompt attention” to reining in the budget deficit — a great example of the pot calling the kettle black). In any case, one will be sorely disappointed if they expect the Fed to ever pick the right path.

Mish explains what happens if they do tighten, and apparently thinks they will (good piece with details on the tools Bernanke plans to use):

However, when the Fed is forced to do so, the economy is likely to be smashed back into a second (or third) serious recession in a hurry. Indeed the recovery is going to be so weak in the interim, for most consumers it will feel as if the recession never ended.

The Fed micro-mismanaging interest rates and monetary policy is the primary reason we are in this mess in the first place. If we did not have a Fed, we would not need a Fed Exit Strategy!

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