Forgetful Fed repeats errors of the past

David Frum

TEXT OF STORY

KAI RYSSDAL: You know, with Wall Street and the economy all topsy-turvy, it's easy to see how Ben Bernanke might be sending mixed messages. Yes, he cut interest rates yesterday. The Federal Funds rate is now two-and-a-quarter percent, less than half of what it was when all the rate cutting started. But it wasn't six months ago Mr. Bernanke was warning us about the danger of cheap money.

Commentator David Frum says the Fed Chairman might benefit from a history lesson or two.


David Frum: If Ben Bernanke owns a Ouija board, this might be a good time to get Arthur Burns on the line...

Burns was Fed chairman under Richard Nixon and Gerald Ford. In the early 1970s, he faced a situation spookily similar to that now confronting Bernanke: Inflation was accelerating. The dollar was dropping. The price of oil, metals, grains and other commodities were soaring. Every economic indicator on the central banker's console screamed for an increase in interest rates.

But at the same time, the nation's troubled corporate sector clamored for rate cuts. In 1970, the Penn Central failed, the largest corporate bankruptcy in history. The shock threatened to tumble Penn's lenders, and to wreck many of the new conglomerates assembled in the 1960s to mesmerize Wall Street by buying earnings growth.

What to do? Burns chose an expansionary policy. He did what Bernanke is doing now: He cut, and cut, and cut again. The crisis of 1970-71 ended in a mild recession.

But that did not end the story. Soon prices were racing at double-digit rates. I still remember the little white stickers my family's favorite steak house used to overwrite last month's price. The savage recession Burns hoped to avoid arrived anyway in 1974-75.

In one of his memoirs, Milton Friedman recalls warning President Nixon against the "easy money" policy of 1970-71.

He told the president: "Do you really want to do that? The only effect of that will be to leave you with a larger inflation if you do get re-elected." Nixon answered, "Well, we'll worry about that after we get re-elected."

Nixon was re-elected -- and everybody was soon worrying about inflation.

The inflation of the 1970s was not some natural disaster. It was the result of deliberate policy choices, made by people as smart as we are today. If anything, they had more excuse for their mistakes: they could not learn from their own example. We can. The more shame on us if we repeat it.

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute. His latest book is called Comeback: Conservatism That Can Win Again.

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