The Great Disconnect

open quoteBen Bernanke began his press conference with a touching tribute to the unemployed. Oh, how he cares! And so deeply! His description of the problem was accurate enough. But then out came the smoke and mirrors.

Bernanke said that to remedy the unemployment problem, he will continue the Fed’s program of asset purchases. Specifically, the Fed will continue to buy and hold mortgage-backed securities . . . .

But here’s the disconnect. What the devil does buying bad debt from zombie banks have to do with getting people jobs? The relationship between assets purchases and policy goals is murky at best.

“I need a job, so I hope the Fed buys more bad mortgage debt” — said no unemployed person ever.

Yes, I know about ancient Keynesian theories. There is tradeoff between unemployment and inflation. But those theories have not really explained much at all for the last 40 years. In fact, they blew up in the 1970s with the emergence of “stagflation.” An affliction where unemployment remains high even as inflation roars ahead.close quote (Read more)

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