The stock market plunged 200 points yesterday, basically because Ben Bernanke, the chairman of the Federal Reserve, used the word "vigilant" in a speech at the International Monetary Conference. Bernanke was referring to the Fed's stance against allowing inflation to get a grip on the economy. Most traders took that to mean the Fed will continue to raise interest rates at its next meeting, and proceeded to stampede for the exits.
Nervous critters, those investors! So easily frightened! Some observers of Bernanke, who have been suspicious of his supposedly loose lips ever since he made some off-the-cuff comments to a CNBC reporter at a dinner party in Washington, are suggesting that the man should be a little more restrained. Ideally, he should take a page from Alan Greenspan's book, and be more "delphic" -- that way, no one will really know what he means, and the traders won't get spooked.
Piffle! Read the full transcript of Bernanke's speech yesterday. As economics professor James Hamilton, writing at the blog Econbrowser, notes, his words are as clear and unambiguous an appraisal of the current economy as one could hope to find. The sticky truth is this: The economy is in an awkward place right now, simultaneously showing signs of growing inflation and slowing growth -- the dreaded symptoms of "stagflation." There's no easy prescription on how to deal with the problem: If you try to tame inflation, you risk slowing growth even further; but if you try to spur growth, you may end up letting inflation run wild.
No one -- not Wall Street, not Bernanke, not the White House or the person-on-the-street -- knows where the economy is headed at this juncture. In this kind of murk, it seems that Bernanke and the Fed are doing exactly the right thing -- making crystal clear their position that whatever steps they take will be based on their best understanding of where the economy is headed, given the most recent economic data.
If Wall Street traders don't like that, maybe they should get into a different line of business. At How the World Works, we like this kind of reality-based economic management. Imagine if other branches of our government operated in the same way; adjusting their policies to what is actually happening on the ground, rather than in focus groups or poll numbers or the backroom strategizing sessons of Karl Rove.
It reminds us, in an odd way, of Al Gore, tramping around the nation pushing his "inconvenient" facts about climate change. Basing policy on data -- what a concept! President Bush could learn a thing or two from Bernanke and his vigilance. Far better a leader who admits he doesn't know what is about to happen, and will make his decisions based on events, than someone who knows what he wants to happen, and ignores all evidence to the contrary.