Inflation remains low–thanks to Bernanke?

One of the Republican candidate’s favorite whipping boys is Ben Bernanke, head of the Federal Reserve.  They have been accusing him of employing monetary policies that produce inflation.  But it turns out, inflation rates continue to be low:

Bernanke didn’t need to rebut his critics; the facts already have. Earlier Wednesday, the Fed reported that expectations are inflation will remain between 1.4 percent and 1.8 percent for 2012 and between 1.5 percent and 2 percent through 2014. The exceptionally low inflation rate proves false the complaints about Bernanke’s aggressive — and successful — actions to avert an economic depression after the 2008 financial crisis.

Former candidate Rick Perry has been the worst of the critics, calling Bernanke’s behavior “almost treasonous” and declaring that Bernanke would face an “ugly” greeting in Texas if he injected more monetary stimulus into the economy. “It’s a travesty that young people in America are seeing their dollars devalued,” Perry complained.

Newt Gingrich called Bernanke “the most inflationary, dangerous and power-centered chairman of the Fed in the history of the Fed.” Ron Paul accused Bernanke of “inflating twice as fast as Greenspan.” Mitt Romney joined the others in saying he wouldn’t reappoint Bernanke, who was first appointed by President George W. Bush.

On Wednesday, Bernanke allowed himself just a passing reference to such critics. “The low level of inflation is a validation,” he said. “There are some who were very concerned that our balance-sheet policies and the like would lead to high inflation. There’s certainly no sign of that yet.”

via Ben Bernanke smiles in the face of critics – The Washington Post.

Could someone explain Ron Paul’s and Newt Gingrich’s criticism of the Federal Reserve?  My understanding is that Paul is against the institution on principle–what’s the principle?  The need to go back to the gold standard?  Is that feasible?

Creating money out of thin air

The Federal Reserve has taken some major action in an effort to stimulate the econnomy:

The Federal Reserve escalated its efforts to get the U.S. economic recovery back on track Wednesday, again entering the realm of risky and untested policy in response to the worst downturn in generations.

The plan to pump $600 billion into the financial system is designed to stimulate the economy in large part by lowering mortgage and other interest rates.

Although the approach carries significant risks for both the economy and the central bank’s credibility, the steps announced by Fed policymakers could represent the nation’s best hope for breaking free of sluggish growth, especially with bold initiatives unlikely from a newly divided Congress.

Fed officials concluded that growth is too slow to bring down the 9.6 percent unemployment rate and is at risk of staying that way for some time absent new action. They were also concerned that inflation has been running too low and were looking for a way to encourage modest price increases, which would give consumers and businesses more reason to spend money before its value declined and help energize the economy.

“The pace of recovery in output and employment continues to be slow,” the Fed’s policymaking panel, the Federal Open Market Committee, said in a statement. “Employers remain reluctant to add to payrolls. Housing starts continue to be depressed.”

The Fed usually manages the economy by adjusting short-term interest rates. With those rates already near zero, Fed officials had to dust off a strategy for boosting the economy that debuted during the darkest days of the financial crisis. The Fed plans to create money, essentially out of thin air, and then pump it into the economy by buying Treasury bonds on the open market.

via Fed to buy $600 billion in bonds in effort to boost economic recovery.

I am neither an economist nor an economist’s son, so could someone explain how creating money out of thin air could possibly be a good idea?


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