Mitt Romney Advisor Goes Wacky Defending Ben Bernanke

Harvard professor and the world's greatest economic textbook hustler Greg Mankiw is now economic advisor for presidential candidate Mitt Romney. Mankiw's first major move since being named Romney's advisor is to come out in his NYT column as a supporter of Fed chairman Ben Bernanke.

His defense is about as wacky as they come. Mankiw writes:

Mr. Bernanke has worked tirelessly to shepherd the economy through the worst financial crisis since the Great Depression, and yet, for all his efforts, seems vastly underappreciated.

Tirelessly? At times Bernanke has caused the money supply to grow by 25% on an annualized basis, at other times it has slowed to near 0%. This is perhaps tireless work, nevertheless this wild money manipulation is the direct cause of the current volatile economy. Mankiw may think Bernanke's work is "underappreciated," I think Bernanke's mad money manipulations are hardly understood and there is nothing to appreciate about what he has done.

Mankiw goes on:

....the signals in the financial markets are reassuring. The interest rate on a 10-year Treasury bond, for instance, is now about 2.8 percent. A 10-year inflation-protected Treasury bond yields about 0.4 percent.

The difference between those yields, the so-called “break-even inflation rate,” is the inflation rate at which the two bonds earn the same return. That figure is now a bit over 2 percent, a sign that the market does not expect inflation in the coming decade to differ much from that experienced over the last five years.

But then he reports correctly that the Fed has been buying 10-year bonds:

The Fed used its main weapon against recession — cuts in short-term interest rates — aggressively as the depth of the downturn became apparent. And it turned to various unconventional weapons as well, including two rounds of quantitative easing — essentially buying bonds — in an attempt to lower long-term interest rates.

So Mankiw is admitting here that the Fed distorted the interest rate market in long-term Treasury bonds by buying them.  Got that? The Fed drove rates down on Treasury bonds, which completely blows up Mankiw's contention in the earlier paragraph that I quote, where he uses that same Fed distorted bond interest rate to prove price inflation is only a "bit over 2%."

In truth, we don't know what the rate would be if the Fed hadn't intervened. It would have most assuredly been higher, we just don't know by how much. Further, the Fed's driving of short-term rates lower, also has an impact on long-term rates. Thus although we can't know for sure how much of a distortion has been caused over all, whenever the Fed has stopped manipulating rates, they tend to go up by hundreds of basis points. In other words, Mankiw couldn't be more wrong in his contention that "the markets" suggest inflation 10 years out will only be around 2%. The market is in fact being manipulated by the Fed and we don't know where unmanipulated markets would trade other than much higher.

Bottom line: NYT continues to publish work from economists, who really, on a very basic level, don't know what the hell they are writing about. And, I shudder to think what recommendations Mankiw is giving Romney.