Will We Repeat the 1970s?

Filed Under economy

The New York Times is making me want hide under the bed with their reporting on the death of the U.S. economy.

Many observers, including Lawrence Summers, the former Treasury secretary, as well as a group of bearish stock traders, say the United States may already be sinking into a recession. The rise in unemployment reported two weeks ago stoked those fears. The White House has started talking about proposing relief. And just recently, (Ben) Bernanke sent the clearest signal yet that the 17-member Federal Open Market Committee (which governs the Fed’s interest-rate policy, and over which Bernanke presides) would cut interest rates when it meets at the end of the month. In a speech, Bernanke warned that “the downside risks to growth have become more pronounced,” a gloomier assessment of the economy than he had given previously. …

A wage-and-price spiral similar to that in the 1970s would not only be a political nightmare for the Republicans, it would also be a crushing blow to Bernanke’s reputation as a Fed chief. And with oil and food prices going through the roof, inflation is already a worry. The consumer price index surged 4.3 percent over the past 12 months — more than twice the inflation rate that Bernanke has delineated as the upper bound of his comfort range. (The widely watched “core” rate of inflation, which does not include volatile food or energy prices, is not as high as the overall rate, but it, too, has edged higher than Bernanke would like.)

“I think Bernanke is in a very difficult situation,” Paul Volcker told me. Volcker was the Fed chief who preceded Greenspan and who conquered, painfully, the great inflation of the 1970s and early ’80s. (He was chairman from 1979 to 1987.) “Too many bubbles have been going on for too long,” Volcker added. “The Fed is not really in control of the situation.”

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