Lesser of Two (or More) Evils

According to Paul Krugman, the Fed's obsession with fixing the liquidity crisis and staving recession has led to out-of-control inflation.

You see, fears of a 1930s-style financial meltdown are apparently out; fears of 1970s-style stagflation are in. And the Fed stands accused of being soft on inflation.

The emerging conventional wisdom, if what I heard is any indication, is that Mr. Bernanke has been fighting the wrong enemy all along: inflation, not financial collapse, is the real threat. And to head off that threat, the critics say, the Fed has to reverse course and raise interest rates — never mind the risks of recession.

Trust me, I don't envy Ben Bernanke. First, he's staring in the face of a financial collapse, in which the banks themselves are not honest about the depths of their problems, from understating LIBOR to trickling billions of dollars in write-downs. Then, he has Congress breathing down his neck to rescue the student loan market, asking the Fed to take student loans as collateral. And, in an election year, recession is always a political liability; the stimulus package may have just exacerbated inflation. As a result, these efforts have simply unleashed a pool of money that has flooded to the commodities market, causing the current run-up in oil, food, metals, etc.

For what it's worth (although I did see the run-up in commodities last fall), I think that we need these higher prices to continue for a bit longer. Trust me, I have no love for investment banks, and I know that some people are truly hurting. I just think that the higher prices will force America to re-calibrate some of its nonsensical ways. I'm not just talking about SUVs, but also $5 Starbucks lattes and $90 Lacostes.