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Confusion in Economic Policy

Dean Baker mocks Henry Paulson and Ben Bernanke:

The High Dollar: Wasn't Bernanke Trying to Stimulate the Economy?

Last weekend, Federal Reserve Board Chairman Ben Bernanke and Treasury Secretary Henry Paulson said they would take steps to prevent the dollar from falling further. This is strange, because the dynamic duo had previously indicated that they wanted to stimulate the economy with policies like interest rate cuts and the tax rebate plan.

There is probably no more effective mechanism for stimulating the economy at this point than a decline in the value of the dollar. This will make imports more expensive, causing people to buy more domestically produced goods. It will also make our exports cheaper for people living in other countries which will naturally cause them to buy more American goods. The effect is a reduction in our trade deficit which is an essential part of any recovery plan.

There is a -- slight -- degree of non-insanity in what Paulson and Bernanke are saying. They want a weak dollar to stimulate exports, true. But they also want a dollar that is not expected to fall any further. In our economic models, the two automatically go together. But Paulson and Bernanke fear that in reality they do not.