Battle of the beards: Bernanke vs. Krugman

Resistance is futile ... you will be assimilated!

By now, you have probably heard of the "feud" taking place between Federal Reserve chairman Ben Bernanke and Nobel-prize winning New York Times economic columnist Paul Krugman. And if you haven't, what the heck are you doing reading this blog?

Anyway, here's the lowdown in case you aren't up to speed. Krugman took Bernanke to task in a Sunday NYT magazine piece, criticizing Bernanke for not doing enough to tackle the problem of high unemployment. Krugman argued that a temporarily higher level of inflation might be necessary (and not problematic) to help bring down the unemployment rate.

In one of the more damning (and most widely picked-up) comments, Krugman geeked out (in a sci-fi, as opposed to econowonk, sort of way) and compared Bernanke to the infamous Borg of "Star Trek" fame, writing that Bernanke's refusal to consider higher inflation targets as an option show he had been "converted into a half-robot servant of a hive-mind."

Bernanke responded to questions about Krugman in his press conference Wednesday, saying that seeking a higher inflation rate would be "reckless" and only lead to a slightly faster pick-up in the drop in unemployment. He added that it risked damaging the Fed's reputation as an inflation-fighter.  Krugman gleefully retorted that this was further evidence that Bernanke had been assimilated by the Borg.

Economists are having a field day with this battle of the beards. I received the best response to this little feud in my e-mail Thursday in the form of a research note by CitiFX currency analyst Steven Englander. Titled "What would Fed Chairman Krugman do for the USD?" Englander took Krugman's sci-fi analogies to an even more preposterously nerdy level.

The first line  of Englander's report reads as follows:

String theory opens the door to multiple universes and in one of them Paul Krugman is undoubtedly Fed Chairman.

It gets better. In a clear sign that this may be bordering on fantasy, Englander assumes that the Krugman Fed operates in a world where one party has clear control of both the White House and Congress.

My presumption is that the Krugman Fed would cooperate by financing the fiscal expansion, allowing government spending or (or in a very strange Republican Krugman parallel universe) tax cuts to have a real impact without affecting government debt.

Englander seems to be backing the Bernanke camp though. He disagrees with Krugman's take that even more stimulus is the answer.

Plenty of economies have tried to spend and print their way to prosperity and the track record is not encouraging. In fact, if it worked, everyone would do it.

He further imagines a world where Chairman Krugman's policies, in a best-case scenario, eventually lead to full employment but a much stronger dollar and significantly higher inflation. And what happens if Chairman Krugman fails? Englander's forecast is grim: "Weimar Republic." Englander also joked that Chairman Krugman could be succeeded by Chariman Plosser, a reference to the uber-hawkish president of the Philadelphia Fed.

By contrast, Englander writes that under current Fed policy, the worst-case scenario appears to be a continuation of the status quo: low inflation and sluggish growth. But if the Fed holds the course and gets it right, it's the best of all outcomes:

A Bernanke Fed that succeeds in gradually returning to full employment. Virtue rewarded.

This is all in good fun of course. Englander concluded his note by saying he leaves it to readers to "weight the probabilities of these outcomes."

But it makes me wonder if the writers at "Fringe" are taking notice. That Fox show, which may or may not return for a fifth season (fingers crossed) deals extensively with alternate timelines and parallel universes. Here's hoping that Fed Chairman Krugman (or heck, Fed Chairman La Monica ...  a boy can dream) makes a future cameo appearance.