File photo of Yellen arriving at the Jackson Hole Economic Symposium in Wyoming
Janet Yellen, currently the Fed's Vice Chair, is the the favorite to be named the next chair, according to a UBS poll. Yellen, shown here in 2009, has a 26% chance of getting the job, the poll said. REUTERS

Federal Reserve Chairman Ben Bernanke doesn’t seem to understand inflation. In 2011, he has denied its existence and dismissed the recent run-up in commodities prices as transitory.

Bernanke once said the understanding of the Great Depression “is the Holy Grail of macroeconomics.” This assessment is incorrect, however, because the Great Depression only deals with the issue of economic contraction and its associated problems, namely unemployment and deflation.

Studying it, therefore, should be more accurately titled the “Holy Grail of understanding economic contractions.”

In his assessment of the Great Depression, Bernanke concluded that tight monetary policy was largely to blame. Indeed, loose monetary policy probably would have helped during that period.

The flip side of the coin, however, is that if monetary policy is too loose, it causes overheating and uncontrolled inflation.

This price stability side – which the Federal Reserve is mandated to guard, in addition to its other mandate of promoting maximum employment – is missing in the studying of the Great Depression.

The “Holy Grail” of uncontrolled inflation is studying the Weimar Republic’s hyperinflation in the 1920s, which Bernanke isn’t known to have done extensively. He isn’t even known as a devoted student of US stagflation in 1970s, which is another problem the Federal Reserve should be concerned about.

Moreover, none of the other members of the FOMC are devoted students of the Weimar Republic or stagflation.

Instead, their backgrounds are concentrated in economic growth, labor markets, and the financial markets.

It’s not surprising, therefore, that the FOMC is overly concerned about economic growth and unemployment at the expense of uncontrolled inflation.

US Presidents, who have appointed these FOMC members, are responsible for its biased composition.

Because of the country’s harrowing experience with the 25 percent unemployment rate during the Great Depression, they have historically obsessed over it, which explains their appointment of experts on the labor market and the Great Depression to the FOMC.

However, the lack of experts on uncontrolled inflation on the FOMC has now put the America in precarious situation – in danger of facing exactly that.

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