Today, Benny Bernanke, the former Chairman of the Federal Reserve Board of Governors, started his new job, ordinary financial blogger. Bernanke's first blog entry is quite laughable, filled with many errors in thought.

Here is what I wrote to Benny in the Disqus comments. I don't expect Benny's handlers to publish it.

There is zero causality between interest rates and the CPI.

The chart you display in your blog entry is meaningless. Correlation is not causation and coincidence isn't correlation.

The CPI is a highly artificial index, that is statistically insignificant with respect to all prices of all things of the economy. No one can use the CPI to project to the universe of prices.

As it is, prices are an effect and not a cause. Inflation is a banking phenomena. Milton Friedman knew this. Edwin Walter Kemmerer knew this.

Under a fiduciary monetary system, inflation arises from bank credit contracts fueling cash accretion and checkable deposits growth.

All interest rates arise as multiples of the Fed Funds Rate (FFR). The FOMC sets the FFR by fiat. That is the only reason why nominal rates are low. Even you agree with me, "The Fed does, of course, set the benchmark nominal short-term interest rate."

And yes, Fed Res banker action gives rise to inflation. However, inflation only happens in the later stages of a credit expansion fueled economy under growth.

Yet your claim, "But what matters most for the economy is the real, or inflation-adjusted, interest rate...The real interest rate is most relevant for capital investment decisions, for example" is laughable on its face. It is the claim of a lifetime academician. To a businessman, what matters is the difference between the rate he pays for credit, which has spent to acquire capital, and the current interest rate.

If the current rate falls below his indebtedness rate, his capital becomes impaired. To adjust his return rate, he must cut employment.

If what you claim is true — "The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited" — then dare to refute that interest rate suppression under quantitative easing hasn't impaired extant capital acquired at much higher rates on credit.

If there were such a thing as an "equilibrium interest rate", it would be consistent with providing profit on outlays paid with credit in conjunction with a rate of business failure, to provide any profit on the purchase and sale of property (right of ownership) in chattel, works or rights of action. If there were no failures, then in the presence of perfect knowledge, no one could earn profits. With profit, there could be no return on interest to an creditor, including commercial bankers.

Your claim, "In a rapidly growing, dynamic economy, we would expect the equilibrium interest rate to be high, all else equal, reflecting the high prospective return on capital investments" reflects horrible logical contradiction. Equilibrium states exist only under static states. By definition, a rapidly economy would be one under increasing returns increasing at an increasing rate. Nothing requires the real rate to stay fixed, but merely increase at a slower rate than the profit rate.

Academia economics silliness like equilibrium conjectures proves to be a false doctrine never observed in the real world. In short, what you are preaching here fails to comport to the reality of commerce, which is the purchase and sale of property in pursuit of profit.

And your claim here — "Government spending and taxation policies also affect the equilibrium real rate: Large deficits will tend to increase the equilibrium real rate (again, all else equal), because government borrowing diverts savings away from private investment" — is quite false.

First, there is no such thing as "savings." There is only profit and loss. When someone has profit and "deposits" cash or cash-equivalent in a bank, he sells his property in this cash in a purchase and sale while buying property in a right of action against a banker.

Clearly, rates failed to rise under your massive QE action. Under QE, Fed Res bankers conjured checking account credits, credited to the agency accounts of Congress in exchange for bonds.

Fiscal year deficits soared. Rates didn't. Thus, reality contradicts you.

Your QE policy was the opposite, exactly, of what you needed to do. Rather than suppress the FFR to the zero bound, you needed to raise the FFR rapidly, pushing it to a high level. Had you done so, extant capital bought on credit at lower rates would have enjoyed excess returns. This would have stemmed the need to cut workers.

Instead, even low interest rates, few firms sought to take credit to acquire capital precisely because falling employment could not support sales needed to achieve profit (positive returns). Instead, your QE action impaired extant capital, thus forcing firms to cut employment to a great amount. Your action launched Americans into the greatest depression ever.

Fed Res bankers adjust the FFR to keep massive bank failure from happening when too many bankers trash the solvency of their banks. Downward adjustment is done to the FFR for no other purpose.

If interest manipulation as a means to control the economy were the purpose, Fed Res bankers simply aren't smart enough to know what that rate should be. That is reality as well.

Instead, the FFR should be set in a futures market where the action of thousands of players could better get the rate right. A futures market would ensure enough bankers remain on the field to enjoy profit while pushing rates around so the return to bankers could not be excessive relative to other uses.

You failed on your first blog entry. What a way to start.