Lately, I've been seeing some Inflation Obsession Disorder where the sufferer is convinced that it's better to suffer a recession or other economic crisis rather than taking an action which might possibly lead to some future inflation in order to prevent that recession or economic crisis. For example, here are a couple of paragraphs by Nobel Laureate Robert Lucas regarding the recent rate cut by the Fed:
In this last paragraph he seems to be saying that the Fed should control inflation no matter what, even if it were to mean economic catastrophe. I personally don't think the Fed needed to cut rates and the economy, including the mortgage markets, would have been okay anyway. But the risk to the economy from not taking action was significant and as a result I have no problem with the Fed's action, even though it probably does mean a bit of a higher inflation rate in a year or two.
So I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.
To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.
To focus on inflation to the exclusion of everything else is its own sort of obsession and can be equally damaging as Deficit Obsession Disorder.