I picked a bad week to try to take a break or maybe it was a really good week and I just haven’t been able to avoid the news with Bernanke’s testimony to Congress both today and yesterday. As I was reading Marcus Nunes’ new post admonishing Paul Krugman for pulling yet more “red herrings out of the hat,” I followed the link to the Krugman article for a look.
Marcus provides a great rebuttal to the essence of the Krugman article, and there isn’t anything more I can add so I poked around Krugman’s column site to see what else he might me saying. His latest article is Feckless Fed. In it, Krugman rightly criticizes Bernanke for not doing more to bring on economic recovery but then makes an astonishing claim about Bernanke’s motivation:
But my sense is that his latest testimony, in which he declared that the Fed has the power to take action, that the economy is in really bad shape, but declined to, you know, actually take action, has left even his usual defenders more or less speechless.
It really makes no sense — except in terms of politics. I really believe that we have reached a point where the Fed is afraid to do its job, for fear of being accused of helping Obama.
This last part is quite a load to swallow for two reasons.
The first reason is that Obama has always been able make an issue out of the Fed not doing its job. He could have done what Ronald Reagan did and threaten to run monetary policy out of the Treasury if the Fed didn’t do what he wanted. Or, if Obama wasn’t feeling quite that brave, he could have used political capital to bring it before Congress, especially when his party had a super majority and they were working on Dodd-Frank, the largest financial system overhaul since the 1930s.
The second reason is that the President has appointed all members of the Board of Governors, except for Bernanke, who did not dissent from the latest action. If he did not take pains to appoint people who would be sympathetic to his point of view that hardly makes him a victim.
The basic problem of why we are sitting here today with dysfunctional monetary policy has precisely to do with Obama’s failure to appropriately deal with the Fed. He certainly had plenty of opportunity to do so, but perhaps was so in love with the idea of spending mountains of cash, he was blind that there was even a problem. Even now, one of the most revered economists on the left, Mr. Krugman, isn’t talking about the defects of the inflation targeting regime. Maybe talking about it now poses a huge problem for both left-leaning economists’ reputations and their ideology, but if they were interested in doing the right thing by all the millions who have been suffering under the circumstances, it doesn’t seem appropriate to me to be saying almost nothing about it while trying to cover Obama’s rear. I guess they don’t like the idea of not needing Congress to get a recovery.
While I was poking around at the NYT website I also found this article about the IMF sounding an alarm for a high risk of deflation in the Euro Zone. Here are a couple of quotes:
FRANKFURT — The International Monetary Fund, warning of “a sizable risk” that some euro zone countries could suffer a debilitating decline in prices, called on Wednesday for the European Central Bank to pump money into the region’s economy by buying huge volumes of government bonds.
Such bond buying, which the Federal Reserve has undertaken in recent years to stimulate the United States economy, is a move the central bank has resisted, one that would probably outrage the fiscal disciplinarians of Germany.
And it goes on to talk about the prospects of the ECB taking the IMF’s advice:
Richard Barwell, an economist at the Royal Bank of Scotland, doubted that the central bank would follow the monetary fund’s advice without evidence of deflation throughout the euro zone. “I think they would view it as being counterproductive,” he said. “It would be alleviating all pressure on policy makers to solve the underlying cause of the problem.”
But fund officials framed their call for big bond purchases as a way for the central bank to maintain its control over interest rates and contain borrowing costs for troubled countries.
“It is an essential part of the E.C.B. fulfilling its mandate,” Helge Berger, an adviser in the fund’s European department, said during a conference call Wednesday with reporters.
Quantitative easing is how central banks stimulate the economy when they have already pushed interest rates as low as they can go. This month, the central bank cut its benchmark interest rate below 1 percent for the first time, to 0.75 percent. But quantitative easing is opposed by Germany, the biggest contributor to the bank, because it would amount to the use of the central bank to finance governments. And German sentiment carries weight with the bank, which is reluctant to further divide the euro zone.
Mr. Draghi has given no clear signals that the bank is seriously considering quantitative easing or other measures. But on Tuesday, at a meeting here with Michael Noonan, the Irish finance minister, Mr. Draghi tentatively addressed a widespread concern that central bank bond buying hurts more than it helps. For instance, it could make the central bank a senior creditor over other bond buyers, who would then be at greater risk if a government defaulted on its bonds.
Admittedly, for me, after studying the social history of the Great Depression in the United States, this is as much of an emotional issue as it is a logical one. It is very difficult for me to listen to considerations of credit seniority regarding the central bank with evidence that some amount of sustained deflation has already been taking place in the south. I cannot figure out how not solving the “underlying cause of the problem,” broken monetary policy, would not put “other bond buyers” in far more jeopardy than they already are. Allowing deflation makes the debt burden heavier and makes a bigger hole in public financial health. By refusing to reverse contractionary monetary policy, the ECB is only guaranteeing those bond holders will have their pants ripped off them while the problem expands to engulf sovereigns that were thought as safe.
If Mr. Draghi thinks that buying sovereign bonds is divisive of the Euro Zone, he will see what his awful policies will accomplish as it is splashed all over the pages of 1930s history. There is only so much desperation people can put up with, and desperate people do desperate things. This isn’t going to end well, and I am quite afraid for the people of Europe.