Central Bankers Favoring Foolishness Over Facts
Tuesday 19 October 2010
by: Paul Krugman, Krugman & Co. | Op-Ed
The view from the roof of the Savoy hotel, London. In Britain, inflation is more than one percentage point above the Bank of England’s annual target of two percent. (Photo: Andrew Testa / The New York Times)
These days there seem to be two types of thinkers in the world of central banking.
On one side there are the serious people, who believe that central banks should raise interest rates in the face of high unemployment and falling inflation, because, well, that is what serious people believe.
On the other side there are the unserious people, who believe that central banks should fight deflation as well as inflation, and try to prevent the economic slump from turning into a quasi-permanent state of depression. But say this to serious people and they wonder: How ridiculous can you get?
In Sweden, Lars Svensson — formerly my colleague at Princeton University and now deputy governor at the Riksbank — is concerned about the recent efforts of his colleagues, who are eager to raise interest rates in the face of inflation that is far below target and in an economy that has not entirely recovered.
On Sept. 2, when Sweden’s central bank voted to raise a benchmark credit rate, Mr. Svensson’s was the lone dissenting voice on the board.
“The policy rate is an ineffective instrument for influencing financial stability,” Mr. Svensson said in a speech delivered in Tokyo on Sept. 16, according to Bloomberg News.
But what does he know? He is only one of the world’s leading monetary economists, having spent a great deal of time studying the problems of monetary policy at the zero lower bound.
In Britain, Adam Posen, an economist who serves on the Monetary Policy Committee of the Bank of England, is urging central banks to act. In a speech on Sept. 28, Mr. Posen noted that central banks will know whether they have implemented enough stimulus measures only when solid indicators such as wages, output and employment are going in the right direction at a sustained pace.
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“[It] is not enough for a central bank to say, ‘look, we expanded our balance sheet more than any time in history,’ or ‘we did things we never did before,’ and argue that, therefore, we must have done a lot, if not too much (not that the Bank of England has done so),” Mr. Posen said. “In my opinion, that is backwards logic. It would be like saying ‘that fire must be out, because we’ve already pumped more water than for any previous fire we’ve fought.’”
But what does he know? He’s only a leading expert on Japan’s lost decade following the bursting of its real estate bubble in 1991 — a period during which deflation and slow growth haunted the nation.
Mr. Posen also points out that mainstream macroeconomics — which suggests that struggling countries need a lot more stimulus, both monetary and fiscal — has actually held up very well in this crisis. It has, above all, made the right predictions about inflation and interest rates.
And the serious people hold that benefits can only come from suffering. But they have gotten it all wrong. Yet “serious” policy makers are rejecting theories that work in favor of those that don’t.
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Backstory: Sweden and Britain, Both Trapped
While some European countries have seen the prices of goods and services drop over the last two years, they have been climbing in Britain. Recent data shows that consumer prices have increased a troubling 3.1 percent since 2009, putting inflation more than one percentage point above the Bank of England’s annual target of 2 percent.
Economists explain that this rise in inflation is partly due to the British pound’s falling 26 percent against the dollar in 2008. Then oil prices jumped 80 percent in 2009, and this year the government reinstated a hefty sales tax. As these forces pushed consumer prices higher, the Bank of England kept interest rates low, supporting the expectation that high inflation would linger. Workers demand wage increases and companies charge more for goods and services when they believe the purchasing power of the pound is likely to keep diminishing.
The usual monetary policy solution for high inflation — raising interest rates — isn’t a feasible option for the Bank of England. With widespread unemployment and cuts to public-sector jobs and welfare looming, bank officials are unlikely to apply policies that would further slow the economy.
Britain isn’t the only country caught in this sort of trap. Through August of this year, housing prices in Sweden jumped at an annualized rate of 6 percent, in what appears to be a property bubble in the making. To quash it, Sweden’s central bank, the Riksbank, raised interest rates in September and seems likely to raise them again this month and in December.
This has some economists worried. At the end of last year, Sweden’s economy successfully pulled out of eight months of deflation — raising interest rates too quickly in a low-inflation environment could lead the economy to shrink again.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2010 The New York Times Company.
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Comments
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Excellent perspective. But
Tue, 10/19/2010 - 15:46 — fredboy (not verified)Excellent perspective.
But when will Mr. Krugman test the Fed's prior decade of actions that have stifled and almost snuffed out our economy?
The double raising of the interest rates beyond chokepoint annihilated businesses and retirement accounts in the spring of 2000--and helped the GOP be appointed to the White House. The only way to stop the Democrats at the end of the roaring, robust 90s was to stop the economy. The Fed did.
Then, when Master Bush was appointed, they started slicing the interest rates like salami. To one percent--in effect, free money for the banks. And what did the banks do? They decided to chuck lending safeguards and principles and give--and that's the right word--loans to anyone. And created a housing bubble and a putrified mortgage lending system.
All the while derivatives--financial alchemy--bet high and low.
The big question is why is the Fed still trusted with the throttle and steering wheel? Do we have to hit a wall or drive completely off a cliff with these stooges?
Mr. Krugman is right on the
Tue, 10/19/2010 - 17:02 — Robert Pool (not verified)Mr. Krugman is right on the money, as usual. Fiscal restraint and tight money policies by central banks will only lead to a deepening recession; we need massive stimulus now, and that stimulus needs to be directed towards infrastructure, clean energy, and R & D. Investments in these areas will grow the economy now, employ young people, and set the stage for future productivity growth.
Can't these morons understand that if everybody tightens their belt, the economy will continue to contract indefinitely?
I suppose we were lucky that WW II provided a solution to the collapse of aggregate demand in the Great Depression. It was an enormously wasteful and destructive solution, but it got Americans working again. We need something similar now. But creative, not destructive.
Anyone Investing Based On
Tue, 10/19/2010 - 18:52 — Can You Do Simple Math? (not verified)Anyone Investing Based On Krugman's theories has lost their shirt over the last ten years - why does anyone still listen to this man. Try Ian Gordon - the 'Long Wave Cycle' analyst. The proof is in the pudding - if his analysis has led to 70% per anum gains over the last ten years, he must have a better grip on reality than Krug - it is clearly not by 'luck' or chance. Read what Ian says about how to fix the economy.
Gee, I don't ever remember
Tue, 10/19/2010 - 21:50 — Motorod (not verified)Gee, I don't ever remember the Krug offering investment advice. Gordon, on the other hand, is full of it.
I'm no economist, but I know
Tue, 10/19/2010 - 22:14 — bbuc (not verified)I'm no economist, but I know that banks are not willing to loan money secured by property which may well decline in value in the next year or two.
Motorod - Krug has made
Tue, 10/19/2010 - 23:11 — Can You Do Simple Math? (not verified)Motorod - Krug has made predictions - not given advice. In none of his writings does he admit that the FRB is a criminal organization and that the country has been taken over by pirates. This was understood years ago by the likes of Ron Paul, who has been pushing for an audit of the FRB for many, many years. Krug is either a fool or a schill in their service - this is why he received the 'Nobel Prize' in Economics - awarded by a Swedish bank "in honor of Alfred Nobel" - has nothing to do with the Alfred Nobel Foundation - it's a banker's prize for economists who promote policies that serve the bankers.
Audit the fed, support
Tue, 10/19/2010 - 23:17 — Charlie Peters (not verified)Audit the fed, support HR1207Paul
This is fascinating - the
Tue, 10/19/2010 - 23:22 — Can You Do Simple Math? (not verified)This is fascinating - the Riksbank is the very bank that awarded him the Nobel Prize. I love Krug's fire analogy - but I see it another way - if deficit public spending has led to the meltdown, why would you borrow and spend more money to try to lift it back up - that's like pouring gasoline on the fire! Unless you issue money directly to the people instead of to the banks - will Krug endorse that policy? Then the people could pay off their debts. Would that help the banks or the people?
CYDSM doesn't seem to have a
Wed, 10/20/2010 - 00:37 — Texas Aggie (not verified)CYDSM doesn't seem to have a good grasp on what is going on. No where is there any indication that deficit spending is what led to the present problems. The problems we now face are related to fiscal fraud on the part of the Wall St. bankers. Read the column about the Countrywide "judgment."
In addition there is no indication that the Fed is a criminal organization rather than an inept organization captured by its dogma, similar to the Republican party.
And if you want to yammer about "failed" predictions, Dr. Krugman is NOT the person you should be talking about. He was spot on with his predictions of the housing bubble, the too small stimulus, and a whole lot more. If you want to get on someone's case about failed predictions, you need to talk about Alan Greenspan.
Texas Aggie - Wall Street
Wed, 10/20/2010 - 02:00 — Can You Do Simple Math? (not verified)Texas Aggie - Wall Street controls the Federal Reserve Bank - which IS a private corporation - learn the history - read The Creature From Jekyll Island or any of the myriad books on the subject.
WRT who ruined us: Sure the banks screwed us with the bad loans - but look who bailed them out - look at the size of the debt that was created in the bailout - it is unpayable - we are bankrupt - they could have used that TARP money to pay off every mortgage in the country, but instead it went to the banks - many overseas - IN SECRET, for God's sake. The FRB is totally corrupt, as is the US Treasury, also run by wall street minions now, thanks to Obama's appointments. Note that the FRB is the only corporation in the US immune from audit.
As ever Krugmanipulation
Wed, 10/20/2010 - 03:52 — Phil Price (not verified)As ever Krugmanipulation gives a short essay full of lies, smoke and mirrors. And some incredibly dangerous advice to boot.
There is no fact that states that QE works, or is indeed the right method to adopt. In this Krugman, as usual, is highly disingenuous. Is taking 1% off long term rates for a trillion dollars what the country needs? Or is it in fact a higher savings rate? Removing the endless bureaucracy from gov't? Stop gov't crowding out private investment? Changing unhelpful tax regimes?
One serious problem is, of course, overvalued debt, both public and private. It needs to be purged from the system.
There are two ways: 1) default - this doesn't seem to be an option in this age where we fear death. We want to save everything, from the lying (previous) gov't in Greece, to TBTF, to our old Grandpa who is 95, lost his marbles, and in excruciating pain. But no, keep the man alive!
The second way: stealth default via devaluation. Central Banks monetise the debt, debasing the currency. All that debt still exists, but it gets paid back in devalued dollars. This is what CBs are doing right now.
Krugman also doesn't mention the h-word... but of course he can't, as he's only interested in one side of the story.
Listen to all the
Wed, 10/20/2010 - 10:08 — bvc (not verified)Listen to all the horseshit!
Would any sane, intelligent, human being really argue that "Economics" is a science?
Imagine a controversy in Physics over how to define velocity.
It's like asking a mathematician "what's your sine?"
$7 trillion sitting on the
Wed, 10/20/2010 - 18:06 — Marc Shapiro (not verified)$7 trillion sitting on the sidelines earning virtually no interest and not supporting the economy. For every 1% increase in interest rates
$70 billion plus its multiplier could contribute to the economy. With totally distorted inflation figures they claim there is no inflation - thus no
adjustment to social security. But, with the exception of those who arbitrarily determine the inflation figures, the rest of us know there is substantial inflation, caused, more than anything else by increases in taxes and fees which are raised (never to be lowered) to compensate for the tax revenue lost because there is no interest to be taxed. How can all these "economists", including Mr.Krugman be so blind to the most significant cause of our
economic problems?
the increase of interest rates is the primary missing factor in bringing back a meaningful recovery!
Bailout?!? With what of any
Thu, 10/21/2010 - 04:06 — Jehnavi (not verified)Bailout?!? With what of any value are the Big Banks being bailed out with? Educate yourself on the history of money…real Commodity monies havent been around for decades. Promissory Money lent itself to Fiat Money, which is the current money you hold in your hand…it is no longer backed by tangible commodities such as Gold, Silver or other precious metals…The Govt, I mean FED RES has been counterfeiting money as long as I’ve been alive, and that’s 32 years…the difference between the $5 bill and the $100 bill is illusory…it is all paper, plain and simple, of an industry that is being depleted via free-trade and outsourcing to be replaced by virtual money, which the Fiat Money you hold really isnt anything but virtual once you make your deposit…the Big Banks are being bailed out with Counterfeit Money that is generated on the backs of the people and their children and their grandchildren as taxes we’ll owe back as Counterfeit-derived obligations, which were in themselves, derived out of corrupt initiatives of master Counterfeiters…
http://www.tipsforinvesting.net/paul-krugman-economist.html
A sustainable energy new
Fri, 10/22/2010 - 00:26 — Anonymous (not verified)A sustainable energy new deal is needed immediately, if we hope to climb out of this depressed economy and regain strength as a nation. Rehire every unemployed and under employed person for a massive energy conservation and sustainable energy campaign. Obama should use his executive emergency powers for something better than drone attacks. Keeping the economy strong is certainly an essential part of defending the country. We were attacked economically by a gang of banksters. These economic terrorists created financial chaos for their disaster capitalism. Kill the FED. It should not exist. It is insane to allow FED banksters to charge interest on money printed by the government for government spending. Government monitary debt would be zero when the government prints the money rather than the bankster FED. No imbalance of trade (debt) between nations should be allowed either. This imbalance of trade has made it possible for china to hollow out the US manufacturing base and destroy millions of US jobs. They would not be allowed to flood our markets with cheap shoddy goods if we insisted on a balance of trade.