FWC-- Monetary policy: QE sera, sera
The article is a good read. The concluding paragraph:
"That is the heart of the matter. In the bitterest of ironies, Mr Bernanke is giving America a Japanese recovery."
If only Americans were so lucky. Because of the time lag of 11+ years between the Japanese and the American economies, driven by giant bubbles at times, in another decade ordinary Americans would do far worse than the ordinary Japanese are doing today or have done over the past few years. Americans who claimed that we are not Japan were right except in the wrong direction.
"He is doing so, seemingly, because pushing inflation temporarily above an arbitrary target is an unthinkable prospect, even though doing so would almost certainly, by his own convincing argument, have a huge impact on America's enormously costly unemployment problem."
The idea that higher inflation target would help American employment is the most absurd thing that I hear from academic morons in the economics departments of Harvard and Princeton. These morons know nothing about economics (never really produced a penny's worth of goods!) they are only trained in manipulation. They are parasites.
"I suspect that the Ben Bernanke of 1999 would characterise this as a moral and intellectual failure of staggering proportions. Maybe the Ben Bernanke of 2012 has a convincing rebuttal; if so, he certainly hasn't shared it with us. Maybe one day we'll all be lucky enough to hear it. It had better be one hell of a good excuse."
For years Bernanke, and Greenspan before him, claimed that price stability provides the optimal climate for economic growth and employment. During 2003-2007 Bernanke said that Fed's target for inflation is 1-2%, which he equated with price stability, and now he says that it is 2%. If he publicly changes the target to 3-4% he would lose lot of credibility. The fact that it might prove disastrous is beside the point. Economic manipulation is not a science; it is quackery.
Jas
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Monetary policy: QE sera, sera
Jul 12th 2012, 17:38 by R.A. | WASHINGTON
THIS week's print edition includes a
long primer on QE. Asset-purchases have been the principal unconventional monetary policy tool deployed by rich-country central banks in this crisis, and their use is once again ramping up; the Bank of England just scaled up its QE plans by £50 billion, the Fed may use its next meeting to pivot from "Twist" operations back to QE proper, and the ECB's recent interest rate moves have some suggesting that QE could be on the table there, as well.
As the piece explains in detail, you can do asset purchases for a number of reasons. "Credit easing", for instance, involves the buying of specific assets, like commercial paper or mortgage-backed securities, in an effort to unblock a broken credit channel. The goal of QE proper is more narrow, however—to raise demand—and it is meant to achieve this goal in a few different ways. First, it gives investors money while taking securities out of their portfolios, in hopes the investors will turn around and use the money to acquire other assets (an effect called "portfolio rebalancing"). This process ripples through the financial system raising asset prices. Higher bond prices mean lower rates and more borrowing. Higher equity prices mean more investing and (through the wealth effect) more consumption. And higher foreign exchange prices mean more net exports. Secondly, QE can reduce government borrowing costs, thereby cutting future expected taxation. And third, QE can have an expectations effect by, for instance, making the central bank's commitment to some other stimulative goal more credible.
It's worth noting that QE is by no means the only way to raise demand through unconventional monetary policy. In Ben Bernanke's famous "self-induced paralysis"
talk in 1999, he outlines several approaches that the Bank of Japan could take to get itself out of the liquidity trap, then wraps up by saying, "I doubt that [QE] will be needed if the BOJ aggressively pursues reflation by other means. I would hope, though, that the Japanese monetary authorities would not hesitate to use this approach, if for some reason it became the most convenient."
And of course, the Bank of Japan did use that approach beginning in 2001, in the process demonstrating the particular convenience of QE. It allowed the BoJ to pursue a policy that was relatively safe involving a metric (ending deflation) with which people were comfortable, it gave the BoJ the ability to say it was trying extraordinary things, and yet it spared them having to try something controversial which might nonetheless have proven far more effective.
By the late 1990s, Japan was suffering from persistent deflation. As a first response, it deployed the zero-interest-rate-policy (or ZIRP), in which it promised to keep short-term rates at zero "until deflationary concerns subside". That didn't have much of an effect, which led Mr Bernanke to complain that:
A problem with the current BOJ policy, however, is its vagueness. What precisely is meant by the phrase "until deflationary concerns subside"? Krugman...and others have suggested that the BOJ quantify its objectives by announcing an inflation target, and further that it be a fairly high target. I agree that this approach would be helpful, in that it would give private decision-makers more information about the objectives of monetary policy. In particular, a target in the 3-4% range for inflation, to be maintained for a number of years, would confirm not only that the BOJ is intent on moving safely away from a deflationary regime, but also that it intends to make up some of the "price-level gap" created by eight years of zero or negative inflation.
That was his primary recommendation: a commitment to zero rates alongside very clear communication about a "fairly high" inflation target. The BoJ didn't want to do this, for reasons Mr Bernanke addressed and dismissed. What it opted to do instead was pursue QE, beginning in 2001. It was reasonably effective; by 2006, inflation had stabilised at about zero. The BoJ, then able to declare "victory", ended QE, rapidly drew down the monetary base, and raised the interest rate. A remarkable piece in the
New York Times commented:
Economists applauded the Bank of Japan's interest rate increase, the first in six years, as a long-awaited signal that Japan's $4.6 trillion economy is finally getting back on track.
They said that by moving pre-emptively on Friday, long before a return of inflation is likely to became a threat, the central bank was also hoping to demonstrate that it was watching prices carefully, and was therefore up to the task of stewarding Japan's economy, the world's second largest after the United States.
Later, the piece notes the BoJ's previous mistakes in tolerating and then overreacting to a large bubble and says, "These errors have haunted the bank as it tries to win respect on a par with the Federal Reserve and the European Central Bank." The "haunted" Bank of Japan never tried a bout of high inflation. Prices rose at very low rates in 2007 and 2008 and have fallen every year since.
Fast forward a few years, and it looks remarkably like the Federal Reserve and the European Central Bank are trying to win respect on a par with the BoJ. Early after the crisis, a number of prominent macroeconomists were repeating Mr Bernanke's advice back to him, suggesting that a bout of moderately high inflation would do the American economy a great deal of good. Mr Bernanke demurred, opting instead to embrace a Japanese goal (moving inflation back up to the minimally acceptable level) using Japanese tools (QE). Unsurprisingly, the results have been very nearly the same. With the exception of the crisis period, prices have hung around or just below the desired level, output growth has hung around or just below trend, and there has been no closing of the output gap to speak of.
One occasionally hears remarks to the effect that Japan's performance might not have been so bad after all and that America's similar trajectory is about the best that can be expected, but this is almost certainly wrong. Some economists like to cite Japan's low unemployment figures, but this is misleading. When Japanese unemployment rose to 5% in 2001, that was more than double the rate of the early 1990s. The rate is currently at 4.4%; since 1997, it has never been below 3.8%. And of course, Japan's population is effectively unchanged from the level of the late 1990s. The labour force has steadily declined; employment is now about 3m jobs below the 1998 level. The absolute figures may differ, in other words, but the trajectory of American unemployment is similar to that in Japan, in other words, and similarly distressing.
Mr Bernanke seems to take some comfort in the idea that 2% is different from 0% when it comes to inflation. I'm not at all confident that's correct in the American context. Using Mr Bernanke's own standard in the 1999 speech—that price level catch up is important—the Federal Reserve is failing; the price index for personal consumption expenditures is below the 2000-2005 trend line and well below (by about 4.4%) the 2002-2007 trend line, and falling farther behind in both cases. Some economists will argue that it's the trend level of nominal output that matters; America's catch-up performance on that score is too awful to mention. And still other economists will argue that the question is whether the Fed is generating a real interest rate sufficiently low (or negative) to achieve full employment. Obviously, it is not.
Will more QE help? The print piece concludes:
For additional QE to prove effective in both Britain and America, central banks must change their approach to inflation. Temporary, higher-than-normal inflation can facilitate wage and price adjustments and help erode the real value of household debts. Most importantly, when nominal interest rates can go no lower, a higher inflation rate corresponds directly to a lower, and more stimulating, real interest rate.
Both the BoE and the Fed target an inflation rate of 2%. Even a modestly effective new round of QE should quickly lift inflation expectations back to target. But if markets think above-target inflation will prompt a reversal of the policy, then new QE will have very little impact...
Relaxing inflation targets is hard for central bankers with intellectual roots in the stagflationary 1970s. In Mr Bernanke's view, central bankers' victory over the runaway inflation of that decade is a momentous achievement. But that stability is now being purchased at a very dear price.
That is the heart of the matter. In the bitterest of ironies, Mr Bernanke is giving America a Japanese recovery. He is doing so, seemingly, because pushing inflation temporarily above an arbitrary target is an unthinkable prospect, even though doing so would almost certainly, by his own convincing argument, have a huge impact on America's enormously costly unemployment problem. I suspect that the Ben Bernanke of 1999 would characterise this as a moral and intellectual failure of staggering proportions. Maybe the Ben Bernanke of 2012 has a convincing rebuttal; if so, he certainly hasn't shared it with us. Maybe one day we'll all be lucky enough to hear it. It had better be one hell of a good excuse.
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