When Federal Reserve Chairman Ben S. Bernanke launched a $600 billion round of asset purchases in November, he said it would lead to a “virtuous cycle” that boosted the expansion. Paul Krugman, his former colleague at Princeton University, said “meh.”
The stock market and the economy has proved more “meh,” an adjective meaning mediocre, than virtuous. Now the Nobel Prize-winning Krugman says the Fed should engage in much more aggressive monetary policy, including raising its target for inflation, to fight unemployment stuck near 9 percent for 28 consecutive months and avert a lost decade of low U.S. growth.
In a speech last week in Jackson Hole, Wyoming, Bernanke said the central bank has tools to stimulate the economy without providing details or signaling when or whether policy makers might use them. Bernanke said that “most importantly” monetary policy must keep inflation low and stable, and most policies that would support growth in the “long run” are outside the central bank’s purview.
“I think Bernanke’s definition of the long run is ‘after all this nasty stuff is behind us’” Krugman said in an e-mailed response to questions. “And similarly for Fed policy. So the speech was basically saying that in the long run we don’t matter, and in the short run, which could be pretty long, not our problem.”
On his New York Times blog after the speech, Krugman quoted John Maynard Keynes: “This long run is a misleading guide to current affairs. In the long run we are all dead.”
Krugman since 2000 has been a professor at Princeton, in New Jersey, where he was hired by Bernanke, then the department chairman. As academics studying Japan they agreed on the need for aggressive action from the central bank to kick start a stalled economy after a financial crisis.
In the U.S, Krugman sees Bernanke’s actions as weak medicine. The central bank decided on Aug. 9 to hold interest rates near zero through mid-2013 and pledged to employ additional tools “as appropriate.” On his New York Times blog, Krugman wrote that day that he was “unimpressed” with that decision as well.
The decision drew three dissents from members of the Federal Open Market Committee, which may serve as a restraint to the action Bernanke may favor, according to Christina Romer, a former White House chief economist.
“There are some very extreme opinions within the FOMC on the ‘don’t do any more’ or ‘start tightening now’ side,” Romer, a professor at the University of California, Berkeley, said in a telephone interview. “The trouble is there’s nobody stridently on the other side. Bernanke’s life might be easier if he had a Paul Krugman on the Fed’s board saying, ‘For heaven’s sake, unemployment is 9.1 percent.’”
Romer has also been a policy maker facing Krugman’s criticism. As chairman of Barack Obama’s Council of Economic Advisors, she pushed for the $830 billion fiscal stimulus package, passed in February 2009, that Krugman wrote in the New York Times was “nowhere near big enough” to make up for the economy’s lost output.
Krugman made a similar argument against the Fed’s asset purchases, saying “$600 billion really isn’t a lot when you’re trying to move a $15 trillion economy,” in a post on his blog less than two hours after the policy was announced on Nov. 3.
“When I was in the administration, I found it helpful to have prominent voices like Paul Krugman’s arguing for more fiscal stimulus,” said Romer, who is also a contributing editor for Bloomberg. “It made it clear that what the administration was pushing for was very moderate.”
“To have an outside voice arguing to do more may be very helpful for Ben,” she said.
Federal Reserve Bank presidents Charles Plosser of Philadelphia, Richard Fisher of Dallas and Narayana Kocherlakota of Minneapolis all voted against the Fed’s decision to keep the target for the federal funds rate at zero to 0.25 percent until at least mid-2013. Plosser and Fisher both said the pledge wouldn’t help spur growth. The last time three policy makers dissented was in November 1992.
During his tenure as Fed chairman, Bernanke has had 26 dissents from the FOMC’s policy statements. Only one, from Boston Fed President Eric Rosengren in December 2007, urged more accommodative monetary policy.
“Chairman Bernanke is timid compared with Professor Bernanke,” Krugman said, when asked why Bernanke had not taken the sort of aggressive actions he had pushed for as a professor at Princeton. Bernanke declined to comment, said Michelle Smith, the Fed’s spokeswoman.
In a 1999 paper, Bernanke, 57, dubbed Japan’s struggling economy “a case of self-induced paralysis” and proposed an idea previously proposed by Krugman -- an inflation target. Bernanke’s favored strategy against deflation, as outlined in a 2002 speech after he became a Fed governor, was to increase Federal Reserve asset purchases.
“Bernanke has always had more faith in the effects of changing the Fed’s portfolio than I did or do,” said Krugman, 58. “Bernanke, going back more than a decade, was more inclined to favor what we now call quantitative easing as opposed to working on expectations of inflation.”
In his speech last week in Jackson Hole, Bernanke didn’t discuss the tools available to the Fed. He announced that the FOMC would extend its September policy meeting to two days from one to allow discussion of its options.
In testimony before Congress on July 13, Bernanke outlined three possible tools. The first was to provide more guidance about the period over which interest rates would remain low. The central bank took that step Aug. 9 with its pledge to keep borrowing costs near zero for two years.
The second option was to initiate more asset purchases or increase the average maturity of the Fed’s securities holdings. A third was to reduce the interest rate the Fed pays on excess reserves.
“I suspect that the main point is that Bernanke now has to deal with politics, both within and beyond the Fed,” Krugman said in an e-mail, when asked why Bernanke hasn’t wielded more policy tools. “The other FOMC members have been very reluctant to get radical -- three votes against mild language suggesting a prolonged era of low rates -- and Bernanke doesn’t want to get too far out ahead. And then he faces harsh criticism from the right, which sees hyperinflation lurking under every bush.”
The prospect of new easing from the Fed has already drawn criticism from Republicans such as Texas Governor Rick Perry. Perry, who Gallup said this week is the leading Republican candidate for his party’s nomination for president, said Aug. 15 that Bernanke would be treated “pretty ugly down in Texas” for increasing monetary stimulus before the November election next year.
“Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous -- in my opinion,” Perry said in Cedar Rapids, Iowa. In Congressional testimony last month, Republican Senators, including Richard Shelby of Alabama, Bob Corker of Tennessee and Pat Toomey of Pennsylvania, told Bernanke they opposed any consideration of increasing the Fed’s record stimulus.
“You have conservatives really beating up on QE2 and I think that reverberates within the Fed, he can’t escape that,” said Dean Baker, co-director of the Center for Economic and Policy Research in Washington. “It amazes me that there’s no drumbeat on the other side, that QE2 was in the right direction and just not anywhere near what we need,” he said in a reference to the second round of asset purchases, also known as quantitative easing.
Pledging to raise the inflation rate temporarily is something that may work better in theoretical models than in practice, said Dean Croushore, chairman of the economics department at the University of Richmond and a co-author with Bernanke of his textbook “Macroeconomics.”
“No central bank I know of has been able to actually manage inflation that well,” Croushore said. “Allowing inflation to rise temporarily could certainly make some bad loans good, in the past it has increased house prices at the expense of bondholders and stockholders. It would lead to a big redistribution of wealth as it did in the 1970s.”
Bernanke’s critics do not fully appreciate the pressure of having the job, said Mark Gertler, a New York University economist who has co-written research with Bernanke.
“Regarding monetary policy, it’s easier to say what you should do from the outside as opposed to when you’re actually in the hot seat yourself,” said Gertler. “Krugman’s had a lot of really perceptive analysis of the economy. I just think he’s gone a little bit overboard about what the Fed should do.”
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