Krugman: Fed changes course; GOP goes wild
By PAUL KRUGMAN
Last week Ben Bernanke, the Federal Reserve
chairman, announced a change in his institution’s recession-fighting
strategies. In so doing he seemed to be responding to the arguments of
critics who have said the Fed can and should be doing more. And
Republicans went wild.
Now, many people on the right have long been
obsessed with the notion that we’ll be facing runaway inflation any day
now. The surprise was how readily Mitt Romney joined in the craziness.
So what did Bernanke announce, and why?
The Fed normally responds to a weak economy by
buying short-term U.S. government debt from banks. This adds to bank
reserves; the banks go out and lend more; and the economy perks up.
Unfortunately, the scale of the financial
crisis, which left behind a huge overhang of consumer debt, depressed
the economy so severely that the usual channels of monetary policy don’t
work. The Fed can bulk up bank reserves, but the banks have little
incentive to lend the money out, because short-term interest rates are
near zero. So the reserves just sit there.
The Fed’s response to this problem has been
"quantitative easing," a confusing term for buying assets other than
Treasury bills, such as long-term U.S. debt. The hope has been that such
purchases will drive down the cost of borrowing, and boost the economy
even though conventional monetary policy has reached its limit.
Sure enough, last week’s Fed announcement
included another round of quantitative easing, this time involving
mortgage-backed securities. The big news, however, was the Fed’s
declaration that "a highly accommodative stance of monetary policy will
remain appropriate for a considerable time after the economic recovery
strengthens." In plain English, the Fed is more or less promising that
it won’t start raising interest rates as soon as the economy looks
better, that it will hold off until the economy is actually booming and
(perhaps) until inflation has gone significantly higher.
The idea here is that by indicating its
willingness to let the economy rip for a while, the Fed can encourage
more private-sector spending right away. Potential home buyers will be
encouraged by the prospect of moderately higher inflation that will make
their debt easier to repay; corporations will be encouraged by the
prospect of higher future sales; stocks will rise, increasing wealth,
and the dollar will fall, making U.S. exports more competitive.
This is very much the kind of action Fed
critics have advocated — and that Bernanke himself used to advocate
before he became Fed chairman. True, it’s a lot less explicit than the
critics would have liked. But it’s still a welcome move, although far
from being a panacea for the economy’s troubles (a point Bernanke
himself emphasized).
And Republicans, as I said, have gone wild,
with Mitt Romney joining in the craziness. His campaign issued a news
release denouncing the Fed’s move as giving the economy an "artificial"
boost — he later described it as a "sugar high" — and declaring that "we
should be creating wealth, not printing dollars."
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Romney’s language echoed that of the
"liquidationists" of the 1930s, who argued against doing anything to
mitigate the Great Depression. Until recently, the verdict on
liquidationism seemed clear: It has been rejected and ridiculed not just
by liberals and Keynesians but by conservatives too, including none
other than Milton Friedman. "Aggressive monetary policy can reduce the
depth of a recession," declared the George W. Bush administration in its
2004 Economic Report of the President. And the author of that report,
Harvard’s N. Gregory Mankiw, has actually advocated a much more
aggressive Fed policy than the one announced last week.
Now Mankiw is allegedly a Romney adviser — but
the candidate’s position on economic policy is evidently being dictated
by extremists who warn that any effort to fight this slump will turn us
into Zimbabwe, Zimbabwe I tell you.
Oh, and what about Romney’s ideas for "creating
wealth"? The Romney economic "plan" offers no specifics about what he
would actually do. The thrust of it, however, is that what America needs
is less environmental protection and lower taxes on the wealthy.
Surprise!
Indeed, as Mike Konczal of the Roosevelt
Institute points out, the Romney plan of 2012 is almost identical — and
with the same turns of phrase — to John McCain’s plan in 2008, not to
mention the plans laid out by George W. Bush in 2004 and 2006. The
situation changes, but the song remains the same.
So last week we learned that Ben Bernanke is
willing to listen to sensible critics and change course. But we also
learned that on economic policy, as on foreign policy, Mitt Romney has
abandoned any pose of moderation and taken up residence in the right’s
intellectual fever swamps.
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