Tuesday, November 16, 2010

Another crie de coeur from Cassandra

Alas, poor Cassandra Krugman -- impelled to prophesy economic doom while watching those in power ignore his warnings.

On Nov. 7, Krugman lamented thusly regarding the likely course of Fed Chairman Ben Bernanke's announced plans for a new round of quantitative easing:
For the big concern about quantitative easing isn’t that it will do too much; it is that it will accomplish too little.

Reasonable estimates suggest that the Fed’s new policy is unlikely to reduce interest rates enough to make more than a modest dent in unemployment. The only way the Fed might accomplish more is by changing expectations — specifically, by leading people to believe that we will have somewhat above-normal inflation over the next few years, which would reduce the incentive to sit on cash.

The idea that higher inflation might help isn’t outlandish; it has been raised by many economists, some regional Fed presidents and the International Monetary Fund. But in the same remarks in which he defended his new policy, Mr. Bernanke — clearly trying to appease the inflationistas — vowed not to change the Fed’s price target: “I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy.”

And there goes the best hope that the Fed’s plan might actually work.

Think of it this way: Mr. Bernanke is getting the Obama treatment, and making the Obama response. He’s facing intense, knee-jerk opposition to his efforts to rescue the economy. In an effort to mute that criticism, he’s scaling back his plans in such a way as to guarantee that they’ll fail.
Yesterday, the Wall Street Journal reported on a planned fusillade against QE2 from a covey of conservative economists (including a healthy proportion of hacks and quacks):
"The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.
And thus is driven one more nail in the coffin of Krugman's proposed raised inflation target:
A spokeswoman for the Fed said Sunday, "The Federal Reserve...will take all measures to keep inflation low and stable as well as promote growth in employment."
Once again, though, one must wonder whether it's feasible for those in power to be as bold as Krugman demands. Given the international firestorm over the proposed QE2, the accusations of deliberate dollar devaluation, imagine the hysteria if Bernanke signaled that he would countenance a significant rise in inflation.

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