Thursday, September 30, 2010

The Case for More Central Bank Action -

From yesterday's New York Times - an article by David Leonhardt (tip of the hat to Ezra Klein of the Washington Post).

Adam Posen is an American economist serving as an external voting member of the Bank of England’s monetary policy committee. He gave a very thoughtful speech arguing that more government action is needed, not less.

Here's an excerpt from an interview with Mr. Posen:

My basic argument is that the current macro policy discussion is mostly missing the point. Our situation (in the U.K., the U.S., and arguably in most of the major Western economies) is one where policy makers face a long uphill battle, in which monetary ease has an ongoing role to play, even if it may not deliver recovery on its own.

Insufficient monetary action risks turning sustained low growth and near deflation into a self-fulfilling prophecy. This happened in Japan in the 1990s, and in U.S. and Europe in the 1930s. I don’t think things will be “that bad” in the sense of an outright depression, but we face a real risk of long-term stagnation with some distracting upward blips and slowly eroding capacity

This is the point that I have posted on several times over the last few months (although Mr. Posen is certainly a more learned observer than I).

I think the correct policies that in a world drowning in excess capacity coupled with high debt should be focused on stimulus and job growth.

The low interest rates in today's bond market are not, in my opinion, reflecting a bond "bubble" but rather reflecting the capital market's collective wisdom that disinflation and deflation are the probable path unless changes are made.

One more note from the Times' article:

In terms of how to do more, there has been too much obsession with the scale of central bank balance sheets. It is backward logic to say that because central banks have bought more assets than ever before, we must have done a lot or our efforts must be fruitless. That is like saying, “that fire must be out because we’ve already pumped more water than for any previous fire we’ve fought before.”

The Case for More Central Bank Action -