Friday, August 27, 2010

Central banks alone

Ben Bernanke at the annual federal reserve conference at Jackson Hole:

Central bankers alone cannot solve the world’s economic problems.

Imagine our collective surprise! Has anyone told Milton Friedman?

But the stock market shot up today on reassuring words like these from Chairman Bernanke:

“Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally,” Mr. Bernanke said. “Because a significant further weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability.”

This guy is good, but he’s nowhere near as inscrutable as Alan Greenspan; that guy was a genius.

What is “resource slack?” you may ask. It’s the pile of cash or cash equivalents that corporations are sitting on, and won’t invest, because they aren’t sure that anybody will be available to buy what they make. Demand is weak, in other words. Wealthy people, the only ones with money to spend, just aren’t it spending, either.

This is the reason that making permanent the tax cuts for the rich aren’t going to help the economy. It is also why “trickle down” (or “piss on” as commenter Ned calls it) economics is, in the words, of George Bush the Elder, voodoo. (It’s a nice afternoon; I don’t intend to spend all of it collecting links about trickle down economics; you’re big enough to do it yourself.)

According to the linked Times article:

It was his most robust statement to date that the Fed would do its part to avoid a Japanese-style deflation from taking hold.

Gee, I feel better already.

Update: In a column published shortly before Bernanke’s statement, Paul Krugman wrote:

What will Ben Bernanke, the Fed chairman, say in his big speech Friday in Jackson Hole, Wyo.? Will he hint at new steps to boost the economy? Stay tuned.

But we can safely predict what he and other officials will say about where we are right now: that the economy is continuing to recover, albeit more slowly than they would like. Unfortunately, that’s not true: this isn’t a recovery, in any sense that matters. And policy makers should be doing everything they can to change that fact.

Back to Bernanke (linked above):

The Federal Reserve chairman, Ben S. Bernanke, said Friday that the central bank was determined to prevent the economy from slipping into a cycle of falling prices, even as he emphasized that he believed growth would continue in the second half of the year, “albeit at a relatively modest pace.” [italics are mine]

We’re not paying people to borrow money yet (Japan darn near did that), but we’re getting there; the Fed is running out of options. And, as Krugman recounts, the Administration is stymied by Republicans, but has some things it can do:

The administration has less freedom of action, since it can’t get legislation past the Republican blockade. But it still has options. It can revamp its deeply unsuccessful attempt to aid troubled homeowners. It can use Fannie Mae and Freddie Mac, the government-sponsored lenders, to engineer mortgage refinancing that puts money in the hands of American families — yes, Republicans will howl, but they’re doing that anyway. It can finally get serious about confronting China over its currency manipulation: how many times do the Chinese have to promise to change their policies, then renege, before the administration decides that it’s time to act?

But I come back to to the sturdy crackers who shout “porklius” and seem to care not a whit about the economy, or perhaps are just too dim to understand the precarious position that the United States economy is in.

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