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  • A Call for More Active Monetary Policy: Clive Crook Puts the Onus on Bernanke and the Fed

    In his speech opening the Jackson Hole Conference , Ben Bernanke stated that "the Federal Reserve remains committed to playing its part to help the U.S. economy return to sustained, noninflationary growth." And he outlined a series of tools available to him and the Fed in countering further economic decline. (Read the speech here ). But Financial Times columnist Clive Crook argues that a "divided Fed" is "letting the country down" and needs to take additional monetary policy steps now: Mr Bernanke and his colleagues are understandably nervous about extending the radical measures they have already taken. Divided on the point, they have taken a modest further step by preventing the maturing of debt they hold from tightening monetary conditions, as it otherwise would have. They are right to worry about their exit strategy; they are also right to be nervous about being in uncharted terrain. But the balance of risks has moved. They need to go further. George Magnus of UBS argued on this page last week that deflation poses a greater risk for the US than inflation. That seems right: inflation expectations, as revealed by rates on index-linked US debt, are very low. Mr Magnus was surely correct to say this points to the need for further monetary easing – but wrong, I think, to say that “unreconstructed monetarists will not be persuaded”. His point was that monetarists would see the policy rate at zero and banks holding enormous reserves at the Fed and conclude that money was already too loose. As the monetary economist Scott Sumner has pointed out, Milton Friedman – name me a less reconstructed monetarist – talked of “the fallacy of identifying tight money with high interest rates and easy money with low interest rates”. When long-term nominal interest rates are very low, and inflation expectations are therefore also very low, money is tight in the sense that matters. When money is loose, inflation expectations rise, and so do long-term interest rates. Unreconstructed monetarists ought therefore to agree with Mr Magnus’s main point: under current circumstances, better to print money and be damned. Read It falls to the Fed to fuel recovery here .

  • Wharton Profs Weigh in on the Threat of Deflation

    Fed Chair Ben Bernanke said earlier this week that the threat of deflation is receding . But some economists remain concerned that deflation could be a problem, if not in the US, then in Japan and possibly Europe. This has been one of many issue on which economists have struggled to be on the same page. Colleagues at the Wharton School , for example, have a range of opinions about the likelihood of deflation. Few see deflation as a major danger. Forbes.com has a roundup of opinions from Wharton professors: "The economy is starting to turn around," says Wharton finance professor Marshall E. Blume, who cites the slowing pace of new unemployment claims as evidence that deflation is not a serious threat. The recent drop in gross domestic product was primarily due to a cutback in production as suppliers drew on inventories instead of new production, he asserts. With inventories down, demand should push prices back up. Others think deflation is more likely. "I'd be very surprised if Japan didn't have a deflation problem," says Franklin Allen, professor of finance and economics at Wharton. "I think it's quite likely in Europe and the U.S.," he added, citing the rapid fall in inflation. He interprets the decline in gross domestic product to be a signal that manufacturers have "huge excess capacity," which equates to an excess of supply that can help drive prices down...Coupled with falling demand due to rising unemployment, these factors could make deflation a serious problem in the U.S. and Europe, Allen contends. Mauro F. Guillén, professor of international management at Wharton, expects deflation to spread but does not think it will be serious. Most price declines have been mild, he notes, and the huge levels of government spending in the U.S. and elsewhere should eventually trigger enough demand to drive prices up. Read the full article here .