Don’t play hanky-panky with Bernanke
I have been busily watching the markets and assessing the new economic numbers and there is a good deal of confusion to sort out in the economic reports for the US to be sure. And there is also a great deal of irregularity in the reports from the economies abroad.
As I look at a top down view of the US, while I am not very satisfied, I am impressed that the US is doing so much better than most other major economies. Consider that the US was ground zero of the financial crisis the economy is recovering better than most and US banks are in much better shape than banks in most other regions. And while Mr Bernanke is not a very a popular figure on this web site he may actually be the best central banker in the world right now (and I will distance myself from any of those who tried to set a similar if not more glorious title on Alan Greenspan before it all came down around our ears).
Bernanke has so far navigated a sold course for the US. Is there still risk? You Betcha. Is his reputation burnished? Well not yet. History will not forget him for all the innovative things he has done. But how he is judged is yet to be determined. But so far the US things are looking pretty darn good.
Compare to the UK… Bernanke’s old roommate Mervyn King has let the UK inflation rate percolate up to average over 3% over the last two years. The UK has an inflation ceiling of 2% and no dual mandate as a distraction. Currently the UK money supply (M4) is contracting at 4% Yr.yr in real terms and the economy is in recession.
China is a Go-Go growth economy and is hard to evaluate. But it has been struggling to get back on track. It’s banks are suffering and the jury is still out on China. When it gets settled China is supposed to shift gears to promote domestic demand in place of export-led growth. This switch should be tricky if China decides to stay with it. The central bank and all of chain’s policy will be challenged,
Japan is still struggling and it has had several central bank heads. It is still under the yoke of deflation and not righted its economy after its triple disasters of last year. The fiscal side seems in a tangle since the rebuilding impact on GDP still has not kicked into gear.
Europe… EMU is a great case study in WHAT not to do. They could write the book ‘Optimal currency areas for dummies: what not to do. Money growth is still weak. There is only the vaguest stirring of growth in money supply in the wake of several rounds of LTRO lending. Private sector credit is not stirring. We know why. LTRO monies mostly went into the government bond markets where banks have grabbed some more of that ‘tier one capital’ that is not really named that because of the threat that it could cause tears to stream down investors’ faces in the future.
What is really interesting in Europe is how austerity has spread its impact beyond economics to the political system. This was obviously going to happen and it why I keep saying that Europe has a competitiveness problem that just can’t be fixed by keeping the Zone together. The pain required to fix it would strain societies past their limits for tolerance.
In Europe, not all because of austerity but there is political instability in spades…Belgium still does not have a government. The Dutch government fragmented. France is facing elections with Sarkozy very much at risk and his opponent is the anti-Merkel. And in Greece a number of minority parties, and in some cases kooky parties, are in the running for influence. How’s austerity going there? Even in the UK where there is an independent central bank and a separate currency austerity is not faring so well.
Trichet, before he left the ECB, was too tight, busily putting the polish on his legacy. Draghi came in sort of sounding German then he switched and endorsed bond buying… then he opted for the LTRO injections. The Germans in response quit the ECB. Weber refused to take the head job that had been his for the asking. Jürgen Stark left. I can appreciate a guy who stands for his convictions but the Germans also quit. This leads so further suspicions of what the Germans are planning. If they are no longer working inside the ECB for EMU are they planning for the big split?
Compared to this tension I think we give Bernanke very high marks. He has muddied the financial markets and their signals with QE and Twist. He has blown up the Fed’s balance sheet and getting out of that could prove tricky.
But he is assailed by the anti Wall Street crowd on one side and by the libertarians like Ron Paul on the other as well as by a host of conservatives. And liberals don’t exactly like what he has done/is doing. Still a lot of people (FOMC members) from varying backgrounds endorsed this policy course. Now as the economy is improving we are seeing more dissent and desire to stop the special programs and to unwind the balance sheet bloat... soon.
As I said Bernanke’s legacy is still to be made. But he has put the US economy in a position from which it can succeed. If Europe falls apart, it will be more difficult. If we fall of the fiscal cliff we will have our own Thelma and Louise moment. The Fed Chairman has already said he can’t save us from that shock. It’s really time for fiscal policy makers to step up. As long as they refuse it makes Bernanke’s job all the harder. And the pressure on him is intense.
Liberal economist Paul Krugman (former Noble Price winning economist and currently NY Times communist-oops typo! I mean columnist) has lampooned Bernanke for not (NOT) creating more inflation. In a response to that demand but not targeted at Krugman, Bernanke said it would be reckless for the Fed to try to spur growth through inflation. In his next column maestro Krugman called Bernanke reckless for not pushing more inflation. Such is Bernanke’s life.
Want to know what it’s like to be him for a day?
Watch a Zombie movie. Always someone else coming at you from another direction; they never stop.
As for the inflation gambit of Krugman-how would that work? The Phillips curve is a discredited ‘tool.’ There is no unemployment inflation tradeoff over the long haul. There is so much unemployment and competition that if we got inflation going, I doubt it would get it wages higher. Instead the real wage would actually fall. And that would not be good. I can’t see it hiking house prices rising because the CPI went up. How would inflation work” what prices would rise and how would that help?
How Paul? Enquiring minds want to know… Can they take away a Noble Prize for stupid policy suggestions?