Second-guessing the Fed
Paul Krugman goes directly at Ben Bernanke today:
Mr. Bernanke has received a great deal of credit, and rightly so, for his use of unorthodox strategies to contain the damage after Lehman Brothers failed. But both the Fed’s actions, as measured by its expansion of credit, and Mr. Bernanke’s words suggest that the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism — a sense that the Fed has done enough now that the financial system has stepped back from the brink, even though its own forecasts predict that unemployment will remain punishingly high for at least the next three years.
The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.
One of the reasons I'd like to see a contentious debate over Ben Bernanke's renomination is that we seem long overdue for a contentious debate on what the Federal Reserve is actually for. Should it worry primarily about inflation, as has been the case since Paul Volcker hunted down stagflation in the 70s? About full employment, as directed in the Humphrey-Hawkins Act? Should it be entirely independent of political meddling, or should Congress routinely use its power of the chairmanship to set the institution's priorities?
We fetishize the Federal Reserve's independence, and I'd probably err on the side of preserving that particular fetish. Congress is a broken institution that's embarrassingly incapable of making hard decisions in response to real problems. But maybe the structure of the Federal Reserve's independence should be changed so that it's less reliant on banks. It's all worth thinking about.
Photo credit: Andrew Harrer/Bloomberg.
Posted by: umesh409 | December 11, 2009 7:56 PM | Report abuse
Posted by: jsalsman | December 11, 2009 11:50 PM | Report abuse
Posted by: Lomillialor | December 12, 2009 7:30 AM | Report abuse
Posted by: jeffwacker | December 14, 2009 12:40 AM | Report abuse
Posted by: jeffwacker | December 14, 2009 12:43 AM | Report abuse
Posted by: slantedview | December 14, 2009 12:28 PM | Report abuse
The comments to this entry are closed.