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Monday, June 24, 2013

Paul Krugman: Et Tu, Bernanke?

Why is the Fed talking about returning to normal monetary policy even though unemployment is still a huge problem?:

Et Tu, Bernanke?, by Paul Krugman, Commentary, NY Times: For the most part, Ben Bernanke and his colleagues at the Federal Reserve have been good guys in these troubled economic times. They have tried to boost the economy even as most of Washington seemingly either forgot about the jobless... You can argue — and I would — that the Fed’s activism, while welcome, isn’t enough, and that it should be doing even more. But at least it didn’t lose sight of what’s really important.
Until now.
Lately, Fed officials have been issuing increasingly strong hints that ... they are eager to start “tapering,” returning to normal monetary policy. ...
The trouble is that this is very much the wrong signal to be sending given the state of the economy. We’re still very much living through what amounts to a low-grade depression — and the Fed’s bad messaging reduces the chances that we’re going to exit that depression any time soon. ...
Sure enough, rates have shot up since the tapering talk started..., and ... higher rates will surely mean a slower recovery...
Fed officials surely understand all of this. So what do they think they’re doing?
One answer might be that the Fed has quietly come to agree with critics who argue that its easy-money policies are having damaging side-effects, say by increasing the risk of bubbles. But I hope that’s not true, since whatever damage low rates may do is trivial compared with the damage higher rates, and the resulting rise in unemployment, would inflict.
In any case, my guess is that what’s really happening is a bit different: Fed officials are, consciously or not, responding to political pressure. After all, ever since the Fed began its policy of aggressive monetary stimulus, it has faced angry accusations from the right that it is “debasing” the dollar and setting the stage for high inflation... It’s hard to avoid the suspicion that Fed officials, worn down by the constant attacks, have been looking for a reason to slacken their efforts, and have seized on slightly better economic news as an excuse. ...
It’s sad and depressing, in both senses of the word. The fundamental reason our economy is still depressed after all these years is that so many policy makers lost the thread, forgetting that job creation was their most urgent task. Until now the Fed was an exception; but now it seems to be joining the club. Et tu, Ben?

    Posted by on Monday, June 24, 2013 at 12:24 AM in Economics, Monetary Policy | Permalink  Comments (42)


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