Bank of Inchoate Sense
Brad DeLong is confused. The Berkeley economics professor has read the Bank for International Settlements’ (BIS) – often called the central bank for central banks –annual report and he just cannot understand what its positions on the global economy and monetary policy actually are: “It calls for raising interest rates now… It fears activist expansionary fiscal policy even more than it fears monetary ease… It seems hostile to any increase in the demand for risky assets.”
The BIS’s position, DeLong writes, fits with no current understanding of the the crisis, recession, or current economy. It does not buy into the Janet Yellen or Ben Bernanke view that interest rates should be kept low for a long time (we wrote about Yellen’s response here). Nor is it the view taken by Harvard economist Ken Rogoff and Nomura’s chief economist Richard Koo that we just need to wait for the credit mess of the financial crisis to work itself out. Nor is it DeLong’s own view that the government should get things going by borrowing more money.
Paul Krugman thinks the whole thing is actually really simple. “You need to see this in terms of an attitude, not a coherent model,” he says. Like political philosopher Michael Oakeshott said about conservatism: it’s “not a creed or a doctrine, but a disposition.” Since 2010, Krugman says, the BIS has been advocating against stimulus because it would limit the necessary harm of the recession. That may sound odd, but Krugman says it’s a retread of Schumpeter’s good old-fashioned theory of creative destruction. When the facts changed – most research doesn’t support the skills mismatch explanation of elevated unemployment – the BIS just looked for new reasons to support the same policies, which left it, Krugman writes, without “any method at all… I see an attitude, looking for justification.”
Oxford University macroeconomist Simon Wren-Lewis has a similar reaction as Krugman’s to the BIS report: it’s understandable, if not rigorously defensible. The BIS, says Wren-Lewis, is saying that low interest rates are dangerous. So dangerous that they, not a lack of regulation or fraudulent behavior, are what caused financial crisis. The BIS just wants higher interest rates instead of new financial regulation.
Noah Smith throws some cold water on the idea that just because asset prices are high – for stocks, bonds, real estate, farmland – the Fed and other central banks need to raise interest rates as soon as possible. “The Fed has raised asset prices,” through quantitative easing and low interest rates, he writes, “but there’s no sign that it has caused an irrational rise in prices.” If markets acted rationally in response to Fed policy, there really isn’t a bubble to burst: “Causing a crash today will just cause a crash today, period.” The Fed, thankfully, isn’t doing that. Instead, it is slowly and deliberately phasing out post-crisis monetary policy. – Ben Walsh
On to today’s links: