Counterparties: Central banks vs austerity

April 29, 2013

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Both the Federal Reserve and the European Central Bank will meet this week, and they’re expected to continue their current policy, which Bloomberg describes as “flooding the world with cash.” Bloomberg also cites an estimate from Barclays that central banks will buy $2.5 trillion in assets this year – more than twice the amount purchased in 2012. This week, the ECB may lower interest rates to 0.5%, although it’s far from a done deal, according to Reuters. The Fed, Jon Hilsenrath reports, is likely to keep its rates at their current level.

There are a number of voices concerned that fiscal policy (read: austerity) has made monetary policy less effective. Mike Konczal writes:

If you look at macroeconomic policy since last fall, there have been two big moves. The Federal Reserve has committed to much bolder action in adopting the Evans Rule and QE3. At the same time, the country has entered a period of fiscal austerity. Was the Fed action enough to offset the contraction? It’s still very early, and economists will probably debate this for a generation, but, especially after the stagnating GDP report yesterday, it looks as though fiscal policy is the winner.

Paul Krugman largely agrees, saying that, “as a practical matter the Fed — while it should be doing more — can’t make up for contractionary fiscal policy in the face of a depressed economy.”

There are still those who believe in the power of the central bank. Economist David Beckworth — who proposed back in 2011 that the Fed do exactly what it has been doing over the past six months — says Konczal and Krugman undersell how well monetary policy has worked. He points to nominal GDP, which has been steadily growing since austerity measures began in 2010 (though slower than before the crisis).

Nouriel Roubini has also chimed in, arguing that whatever the Fed does from here forward will likely be a problem. “The exit from the Fed’s QE and zero-interest-rate policies will be treacherous: Exiting too fast will crash the real economy, while exiting too slowly will first create a huge bubble and then crash the financial system,” he says. – Shane Ferro

On to today’s links:

Primary Sources
If there is a limit to money buying happiness, we haven’t reached it yet – Brookings

Facebook is reportedly losing millions of users in major markets – Guardian

America’s education system leaves no rich child behind – Sean Reardon

JPMorgan’s co-COO — and a top Dimon ally — is leaving – DealBook
JPMorgan tops Goldman in investment banker pay – Bloomberg

EU Mess
Spain’s economic crisis is creating a permanent underclass – Matthew O’Brien

Possibly Useless Data
New study finds Google Trends may be a useful stock-picking tool – Nature
Back in 2010, the same researchers found Google Trends couldn’t predict stock market fluctuations – Science

Charting the difference between critics and haters – Ann Friedman

The battle over a dead NFL player’s brain – Frontline

Data Points
The racial wealth gap in the US is 50% worse than it was before the recession – NYT

The golden age of the blog has ended – The New Republic

EU Mess
Moody’s says Italy may still need a bailout – Reuters

And, of course, there are many more links at Counterparties.


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