Ten years ago, one of America’s leading economists delivered a stinging critique of the Bank of Japan, Japan’s equivalent of the Federal Reserve, titled “Japanese Monetary Policy: A Case of Self-Induced Paralysis?” With only a few changes in wording, the critique applies to the Fed today.
At the time, the Bank of Japan faced a situation broadly similar to that facing the Fed now. The economy was deeply depressed and showed few signs of improvement, and one might have expected the bank to take forceful action. But short-term interest rates — the usual tool of monetary policy — were near zero and could go no lower. And the Bank of Japan used that fact as an excuse to do no more.
That was malfeasance, declared the eminent U.S. economist: “Far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism.” He rebuked officials hiding “behind minor institutional or technical difficulties in order to avoid taking action.”
Who was that tough-talking economist? Ben Bernanke, now the chairman of the Federal Reserve. So why is the Bernanke Fed being just as passive now as the Bank of Japan was a decade ago?
Now, America’s current economic troubles aren’t exactly identical to those of Japan in 1999-2000: Japan was experiencing outright deflation, while we aren’t — yet. But inflation is well below the Fed’s target of around 2 percent, and it is continuing to slide. And Americans face a level of unemployment, and sheer human misery, far worse than anything Japan went through.
Yet the Fed is doing almost nothing to confront these troubles.
What could the Fed be doing? Back when, Mr. Bernanke suggested, among other things, that the Bank of Japan could get traction by buying large quantities of “nonstandard” assets — that is, assets other than the short-term government debt central banks normally hold. The Fed actually put that idea into practice during the most acute phase of the financial crisis, acquiring, in particular, large amounts of mortgage-backed securities. However, it stopped those purchases in March.
Since then, the economic news has grown steadily worse. And earlier this week, the Fed changed course — but barely. It now says that it will reinvest the proceeds from maturing securities in long-term government bonds. That’s a trivial change, basically the least the Fed could get away with without facing a firestorm of criticism — and far short of the major asset-purchase program the Fed should be undertaking.
Back in 2000, Mr. Bernanke also suggested that the Bank of Japan could move expectations by making announcements about its future policies. In particular, he argued that it could make private-sector borrowing more attractive by announcing that it would keep interest rates low until deflation had given way to 3 percent or 4 percent inflation — an idea originally suggested by yours truly. Since we are, if anything, in worse shape now than Japan was in 2000, an inflation target of at least 3 percent would very much be in America’s interest. But as chairman of the Fed, Mr. Bernanke has explicitly rejected any such move.
What’s going on here? Has Mr. Bernanke been intellectually assimilated by the Fed Borg? I prefer to believe that he’s being political, unwilling to engage in open confrontation with other Fed officials — especially those regional Fed presidents who fear inflation, even with deflation the clear and present danger, and are evidently unmoved by the plight of the unemployed.
And in fairness to Mr. Bernanke, discord among senior officials also makes it difficult for policy to change expectations: it would be hard to credibly commit to higher inflation if this commitment were constantly being undercut by speeches out of the Richmond or Dallas Feds. In fact, I’d argue that loose talk by some Fed officials is already having a negative economic impact. But while Mr. Bernanke doesn’t have the authority to stop that loose talk, he could make it clear that it doesn’t represent overall Fed policy.
Last, but not least, policy is suffering from an act of neglect by President Obama, who waited until his 16th month in office before offering a full slate of nominees to fill vacancies on the Federal Reserve Board. If he had filled those slots quickly — his nominees still aren’t in place — the Fed might be less passive.
But whatever the reasons, the fact is that the Fed — which is required by statute to promote “maximum employment” — isn’t doing its job. Instead, like the rest of Washington, it’s inventing reasons to dither in the face of mass unemployment. And while the Fed sits there in its self-inflicted paralysis, millions of Americans are losing their jobs, their homes and their hopes for the future.
China says it will tighten monetary policy in 2011
In this Oct. 20, 2010 file photo a pile of renminbi bank notes are stacked near a bank clerk at …
By JOE McDONALD, AP Business Writer Joe Mcdonald, Ap Business Writer – Fri Dec 3, 7:34 am ET
BEIJING – China's leadership ordered a shift from easy credit to a "prudent monetary policy" on Friday as Beijing steps up its fight against inflation and tries to guide rapid growth to a sustainable level.
The announcement reinforces a change in direction charted this year of modest tightening after the government and banks flooded the economy with easy money to effectively ward off the global economic crisis in 2009.
The ruling Communist Party's top body, the Politburo, decided to "implement an active fiscal policy and a prudent monetary policy" in 2011, said a Cabinet statement.
Beijing raised interest rates Oct. 19, highlighting its divergence from the United States and other major economies, which are trying to boost growth. The central bank said in its latest quarterly report it would "gradually return policy to a normal position," indicating interest rates would rise.
The government is trying to cool inflation that spiked to 4.4 percent in October — well above the official 3 percent target — driven by a 10.1 percent jump in food costs. Analysts say November inflation might rise still higher.
"Growth seems pretty solid and inflation is higher than expected," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates. "Put that together and it makes sense to shift policy position."
Analysts expect more rate hikes in coming months. Chinese stocks have fallen amid investor concern that might slow growth or choke off credit that is helping to support stock prices.
The country's benchmark Shanghai Composite Index ended Friday down less than 0.1 percent while the Shenzhen Composite Index for China's smaller second exchange fell 0.6 percent.
The Oct. 19 hike pushed the lending rate on a one-year loan to 5.56 percent. JP Morgan & Co. says it expects three to four more increases beginning as early as this month and pushing the benchmark rate to 6.31 percent by mid-2011.
Chinese regulators also have reined in credit by forcing banks to hold back more money as reserves and tighten lending standards.
Economic growth eased to 9.6 percent in the three months ending in September after hitting a post-crisis peak of 11.9 percent in the first quarter. The World Bank and private sector economists expect full-year growth of up to 10 percent.
Inflation has risen well above the 2.5 percent paid on Chinese bank deposits. That has triggered an outflow of cash into stocks and real estate as families seek a better return, fueling fears of a dangerous price boom and bust.
Beijing is trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. Authorities are cracking down on hoarding and speculation they say are partly to blame for the price rises.
Analysts believe plans for more rate hikes face opposition from officials who worry about raising borrowing costs, especially for investment agencies run by local governments that owe hundreds of billions of dollars to state banks.
"You raise the cost of borrowing for those people and you could have them getting into trouble," Orlik said. "So they are going to be pushing hard against any rapid changes in interest rates."
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