Thursday, May 7, 2009
"In the world that existed before the financial crisis, central bankers were triumphant. They had defeated inflation and tamed the business cycle. ... Central bankers had merely to calibrate their interest-rate tools and all other markets would automatically adjust. ... The financial crisis has upended all that. The business cycle was supposedly subdued, yet the world is in the deepest recession since the 1930s. Deflation has become a more dangerous enemy than inflation; with interest rates in many countries at or close to zero, central banks have had to reach for other tools. More fundamentally, the collapse of stable relationships in the financial markets has forced central banks to make judgments they once left to the private sector. ... Central bankers still believe that once the crisis has passed they will return to their pre-2007 roles as apolitical technocrats pulling a single lever and eyeing a single variable. It may be a vain hope. ... Those links came under strain before the crisis, as a global savings glut caused a decoupling of long- and short-term rates. ... Even if the crisis is getting no worse, it is not over and most of the world is in recession. No central bank is about to withdraw any emergency measures. ... Central bankers assume they will wind down these measures when the crisis ends. ... The exclusive focus on low and stable inflation is being questioned. ... The recession began against a backdrop of price stability. ... Yet macroprudential supervision smacks of a fad that will not live up to its billing", my emphasis, Economist, 24 April 2009, link: http://www.economist.com/PrinterFriendly.cfm?story_id=13527329.
I'm so old I remember JFK's administration and how the new economics had tamed the business cycle. Sure. Deflation more dangerous than inflation? "Collapse of stable relationships". Hmm. Central bankers are accountants, looking backwards, lacking a concept of the market as an equilibrium-seeking device. "Apolitical technocrats"? What is the Economist smoking? What "global savings glut"? "Backdrop of price stability"? In housing? Yes, this is a new fad. Anyone remember the Phillips Curve?