In his nightly note, BTIG’s Dan Greenhaus writes in regards to tomorrow’s big Fed announcement:What is also important about this strategy is that it shouldn’t increase the size of the Fed’s already bloated balance sheet. Ironically, it appears the main reason the Fed isn’t pursuing even more potent stimulus at this time is political limitations, the very constraint Ben Bernanke suggested to which Japan succumbed.
Greenhaus is obviously referring to Bernanke’s famous 2002 speech on the failure of policy in Japan titled: Deflation: Making Sure “It” Doesn’t Happen Here.
Specifically on the matter of political limitations, Bernanke said:
I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan’s overall economic problems. As the Japanese certainly realise, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan’s long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan’s deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
There are more than enough reasons to draw parallels between the US and Japan, but given that just tonight we saw letters from top GOP congressional leadership slamming the Fed for (possibly) doing more easing, this is yet another point of similarity.
Meanwhile, for a preview of tomorrow’s big show, see here.
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