The latest Paul Krugman column is called The Great Abdication, and the gist is that the Eurozone crisis and the US depression are being left to fester because policymakers are afraid to do anything decisive in a repeat of the great collapse of 1931.
On the Fed he writes…
Let’s talk instead about the Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek both price stability and full employment. And last week the Fed released its latest set of economic projections, showing that it expects to fail on both parts of its mandate, with inflation below target and unemployment far above target for years to come.
This is a terrible prospect, and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in particular about the damage being done to America by the unprecedented level of long-term unemployment.
So what does the Fed propose doing about the situation? Almost nothing.
Krugman’s fury at policymakers is timed perfectly with a new letter from the Bank for International Settlements on The Limits of Monetary Policy, warning central banks that more aggressive expansion isn’t costless and may not be worth the risk.
It concludes with this warning, which can basically be summed up as: Central Banks are already doing a lot and are risking long-term credibility.
The global monetary policy stance is unusually accommodative. Policy rates are well below traditional benchmark measures. At the same time, central bank balance sheets have reached an unprecedented size and continue to expand.
Against the background of weak growth and high unemployment in many advanced economies, sustained monetary easing is natural and compelling. However, there is a growing risk of overburdening monetary policy. By itself, easy monetary policy cannot solve underlying solvency or deeper structural problems. It can buy time, but may actually make it easier to waste that time, thus possibly delaying the return to a self-sustaining recovery. Central banks need to recognise and communicate the limits of monetary policy, making clear that it cannot substitute for those policy measures that can address the root causes of financial fragility and economic weakness.
The combination of weak growth and exceptionally low interest rates in the core advanced economies, and efforts to manage the spillovers in emerging market economies, has helped to spread monetary accommodation globally. The resulting risks of a build-up of financial imbalances and increasing inflationary pressures in emerging market economies might have significant negative repercussions on the global economy. This points to the need for central banks to take better account of the global spillovers from their domestic monetary policies to ensure lasting financial and price stability.
Finally, central banks need to beware of longer-term risks to their credibility and operational independence. Failing to appreciate the limits of monetary policy raises the risk of a widening gap between what central banks are expected to deliver and what they can actually deliver. This would complicate the eventual exit from monetary accommodation and may ultimately threaten central banks’ credibility and operational autonomy. This concern is reinforced by political economy risks arising from the combination of balance sheet policies that have blurred the line between monetary and fiscal policies, on the one hand, and the risk of unsustainable fiscal positions, on the other.
So basically this is exactly what Krugman is so angry about.
We’re in the middle of a massive crisis that threatens a repeat of The Great Depression, and the world’s elite are warning about how Central Banks will have a difficult time exiting their stimuli, and how they are risking their credibility and so forth by doing more.