Friday, December 11, 2009

More Misplaced Priorities

Image credit: afagen

While we're at it, let's look at what Paul Krugman had to say about Federal Reserve Chairman Ben Bernanke today:

Mr. Bernanke has received a great deal of credit, and rightly so, for his use of unorthodox strategies to contain the damage after Lehman Brothers failed. But both the Fed’s actions, as measured by its expansion of credit, and Mr. Bernanke’s words suggest that the urgency of late 2008 and early 2009 has given way to a curious mix of complacency and fatalism — a sense that the Fed has done enough now that the financial system has stepped back from the brink, even though its own forecasts predict that unemployment will remain punishingly high for at least the next three years.

The most specific, persuasive case I’ve seen for more Fed action comes from Joseph Gagnon, a former Fed staffer now at the Peterson Institute for International Economics. Basing his analysis on the prior work of none other than Mr. Bernanke himself, in his previous incarnation as an economic researcher, Mr. Gagnon urges the Fed to expand credit by buying a further $2 trillion in assets. Such a program could do a lot to promote faster growth, while having hardly any downside.

Bernanke’s Unfinished Mission

I don't know enough about banks to know whether this is a good idea or not, but it's for sure that something must be done soon. The banks aren't lending money at anywhere near the rate needed to increase growth. The Fed can't lower the interest rates any more. They're already at zero percent interest for all practical purposes. Yet, as Krugman observes, Bernanke has so far refused to do this. Krugman speculates as to why here:

[T]here’s also, I believe, a question of priorities. The Fed sprang into action when faced with the prospect of wrecked banks; it doesn’t seem equally concerned about the prospect of wrecked lives.

And that is what we’re talking about here. The kind of sustained high unemployment envisaged in the Fed’s own forecasts is a recipe for immense human suffering — millions of families losing their savings and their homes, millions of young Americans never getting their working lives properly started because there are no jobs available when they graduate. If we don’t get unemployment down soon, we’ll be paying the price for a generation.

Bernanke’s Unfinished Mission

As I've noted before, Krugman has refrained from criticizing Bernanke even when it seemed like there was grounds for criticism. Yet now, as in an earlier blog column, it appears he's begun to lose patience.

We'll see if this is a trend or just a couple of anomalous instances. If it's the former, I'd take it as a sign of how bad things are getting. It certainly would have no political implications - it's patently obvious that the Obama Administration don't listen to Krugman. But it shows that the government isn't even doing the things that it could do without Congressional approval.

In that column, Krugman estimated that the economy needs to add eighteen million jobs to gain back what we've lost the last couple of years. To me, that's just the tip of the iceberg, since many of the old jobs were, if recent trends hold true, higher-paying than the ones that will replace them. There are also significant numbers of long-term unemployed - people who have just given up looking for work. All in all, the middle class in this country is in a world of hurt, and it's not getting any better.

And that's why I think Prof. Krugman is losing patience with Mr. Bernanke.

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