Bernanke Fearing Fate of Japan, Not Greece
By SEWELL CHAN
nytimes.com
WASHINGTON — By placing a $600 billion bet on the Federal Reserve’s ability to encourage the recovery, Ben S. Bernanke is gingerly trying to avoid the mistakes of Japan, where deflation has stymied growth. But the antideficit Republicans who seized control of the House on Tuesday draw cautionary lessons from a different country: debt-stricken Greece.
Regardless of which comparison is more apt, the Fed’s decision on Wednesday to renew a no-holds-barred effort to nudge the recovery by lowering long-term interest rates was a notable display of Mr. Bernanke’s determination to act at a time when the effectiveness of both monetary policy, which he controls, and fiscal policy, which he does not, is under debate.
The impact of the Fed’s decision to embark on a new round of debt-buying rippled through world markets on Thursday. Stocks in Asia and Europe were up, as was the Dow Jones industrial average, which surged nearly 2 percent. But as Treasury yields fell, along with the dollar, officials from emerging markets expressed alarm about the prospect of a wave of foreign capital crashing on their shores in search of higher returns.
That unwelcome flood of cash has already pushed up their currencies, and the new Fed action is certain to be a topic of contention when President Obama and other leaders of the Group of 20 economic powers gather in Seoul, South Korea on Thursday of next week for a two-day summit meeting.
But Mr. Bernanke has by now made it clear that his top priority was to get the American economy going again, even at the risk of unsettling the nation’s trading partners. His decision to act — a culmination of months of debate within the Fed — occurred against the backdrop of political gridlock at home, and despite a conservative resurgence more concerned about Greek-style debt than Japanese-style stagnation.
In an op-ed article published Thursday in The Washington Post, Mr. Bernanke described the “body blow” that the financial crisis dealt the world economy two years ago, and said the Fed’s actions — lowering short-term interest rates to nearly zero and then buying $1.7 trillion in mortgage-backed securities and Treasury debt — “helped end the economic free fall.”
He described the Fed’s experience with quantitative easing, the strategy of buying assets to lower long-term rates, in optimistic terms. “This approach eased financial conditions in the past and, so far, looks to be effective again,” Mr. Bernanke wrote, predicting lower mortgage rates, cheaper corporate borrowing and higher stock prices that would encourage consumer confidence. “Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion,” Mr. Bernanke predicted.
He said the economic fix “will take time and the combined efforts of many parties, including the central bank, Congress, the administration, regulators and the private sector.”
However, Robert J. Gordon, an economist at Northwestern University, said that without additional government spending to match the Fed’s loose monetary policy, the economic frailty was bound to persist.
“Virtually everything on the fiscal policy side will be off the table in the deadlocked partisan world we face in 2011 and 2012,” he said. “This greatly increases the probability of a Japanese-style lost decade that would span the decade 2007-17.”
Mr. Bernanke has said that the economy needs continued fiscal support from Congress, as long as it is paired with a longer-range plan to rein in deficits and stabilize public debt levels.
But his appeals for fiscal help have been muted.
“The chances of getting some stimulus from fiscal policy are close to zero,” said Lyle E. Gramley, a former Fed governor. “I think Bernanke is well aware of that, so he probably feels that there is little use in belaboring the point.”
Perry G. Mehrling, an economist at Barnard College, said Mr. Bernanke was being careful not to overstep the Fed’s role. “Probably he would prefer fiscal easing over quantitative easing, but that decision is ultimately a political one,” he said.
Robert E. Hall, a Stanford economist who is chairman of the committee that determines the start and end dates of recessions, said it would be “very wise” for Mr. Bernanke to keep out of the fiscal policy debates.
“He should stick to what he controls — Fed policy, broadly conceived,” Mr. Hall said. “Ben has his hands full with enlarged powers to keep banks under control and to manage his big portfolio.”
That portfolio — a $2.3 trillion balance sheet that has already more than doubled — is about to grow even more.
Along with $600 billion in Treasury securities to be purchased by the end of June, the Fed is continuing an earlier effort, begun in August, to use mortgage-related proceeds to buy government securities.
In a research note, Jan Hatzius, the chief United States economist at Goldman Sachs, predicted that the program “will grow significantly beyond the initial $600 billion.”
If his forecasts of 10 percent unemployment and a further decline in core inflation to around 0.5 percent by late 2011 prove correct, the Fed could continue buying Treasuries into 2012 for a total of around $2 trillion, Mr. Hatzius wrote.
Most business economists expect the Fed to start tightening monetary policy, by raising interest rates, in 2012, but Mr. Hatzius said that tightening might not begin “until 2015 or later.”
Thomas M. Hoenig, president of the Federal Reserve Bank of Kansas City and the sole dissenter from the Fed’s decision, believes such a delay would be a mistake. In a phone interview, he said the fears of Japanese-style deflation were overblown.
“High inflation or strong deflation, like we had in the Depression, is of course abhorrent,” he said. “But we can’t use the fact that we had this negative event, the Depression, to say we can’t have any deflation. I’m not any more afraid of very modest deflation than I am of very modest inflation.”
Mr. Hoenig said the Fed erred after the 2001 recession by holding interest rates low for too long, which he views as having contributed to the housing bubble. The Fed is at risk of repeating that mistake, he said.
But at the moment the Fed seems to be paying more heed to people like Kazuo Ueda, an economist at the University of Tokyo.
In a conference organized by the Boston Fed in October 1999, Mr. Ueda warned that fighting deflation when short-term rates are at zero “will be a lot more painful than you can possibly imagine.”
In a reprise of that conference last month, the Boston Fed’s president, Eric S. Rosengren, called that prediction “accurate and prophetic.”
Mr. Ueda, looking back on the past decade, took little satisfaction from that praise. “Despite the adoption of various unconventional, nontraditional monetary policy measures, we are still in deflation,” he told a crowd that included numerous Fed officials. “So in a sense, we failed to stop it.” |
