On the subject of interest rates in a slow economy, Alan Greenspan said, “You can’t push a string.” And this was when the then-Federal Reserve chairman was dealing with a relatively mild recession. It’s a lesson Ben Bernanke is learning the hard way. Today the Fed’s policy-making committee backed off earlier language of an economy that has “continued to strengthen,” to merely saying a recovery is “proceeding.” Record low rates will be held for an extended period.
As David Wessel made clear in his fascinating book, In Fed We Trust, Bernanke the Depression scholar was determined to avoid the mistakes of the 1930s central bank, which mistakenly tightened money in the face of deflation. It was Milton Friedman’s insights into this catastrophic mistake that put him into the pantheon of great economists. Bernanke succeeded, but what now?
Low interest rates have avoided depression and a huge expansion of the money supply has fended off deflation. They aren’t creating jobs, and the United States faces a long-term unemployment crisis that risks becoming explosive.
The lone dissenter on the Fed board worries about inflation. That’s not the problem. Instead, we have a Fed that emptied all its ammo on stabilizing the old order that caused the Great Recession in the first place. That’s a mistake the Depression Fed, or FDR, didn’t make, and a future Friedman will have a dandy dissertation as a result. One major question is how much of the financial playerz’ toxic “assets” the Fed took on its books. One trillion dollars? Two? No wonder liberals and conservatives in Congress want an audit of the central bank.
So you can’t push a string. And you also may be out of string if the world economy faces another big shock or double-dip recession. As the French generals learned the hard way more than once, there’s a danger in fighting the last war when faced with an entirely new situation.
Today’s Econ Haiku:
So much for the line
That a bitching soldier is
A happy soldier