Paul Krugman: Ben Bernanke Has Been ‘Assimilated by the Borg’

[meow2u3]

In what is just the latest in the war of the words between the nation’s top liberal economist and the nation’s top central banker, Nobel Prize-winning economist Paul Krugman took Federal Reserve Chairman Ben Bernanke to task on “This Week” today, saying the head of the Fed has been “assimilated by the borg” and should be doing more to address the high unemployment in the country.

“I think what’s happened to Bernanke, as they say, he’s been assimilated by the Borg, he’s become — he’s become more concerned, probably unconsciously, with defending the Fed’s institutional safety, because it’s the apostle of price stability, than with doing whatever he can to get this economy moving. Which if he’d listened to Professor Bernanke, himself ten years ago, he would know that he was supposed to be doing more, ” said Krugman, a columnist for The New York Times. “We’ve defined recklessness the wrong way. We think that anything that rocks the boat and is not certain in its outcome would be reckless. But actually allowing unemployment to stay near 9 percent, allowing the number of long-term unemployed to be 4 million, which it hasn’t been since the 1930s, which is destroying skills, destroying the attachment of workers to the workforce.”

The spat between the two economists erupted earlier this week when The New York Times Magazine published an article online by Krugman titled “Earth to Ben Bernanke.” In it, Krugman essentially argues that there is a disparity between the type of action during a financial crisis that Ben Bernanke advocated for before he became head of the Federal Reserve and the action Bernanke has actually taken during his tenure as chairman. Given this, Krugman assigns some blame to Bernanke for the ongoing suffering of many Americans.

http://abcnews.go.com/blogs/politics/2012/04/paul-krugman-ben-bernanke-has-been-assimilated-by-the-borg/
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Banksters to Fed (in Borg monotone): We are borg. You will be assimilated. Resistance is futile.

[coalition_unwilling]

1. I love Krugman and share for the most part his take on Bernanke. But there

are limits to what the Fed and monetary policy can do to get the economy moving, since short-term interest rates (which the Fed mightily influences) are already near 0% and slated to remain there until 2014.

What would Krugman have Bernanke do? The stimulative impact of monetary policy has pretty much been exhausted, imho. What remains is fiscal policy, i.e., government spending. Bernanke has very little say over what the Repuke whack-jobs in Congress do in that regard.

[banned from Kos]

2. I agree. But I read a Krugman column where he called for double the bond buying

(misnamed QE). I think he is trying to nudge Bernanke to do that.

The right would go nuts though. Especially in an election year. So Krugman aptly calls Bernanke timid or consumed by the Borg. I like them both, by the way. Bernanke has been very accommodating and Krugman has no political angle to consider.

[coalition_unwilling]

3. Not to engage in technical wonkery (not my strong suit by any means), but

doubling the Fed's bond purchases seems to me like pushing on a string and runs the risk of inflating yet another asset bubble by injecting massive amounts of liquidity into the financial system where they will probably drive stock prices higher (thereby creating some marginal but vague 'wealth effect), but without doing much of anything to stimulate aggregate economic demand for the excessive production capacity that remains un- or under-utilized.

As I say, monetary policy has pretty much shot its wad as far as stimulative effects upon the economy. When was the last time you heard any major political figure call for a policy of full employment and fiscal measures, i.e., spending, to achieve it?

[banned from Kos]

4. but that liquidity does not show up in M2 - the primary gauge of currency

Bond buying basically only shows up on the Fed's balance sheet and frees other capital for more worthy endeavors. The Fed only buys US Government assured bonds now.

The effect on equities is mainly psychological.

And yes, bond-buying effects on aggregate demand are hard to prove.

[coalition_unwilling]

5. Let's say you have a U.S. bond with face value of $1,000. If the Fed

pays a premium and buys that bond from you at $1050, it deposits $1050 into your bank account and you deposit your bond with the Fed. So you have exchanged a debt obligation of the U.S. government for $1050 of new liquidity. What will you do with that liquidity? You can let it sit in your bank account earning 0% (the so-called safe-haven approach) OR you can venture out onto the risk spectrum by using it to buy stocks. In the act of using your liquidity to buy stocks, you add demand-side pressure to stocks causing their prices to experience some upward pressure.

Not sure that's purely 'psychological,' although others may buy stocks trying to get in ahead of you, so that you have a stampede-like herd mentality to buy first.