Republicans for Jean Trichet

      Lately Ben Bernanke has been under fire. At his last confirmation vote he had the fewest Senators ever vote for a Fed Chairman at 70. Recently he has been taking it from both sides, Right and Left, Republican and Democrat. What kind of assessment does Mr. Bernanke deserve? I will not even deign to go there as doing so is beyond the scope of this post.

     He does seem to be awfully preoccupied with the Depression which may be good or bad dependiing on what lessons he draws from it. At least he is not preoccupied with the 70s as the Congressional Republicans and the Wall Street Journal editorial pages are. However it is possible that Bernanke doesn't always draw the right lessons from his Depression studies and that in some ways he can fall into fighting the last war.

    Still as indicated while you don't want to fight the last war, in the situation we are currently if you must fight the last war it is still preferable for that last war to be the Depression than the 70s. Why is this? Partly, because the 70s while there is no reason to romanticize them were not nearly as bad as either the 30s or indeed today.

   For more on this fallacy of exaggerating the horrors of the 70s, see Tim Duy's excellent piece called aptly enough, "Not the 1970s."

   http://economistsview.typepad.com/timduy/2011/09/not-the-1970s.html

   As he points out, inflation can be problematic but you can also exaggerate it's horrors. There were some virtues in the 70s-pretty decent GDP numbers for one thing. And directly because of inflation Americans who went to college were not life time prisoners to the student lenders as they are today. As Duy puts it,

   "Of course, in the background, the unexpected inflation of the 1970s drove a redistribution of wealth, and it is this that is probably Volker’s real complaint.  My first undergraduate economics professor told a story of how all the student loans he took out in the late 60s and early 70s evaporated in real terms a decade later.  Perhaps Volker would have preferred that he had been weighed down by those debts instead - a situation not unlike today, were the debt overhang is a weight on household spending."

    As he says "the inflationary 1970s look pretty good right now relative to the price stability of the last decade."

    So if we were in the 70s, which we're not, many of us would not be saddled with the loans many of us are today.

   In addition, back then it actually paid to put your money in the bank with double digit interest rates-I know that was harmful in many other areas but there's always a trade off. Again today who wouldn't dream of earning even 5% on your money in this day of perhaps permanent zero percent interest rates-necessarily unless we ever come out of this.

   Bernanke has certainly had a tough 2 weeks: last week MA-Rep (D) Barney Frank chair of the House Financial Services Committee called for the Fed to be radically restructured where the 12 members of the FOMC would now be voted on by the Senate rather than chosen behind closed doors by the bankers.

   http://abcnews.go.com/Politics/rep-barney-frank-banking-industry-influence-federal-reserve/story?id=14520628

   While this week the 2 highest ranking Republicans in both the House and Senate tried to warn Bernanke from any more stimulus.

    http://blogs.wsj.com/economics/2011/09/20/full-text-republicans-letter-to-bernanke-questioning-more-fed-action/

    Of course the award for rhrhetorical excess goes to Rick Perry who declared that Bernanke's attempts at stimulating the economy were "near treasonous" and that he would fire him if elected.

   This is how deeply the Republicans are opposed to anything that could even possibly help the economy in any way no matter how small. Operation Twist may be little more than a cap gun but the even logical possibility that it could possibly work can't be chanced.

   But if the GOP really wants to tank the American economy in style maybe they should consider nominating European Central Bank president Jean-claude Trichet to take Bernanke's job. Because say what you want about Bernanke the one thing you can say in his favor is he's not Jean Trichet. Bernanke tries feebly to stimulate the economy, Trichet isn't even trying to stimulate the European economy.

   http://seekingalpha.com/article/295262-the-last-and-only-solution-for-eurozone-survival


     We know all about Trichet's suicidal embrace of budget austerity; while there is danger in fighting the last war, it still pays to know about the last war which Trichet clearly doesn't as he fails to grasp the paradox of thrift.

      Right now we are, as Krugman warns us daily(as we or at least our policy makers never seem to get), enmeshed in a classic liquidity trap. Yet Trichet has been in interest rate raising mode since spring 2010. He recently raised rates in August-while at the same time trying to buy euro debt-talk about canceling yourself out. About all you can say is that with a 1.40% interest rate at least he has the weapon of further easing. But he has led Europe to commit the mistakes of 1937: tightening in the middle of the Depression.

    "Since the beginning of its unorthodox interventions, the Fed has bought $1,657 billion in US government debt, representing 16.50% of outstanding federal government debt, amounting to more than the entire US budget deficit for 2010, or about 8.7% of GDP. In addition, there is the $885 billion in MBSs.
   

In Europe, the ECB bought via its SMP €152.5 billion in eurozone government debt, representing less than 2% of total outstanding European debt. Its purchases of covered bonds from June 2009 to June 2010 totalled €60 billion, which pales in comparison with the Fed's purchases of $885 billion in MBSs."

 

   So there you have it. Bernanke has at least tried to stimulate and improve the economy. Trichet even in principle insists his hands are tied and all he can do is fight inflation. So if the GOP hasn't nominated this guy yet to replace Bernanke it must be that they don't know his work. Because if you are running Operation Tank the Economy, Trichet has got to be your point man.