Monday, September 22, 2008

Turning Japanese: Krugman on the humbling of the Fed

Paul Krugman's fairly accessible (non-mathematical) explanation of why Bernanke and the Fed are fighting for traction:
The humbling of the Fed (wonkish) - Paul Krugman - Op-Ed Columnist - New York Times Blog

... in March, and again this week, interest rates on T-bills fell close to zero — liquidity trap territory. What does that do to the Fed’s role?

You still see people saying, in effect, “never mind the zero interest rate, why not just print more money?” Actually, the Bank of Japan tried that, under the name “quantitative easing;” basically, the money just piled up in bank vaults. To see why, think of it this way: once T-bills have a near-zero interest rate, cash becomes a competitive store of value, even if it doesn’t have any other advantages...

... Ben Bernanke came into his current position believing that central banks have the power, all on their own, to fight Japan-type problems. It seems that he was wrong
So when you're turning Japanese (apologies to those in Japan who suffered this road in the 80s and 90s), you need more than the Fed. You need policy. That means you need a President.

That means that there's no real hope until next January, then we either flame out with McCain/Palin or hope with Obama/Biden.

Oh well, we knew that the last election was one of the most important in American history. We blew it anyway. So now we the next one is one of the most important in American history ...

PS. Krugman's blog is being overwhelmed by comments, most of them are denial-of-service insults from the enemies of the enlightenment. We need to tell him that others have solved this problem by outsourcing the moderation task to trusted third parties. Of course he doesn't control his blog, the NYT does ...

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