quarta-feira, 7 de agosto de 2013
Scott Sumner: Why Obama should not pick Summers for the Fed
Analise bem interessante. Vale a leitura.
The debate over the relative merits of the candidates for the position of chair of the US Federal Reserve has revolved around two issues: who is the most dovish, and who would be the more aggressive regulator. But this misses the most important question: which of the frontrunners – Janet Yellen, Fed vice-chair, and Lawrence Summers, former Treasury secretary, – can most effectively do monetary policy with interest rates at the zero bound?
Ben Bernanke, the current chair, has always insisted monetary policy remains effective when rates fall to zero, and has implemented several unconventional policies. Ms Yellen supports those policies and might even be a bit more aggressive. But Professor Summers has argued that the Fed may not be able to control aggregate demand once interest rates hit zero, and therefore that we need to rely on fiscal stimulus.
Even worse, he has warned that policies such as quantitative easing and low interest rates threaten to create malinvestment and new asset bubbles. Admittedly Prof Summers is not likely to reverse immediately current policy; but should we be reassured that his defenders claim that he will not immediately implement his bad ideas?
In a recent paper, Christina Romer (a professor at the University of California, Berkeley, who should be on President Barack Obama’s shortlist) and David Romer pointed out that, through its history, the Fed’s three main policy errors have shared an underlying cause: economists were too pessimistic about the ability of monetary policy to control nominal spending.
During the Great Depression, US nominal gross domestic product halved, and yet relatively few economists blamed the Fed or believed that monetary policy could solve the problem. Today we know the Fed could have, and should have, done much more.
The second big error occurred during 1966-81, when the Fed lost control of inflation. At the time, most economists failed to understand the essential role of monetary policy in controlling inflation, and were sceptical that tight money could fix the problem. They blamed everything from food and oil price shocks to overly powerful labour unions, and called for “incomes policies” to control inflation. But it was only when central banks adopted the “Taylor Principle” that they were able to bring inflation down and keep it at low levels. Today inflation is the least of our problems.
The third failure was much less severe than the first two but still quite costly. The Fed allowed nominal spending to plunge in late 2008, and then refused to promise to try to return spending to the previous trend line. As expectations of nominal growth fell sharply, nominal interest rates fell to zero and conventional monetary policy became powerless. Some of Prof Summers’ supporters claim his personality would be effective in a crisis. But that’s what worries me.
After Lehman Brothers failed, the Fed and the administration focused their attention on the banking crisis, and totally ignored the continuing collapse of demand, which was less obvious. Those who think they recall what happened in late 2008 may be shocked to be told that the Fed refused to cut rates in the meeting two days after the bank collapsed, leaving them at 2 per cent. In retrospect, they should have been cut to zero, as the economy was clearly plunging into recession and five-year inflation expectations had fallen to 1.23 per cent. A dose of QE plus “forward guidance” should immediately have been adopted.
Prof Summers is a brilliant economist and would probably display outstanding leadership skills in a banking crisis. But that is not what we need in a 21st century central banker. The most important monetary trend of the past 30 years is the relentless decline in real yields on Treasury bonds, from 7 per cent to roughly zero. We can debate the causes of the decline, but there is no evidence that it will turn around soon. That means the US economy is likely to hit the zero bound in future recessions, again and again.
If the Fed is as passive as it was in 2008, the recessions may end up being needlessly severe, regardless of how decisively we address banking panics. If Prof Summers replaces Mr Bernanke, we are likely to see more policy passivity. Prof Summers claims the solution at the zero bound is fiscal stimulus, but that is far too weak to prevent an economy from falling into a severe recession.
Would you want a ship’s captain who did not believe that turning the wheel would change the direction of a ship? Especially when the financial markets are telling us not only that monetary policy is important but also that there is nothing more important in terms of the economy’s medium-term direction.
Scott Sumner is an economist at Bentley University