Sunday, September 18, 2011
From an American in London, Global Warnings
GOVERNMENTS are pushing austerity; bankers are hoarding cash; a recession looms in the United States and Europe. But Adam S. Posen has a solution: a shock-and-awe display of coordinated central bank attacks aimed at reviving sluggish economies.
An American economist on the Bank of England’s monetary policy committee, Mr. Posen is no academic scribbler or lonely blogger, but someone inside the central banking establishment.
And, as a leading expert on what is often called Japan’s lost decade, he is particularly worried that the Federal Reserve in the United States and the European Central Bank are making the same monetary policy mistakes that left Japan’s once-robust economy stagnant all through the 1990s and even into the 21st century.
For months now, Mr. Posen — who got his bully pulpit at the Bank of England by answering an ad in The Economist — has been warning that policy makers in Washington and in Europe have been too optimistic about how quickly the global economy would recover from the financial crisis.
The joint action by central banks on Thursday to make it easier for weak European banks to borrow dollars is no doubt a policy nod in Mr. Posen’s direction, but it is still a far cry from the type of unified bond purchasing program, or quantitative easing, that he is advocating.
When Fed officials meet this week, they are widely expected to take further action to reduce long-term interest rates, a significant turnabout after months of suggesting that a recovery was solidly under way. The European Central Bank has not yet gone so far, but officials have recently signaled a new openness to reducing interest rates or at least to stop raising them.
In simplest terms, Mr. Posen wants central banks to print more money. A lot more money.
There is a certain tilting-at-windmills aspect to his crusade. The Fed will probably stop well short of the aggressive bond buying that Mr. Posen has advocated. Already, some Fed officials — and most Republican leaders, including the presidential hopefuls Rick Perry and Mitt Romney — believe that the Fed is at risk of rekindling inflation.
But that hasn’t stopped Mr. Posen from pressing his case. Earlier this month, he had lunch with Kiyohiko Nishimura, a deputy governor at the Bank of Japan, and Charles Evans, the president of the Federal Reserve Bank of Chicago. And, last Tuesday, he traveled to this small hamlet in southeast England to issue his most passionate cry yet ”I am here to warn policy makers in the United States, Europe, everywhere that we cannot take our foot off the pedal,” Mr. Posen said before a roomful of small-business leaders and bankers. “The outlook is grim — the right thing to do now is engage in more monetary stimulus.”
Although a few bubbles of sweat appeared on his forehead, Mr. Posen argued his brief here with aplomb — mixing self-deprecating remarks that touched on the oddity of a 44-year-old American prescribing monetary policy in Britain (“I get paid in pounds and pay rent in pounds,” he assured his audience) with a trenchant analysis of the economy’s various ills (stagnant growth, increasing unemployment and banks that will not lend).
His listeners hailed his proposal that the Bank of England and the British Treasury form a government-backed bank to make small-business loans. But on a day when inflation ticked up to 4.5 percent, among the highest annual rates in Europe, his call to monetary arms received a muted response.
”I am very worried about the consequences of quantitative easing,” said John Thurston, chairman of Watts, a local company that supplies parts and services to commercial vehicles. Watts has felt the effect of the business slump, but the inflationary impact of more government bond buying worried him.
“I just don’t know how you unwind it,” he said.
Mr. Thurston is not alone in his concern.
On the Bank of England’s nine-member monetary policy committee, Mr. Posen was the only one to vote last month for the bank to resume its bond purchasing program, according to minutes of the meeting.
IN addition to the Fed’s reluctance to start another bond-buying effort, the European Central Bank is also not expected to continue its current program of purchasing the bonds of weak euro zone economies for much longer.
Mr. Posen’s central premise is that governments in Japan, Europe and the United States are running the risk of repeating the policy mistakes of the 1930s, when the conventional wisdom called for strict monetary policy and budget cutting, only deepening the Depression.
Not that central bankers have exactly been sitting on their hands.
Their efforts clearly helped prevent the sharp recession of 2008-9 from turning into something much worse, and the Fed, the European Central Bank, the Bank of England and the Bank of Japan have all bought large amounts of government bonds to help push down interest rates.
Now, with rates touching zero, the view has taken hold that to do more would risk stoking inflation and damage the credibility of central bankers.
But for Mr. Posen, such hand-wringing over inflation when unemployment is spiking in developed countries is not just misguided but irresponsible.
“I am really angry — we are getting these incredibly wimpy excuses for inaction,” Mr. Posen said, speaking broadly of central bank attitudes.
“My proposal is that the Bank of England buy £50 billion in gilts, although a good case can be made for doing more,” he said, referring to British government bonds.
Amid the secretive world of central banking, Mr. Posen strikes an arresting contrast. He is voluble, eager to please and, not being immune to a bit of gossip, has to restrain himself from revealing market-sensitive details about the bank’s inner workings.
More policy entrepreneur than wonk, Mr. Posen used his perch at the Peterson Institute of International Economics in Washington to push his core, Keynes-colored notion that governments and central banks must jump-start economies stuck in a slump when banks and the private sector show that they cannot.
A spate of papers on this topic that pointed to policy dithering in Japan brought him a measure of renown. He also showed an ability to ally himself with name-brand economists and policy makers on both sides of the Atlantic. Early supporters include the Fed chairman, Ben S. Bernanke, while he was at Princeton, as well as Mervyn King, before he became governor of the Bank of England.
But it was not until 2009, when Mr. Posen joined the Bank of England, that he was given a chance to advance his views from inside the temple. Unlike the Fed or the European Central Bank, the Bank of England reserves several slots on its policy-making panel for outsiders.
He has an office at the bank’s grand headquarters on Threadneedle Street, is expected to show up there no more than three days a week and has the use of two trained economists to assist him in his big thinking and speech-making.
“It’s like being a governor of the Federal Reserve, only better because you are not stuck with the crap work,” Mr. Posen said. He is also very adept at explaining the dry arcana of monetary policy in a way that is understandable and offers up good guys (those in favor of quantitative easing) and bad guys (those who are not).
“Adam is very confident that inflation will come down, and he has said he will eat his hat if that does not happen,” said Charles Goodhart, an expert on central banks at the London School of Economics and an early mentor to Mr. Posen. “He may well be right — but many of his colleagues do not share this belief.”
While it is expected that economists become policy advocates, it is unusual for central bankers to fly their philosophical colors with the ardor that Mr. Posen has shown. “Amid a culture of group-think, Adam sticks his neck out,” said Hans-Helmut Kotz, a former board member at the Bundesbank of Germany.
Mr. Posen acknowledges late-night rants on his Facebook page earlier this year when his core thesis — that extraordinary action was needed to keep Britain from slipping into a second recession — was not being accepted by his colleagues on the bank’s monetary policy committee.
“It was agonizing. I mean I have been doing this for 25 years and here was the possibility that I could be fundamentally wrong,” he said. “I was lying awake at night — ask my wife.”
Even now, with signs of global weakness increasing by the day, it is unclear whether Mr. Posen will win the day.
In fact, many economists argue that with Europe and the United States burdened with a huge overhang of debt, with banks undercapitalized and reluctant to lend and with the American and British housing markets still in the doldrums, central banks are largely powerless to revive growth on their own.
“My position is that once interest rates come to zero, there is not much more a central bank can do to stimulate the economy,” said Kazuo Ueda, an economist in Tokyo who served on the monetary policy board of the Bank of Japan as it struggled, unsuccessfully, to inject life into the Japanese economy.
In his recent paper, “The Effectiveness of Nontraditional Monetary Policy Measures: The Case of the Bank of Japan,” Mr. Ueda suggests that in Japan, structural economic defects and deflation were too powerful for even the most creative monetary policy interventions.
ECONOMISTS who share his view say that what is happening in Europe reinforces the point. Radical monetary easing, they argue, is no substitute for wrenching, yet necessary, structural changes like cutting wages and government spending and recapitalizing zombie banks. If anything, it’s an excuse not to put such reforms in place. But to Mr. Posen, those arguments are a poor excuse for inaction.
“The Austrians would say you just have to suffer through it,” he said, referring to a school of laissez-faire economic thought popularized by Friedrich Hayek and Ludwig Von Mises. “But suffering is not good for the soul — monetary policy won’t solve all your problems, but it can make things easier.”
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