Sunday, November 7, 2010

Economists for Firing Larry Summers are back!

We've been busy. Doing what? Trying desperately, and, as it turns out, in vain, to limit the damage in the midterms caused by Summers and Bernanke's mismanagement of the economy. (Can't win em' all...) The midterms were largely a referendum on how solid a grasp on economics principles Summers and Bernanke have. Have they really been "hitting the bulls-eye" as Alan Blinder is wont to say? The midterm results and unemployment rate would seem to suggest otherwise...

I'll have to give major props to Bernanke for doing $600 billion more in QE, although I'm not sure I understand why he waited until after the midterms. He wanted to appear non-political, but if he felt the economy needed a boost and held off in the interest of appearing "non-political", then the end result is that he hurt the incumbents and helped the GOP. The way to be non-political would have been to do what he felt was right for the economy regardless of the election.

In any case, at least Bernanke did more than I thought he would do, and apparently it also surprised currency traders given their reaction. And, given the adjustments in prices we've already seen, I think it is clear that QE helps. $600 billion is probably not enough, let's just hope Bernanke shows a willingness to adjust the amount when new data comes in -- a flexibility neither he or Summers has displayed so far. For it was clear 17 months ago that we needed more QE, and would have been much preferable for him to start out with an additional $200 billion then, and then up it by $400 billion if it had no effect, and then continue to adjust either upwards or downwards based on data. Instead his strategy was to do a bunch of QE almost two years ago and then essentially do nothing for the next 22 months, even though every month's data released all painted the same picture of the economy.

One of the most bothersome aspects of this is how the media continues to report on it -- it's Bernanke's "big gamble". Even the New York Times refers to QE2 as being "risky". It's just hard to see what planet these people are on. With no more QE, the most likely scenario is that we have continued high unemployment. In other words, no QE seems incredibly risky. With QE, the worst case scenario is that it isn't big enough and doesn't do anything -- the status quo. Clearly, this wouldn't represent any additional risk from the QE. It's hard to even guess at what the "risk" perceived by the NY Times is. Most likely they fear a scenario in which inflation somehow gets out of control, even in the context of slow growth and 9.6% unemployment. Trouble is, if this happens, it would most likely be accompanied by a robust economic recovery and falling unemployment, and could be met by a simple reversal of the QE and multiple interest rate hikes. In other words, this is precisely what we're hoping for -- getting out of the liquidity trap.

The real "risk" as I see it is that we'll continue to have a few more months of slow job growth and low inflation, and Bernanke will wait another 9-12 months before he makes any adjustment to the size of the QE. Then, perhaps he'll do a bit more 8 months of disappointing/marginally decent results later, in the interests of being non-political, wait until after the Presidential election of 2012 before doing anything further, while unemployment is still hovers above 8%...

Frustrating times...

1 comment:

  1. Sir, you are missing the point. Barack Obama chose to reappoint Bernanke.

    Because Barack Obama, not Tim Geithner, not Larry Summers, and not Ben Bernanke, is determined to protect the big bankers, who wanted a conservative Republican reelected, he got screwed.

    The fish rots from the head.