“Stocks Soar on Summers Withdrawal” is the headline on the New York Times Web site. It appears over a Reuters dispatch reporting that Wall Street and global market indices were rising after Lawrence Summers withdrew his name from consideration to be chairman of the Federal Reserve.
Reuters explained that Professor Summers was “widely regarded as more eager to taper the Fed’s $85 million a month bond-buying program” than was Janet Yellen, another leading contender. As a result, “In early trading the Standard & Poor’s 500-share index gained 0.9 percent, the Dow Jones industrial average 1 percent and the Nasdaq composite 0.8 percent. Wall Street was following global markets higher. In afternoon trading in Europe, major bourses were as much as 1.3 percent higher. Hong Kong’s Hang Seng closed with a gain of 1.5 percent.”
Chairman Bernanke: “We could raise interest rates in 15 minutes if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time. Now that time is not now.”
Scott Pelley, CBS 60 Minutes: “You have what degree of confidence in your ability to control this?”
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No doubt that exchange of 2010 will go down as the most famous of Mr. Bernanke’s tenure as chairman of the Federal Reserve. It is the context in which to savor — if that is the word — the news of today’s “surprise,” as the headlines labeled the announcement of the Federal Open Market Committee’s decision to keep on pumping. On the one hand the Fed has been signaling it's getting ready to start ending the regime of quantitative easing by which it has been trying to keep the sluggish economy from falling back into recession. On the other hand every time it wants to start tapering off it discovers it can’t.
“I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis. But this really proves it beyond a shadow of a doubt; if you really want to understand what’s going on here, the Austrian you need to read isn’t Friedrich Hayek or Ludwig von Mises, it’s Sigmund Freud.”
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So writes the Nobel laureate Paul Krugman in his Web log at the Times. He is reacting to our editorial, “The Female Dollar,” and to the Wall Street Journal’s more substantive debunking of the way gender has eclipsed monetary policy in the debate on the next chairman of the Federal Reserve. And, by George, if it doesn’t appear that Professor Krugman has stumbled onto something.
The debacle ignited by the Federal Reserve this week invites this question: What would have happened had Chairman Bernanke refrained from saying anything? He held on Wednesday one of his press conferences, announcing that, as the Associated Press put it, the Fed would likely slow its $85 billion-a-month program later this year and end it next year if the economy continued to strengthen. The stock market collapsed, and the value of the dollar soared — to more than a 1,300th of an ounce of gold at last check — and alarm is spreading.
Well, let it not be said that The New York Sun failed to warn of this kind of chaos. We did this a bit more than two years ago, in an editorial called “The Verbal Dollar.” It quoted a founder of TradeMonster.com, Jon Najarian, as warning Mr. Bernanke’s press conferences would ignite a “giant ramp up in volatility.” He reasoned that traders “react to one word removed from a paragraph in a policy statement” and remarked, “now he’s going to hold a press conference?” It reminded us that there had long been a tradition of silence among central banks, going back at least to the Bank of England.
For those of us who spent the Reagan revolution arguing against the idea of austerity and instead in favor of supply-side tax cuts, it’s quite something to cover the eruption in the 21st century of the latest feud among economists. A generation ago we didn’t argue against spending cuts, simply that sometimes it was better to borrow than tax. Today’s dispute has been triggered by the Nobel laureate Paul Krugman, who, in his column in the Times, has been going after Harvard’s Kenneth Rogoff. This for the warnings by Mr. Rogoff that there is a limit to how much debt a country can take on before it begins to have a negative impact on growth.
“Debt hysteria” is the phrase Professor Krugman uses in today’s column to describe the fear that has been driving economic policy in the current crisis. For years he has been criticizing Chairman Bernanke of the Federal Reserve for running a monetary policy that’s too tight. He describes our policy has “monstrously failed.” He warns that there’s a “real danger we’ve ignored: the corrosive effect, social and economic, of persistent high unemployment. And even as the case for debt hysteria is collapsing, our worst fears about the damage from long-term unemployment are being confirmed.”