Remember me
Keynesians and Monetarists were upset with Bernanke about bank lending and money supply, even before Bernanke's discount rate move. Please consider US Bank Lending Falls at Fastest Rate in History:
Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession -- or worse -- is growing by the day."It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement."The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Mr Ashworth.
Tim Congdon is yet another economist complaining about stimulus withdrawal. On February 12, it was Olivier Blanchard, with Krugman defending Blanchard. See Krugman Says Inflation Is the Answer for details.In response to to the discount rate hike by the Fed, I expect to see more chanting about the Great Depression and how Bernanke will kill the recovery.What caused the Great Depression was the extreme run-up in credit that preceded it. Smoot Hawley and FDR policies made matters worse.Printing and spending money when the problem is too much debt already simply doesn't work.Total Bank Credit Drops at Record PaceWhat has everyone excited is the dramatic turndown in bank credit at commercial banks.From the Telegraph article: "David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. 'Since the credit crisis began, $740 billion of bank credit has evaporated. This is a record 10pc decline,' he said."Total Bank Credit of Commercial BanksIn contrast to Keynesians and Monetarists, I'm not horrified by that drop. I'm horrified by the parabolic rise that preceded it.That credit is plunging is a good thing, not a bad thing. A much-needed deleveraging is in progress. The question now is: Will Bernanke have the courage to see this through or not?No Short CutsSt. Louis Fed President Hoenig says policy is on an unsustainable course as noted in "Three Paths Forward" -- Kansas City Fed on Current US Fiscal Imbalance, Hyperinflation, Printing:
From Hoenig:Finally, there are no short-cuts. We currently must adjust from a misallocation of resources. There is no way to avoid some short-term pain in fixing the fundamentals in our economy. It is inconvenient for the election cycle, and it is undeniably terrible to have at least 10 percent of the labor force out of work. But short cuts now mean people out of work again in only a few years because we again try and avoid difficult adjustments. Outlining a credible course for managing our debt for the future will accelerate the restoration of confidence in our economy and contribute importantly to sustainable capital investment and job growth.
Hoenig has it correct. There are no short cuts to cure a misallocation of resources.When the economy slumps (and it will regardless of what the Fed does, in my opinion), Bernanke will take the blame for tightening too early even though all he's doing is taking baby steps. He deserves a lot of blame, but not for a measly quarter-point hike in the discount rate, or the stated desire to contract the Fed's balance sheet -- neither of which will kill the recovery.Truth be known, there's no recovery to kill; it's simply a mirage fanned by liquidity that found a temporary home in the stock market and commodities. The sooner we adjust to that economic fact, the better.
Most Read
Emailed
Latest
Read Full Article »