She shows an understanding Bernanke lacks. And nails it again.
The bottom line is that there is suggestive evidence that Roosevelt’s largely monetary regime shift was an important source of recovery. More work is needed, but the evidence is already pretty strong. If this were a clinical trial, one might stop it early and start treating patients.
On Fed monetary policy today:
But the truth is even these moves [Qe´s] were pretty small steps. With its most recent action, the Fed has pushed the edges of its current regime. And I am sure that given the opposition in Congress and the difference of opinion within the FOMC, even those measures were a struggle. Nevertheless, the key fact remains that the Fed has been unwilling to do a regime shift. And because of that, monetary policy has not been able to play a decisive role in generating recovery. To paraphrase E. Cary Brown’s famous conclusion about fiscal policy in the Great Depression: monetary policy has not been a strong recovery tool in recent years not because it did not work but because it was not tried—at least not on the scale and in the form that was necessary to have a large impact.
The new Governor, Haruhiko Kuroda, was thought to be committed to rapid monetary expansion going in to office. But the recent policy announcements were even more expansionary than almost anyone expected. The Bank of Japan changed its focus from the policy interest rate to the monetary base, and pledged to double the monetary base by December 2014.19 This change may not be as dramatic as Roosevelt’s going off the gold standard, but it is getting there.
There is a tendency for both policymakers and economists to say that humility is a key characteristic in a central banker. And, I agree that it is only right to admit that there is much we do not know about monetary policy and its effects on the economy. But, such humility can express itself in two very different ways.
Often humility can lead to paralysis. If policymakers are unsure about the effectiveness of a policy or fear there could be large costs, they may just do nothing or be willing to take only small steps. Why take risks when we don’t know if a policy will work?…
…But there is another much more positive direction that humility can take policymakers. Humility about how much we don’t know can lead policymakers to admit when something isn’t working. It can lead them to revise opinions and be open to new evidence. This positive kind of humility can lead to experimentation. Rather than assuming that doing nothing is the best course, policymakers can choose to act aggressively on the best evidence available, even if it is highly imperfect.
It seems to me that what we are seeing in Japan now is this positive kind of humility. Rather than rehashing the old arguments about why they can’t do anything about deflation and low growth, Japan is trying a grand experiment. It is based on the best evidence available, but that evidence is highly imperfect—one observation from a very different place and time.
I don’t know if the Japanese experiment with monetary regime change will work. But I am confident that we will learn a great deal because they had the nerve to try.
HT David Levey