Paralysis at the Fed … Ten years ago, one of America's leading economists delivered a stinging critique of the Bank of Japan, Japan's equivalent of the Federal Reserve, titled "Japanese Monetary Policy: A Case of Self- Induced Paralysis?" With only a few changes in wording, the critique applies to the Fed today. At the time, the Bank of Japan faced a situation broadly similar to that facing the Fed now. The economy was deeply depressed and showed few signs of improvement, and one might have expected the bank to take forceful action. But short-term interest rates — the usual tool of monetary policy — were near zero and could go no lower. And the Bank of Japan used that fact as an excuse to do no more. That was malfeasance, declared the eminent U.S. economist: "Far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution and its defensive response to criticism." He rebuked officials hiding "behind minor institutional or technical difficulties in order to avoid taking action." – New York Times/Paul Krugman (left)
Dominant Social Theme: Why don't the high priests of finance use their huge brains to get us out of this mess?
Free-Market Analysis: Paul Krugman is upset. He wants the Federal Reserve to take a number of concrete actions to make the deleveraging of America go away. He doesn't call it deleveraging of course. He calls it deflation, which means the money supply is contracting. Of course he doesn't explain how the money supply could contract or whether it is contracting.
He would no doubt say that such details are arcane and should not appear in a popular article on monetary analysis. We disagree of course. By continuing to define terms simplistically and in a Keynesian way, Krugman is perpetuating certain kinds of inaccurate information. Even if he disagrees with the classical definitions of inflation and deflation he should make them clear. (Even in his blog, which is quite elaborate, he does not.)
Anyway, like many Keynesians, Krugman is worried that lower prices will feed a credit crunch. Of course Krugman doesn't define his terms and in this article he doesn't even mention credit and loans but that is what he is after. He is worried that if money becomes worth MORE it will only aggravate people's over-leveraged positions. He is an inflationist, as are most people in a central banking economy, because people's buying decisions are usually based on an expectation of gradual inflation.
Of course, Krugman doesn't define his terms here either. If he had mentioned a credit collapse, then he might have felt that it was incumbent on him to define credit. When he did, he might have faced a dilemma, since it is hard to conclude that credit is money. Credit and loans can be EXTINGUISHED by money, but that is not the same thing as commingling the two terms and presenting them as one and the same.
Having explained the difference between money and credit (hypothetically, since he did no such thing in this article) Krugman might have another difficulty, which is defining exactly what money is. Today's money is merely printed paper and electrons issued by a private cartel under the color of government laws. Every piece of paper comes attached to a debt as well, which means there is always more debt than money, at least initially.
Having explained this strange system, Krugman might then have been prompted to remind people it hasn't always been this way and that historically money has proven out as gold and silver, issued privately into the marketplace via mining. But once you have gone down this path, the explanations are almost endless, which is why Krugman no doubt refuses to do so.
Instead, he treats us to his usual jeremiad on the lack of competence at central banks – which, as with so many apologists, simply means the bank has not done "enough" – or that its leaders ought to do more. Never mind that there has never been a single central banking executive who has "got it right." Krugman's tune is familiar of course to anyone who follows these sorts of conversations. It is always the same narrative: THIS Fed, THIS group of central bankers is incompetent. They need to do THAT in order to provide the proper guidance.
There is always something that some central banker is not doing correctly that is causing problems. It is never the system itself – though of course it is. No group of wise-men can properly steer the economy. It is impossible. No such group can guess how much money should be put into the economy or when it should be withdrawn (even if they could properly perform such "sterilization" functions).
Krugman wants a more active Federal Reserve. He wants Ben Bernanke, the Chairman, to buy assets directly in the market, to flood banks and other financial establishments with cash that will then "trickle down" to "consumers" – who will begin to spend again. Only this time, what Krugman et. al are dealing with though they will not admit it is a generalized crack-up boom. The economy has been so distorted over the decades by money creation and the subsequent support of failing businesses that price-information has been fatally compromised. The West's economies need a massive unwinding. Krugman's antidote, flooding the markets with yet more cash, will only compound the problem.
The problem at this point is banking itself. Banking (and the financial industry generally) is the biggest bubble of all. Because the elite depends on the financial industry for monetary control, banks and other such institutions have been artificially cultivated and consolidated for 100 years. The amount of distortion, excess and waste in the Western financial system is beyond measure. It is like a metastized cancer that is poisoning the entire body politic. Krugman's ideas will merely provide an environment that will enhance the cancer and spread it further. On the other hand, one can visit SueTheFed.com for an anodyne.