IN JANUARY 2000, a Princeton University economist presented a paper in Boston, lambasting the Bank of Japan (BoJ) for not doing more to pull the stagnant Japanese economy out of its morass.
By Andy Mukherjee, Senior Writer
Be experimental, he said. Just because you have interest rates at zero doesn't mean that you are powerless to do more, he told the policymakers.
One of the tools the professor recommended to the Japanese central bank to battle deflation was 'cheap talk': Just tell the market that you're going to keep interest rates at zero until inflation is between 3 per cent and 4 per cent, he urged the BoJ.
Another measure he suggested was a 'helicopter drop' of cash: Finance a tax cut with newly printed money rather than government borrowings; the current generation will have more to spend, but future generations won't have to foot the bill. The economy will surely perk up.
If these tricks don't work, the BoJ could always engineer a steep depreciation in the yen or buy government bonds from the market at fair value, he said. Both steps will be expansionary.
Almost 12 years later, life has come full circle for the former Princeton academic, Mr Ben Bernanke. As chairman of the United States Federal Reserve, he now has some very similar challenges at hand in his own home economy. And when it comes to finding solutions to them, he is clearly sticking to his own operating manual.
The Fed has already completed two rounds of bond purchases, totalling almost US$2.3 trillion (S$2.8 trillion). It has also allowed the US dollar to depreciate by about 20 per cent against a basket of other currencies since March 2009.
Finally, in promising to keep the Fed's target for overnight interbank interest rates at near zero, Mr Bernanke has already tried cheap talk.
So are there any other manoeuvres left in his playbook?
Speaking at the Kansas City Fed's annual conference in Jackson Hole, Wyoming, yesterday, Mr Bernanke gave no indication of any new tools that will be put to work. 'The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability,' he said.
Nervous global markets were expecting a lifeline from Mr Bernanke. They didn't find it, or at least that is what the initial reaction of US and European equity markets to Mr Bernanke's speech seemed to suggest.
The US Commerce Department yesterday pared its estimate of economic growth in the second quarter to an annualised rate of 1 per cent, after just 0.4 per cent expansion in the first three months of this year. The US economy hardly ever re-accelerates from such low rates of growth without first suffering a recession.
Mr Bernanke seems to have run out of ideas at an awful time. Consumers are scared because they cannot see a future in which everyone will have well-paying jobs again, while US businesses sitting on cash would rather buy their own stock than invest in new machinery.
Since economists can never really agree on anything, it may be decades before we know with any degree of certainty just why the Fed failed to create inflation with its asset purchases, currency debasement and cheap talk.
By then, the Great Recession of our times will be of little interest to people outside the academia where Mr Bernanke's playbook - full of unworkable ideas - really belongs.
andym@sph.com.sg
