Two fascinating articles:
There is an ongoing three way debate between those who believe the Fed should do more to strengthen the recovery, those who believe that the recovery is strong enough to continue on its own, and those who believe that the economy has been so fundamentally altered by the recession that no amount of stimulus can succeed in pushing unemployment down to pre-crash levels. As usual, they all have it wrong (although some are more wrong than others).
The false conclusions are being made by the likes of bond king Bill Gross, who has suggested that the economic fundamentals have changed. They argue that a “new normal” is now in place that sets an 8% unemployment rate as a floor below which we will never fall. This is absurd. America can once again prosper if we put our trust in first principles and let the free markets work. Unfortunately, that is not happening. Government is taking an ever greater role in our economy where its efforts will continue to stifle economic growth. A close second in cluelessness comes from those who believe that we are currently on the road to a real recovery. I’m not sure what economy they are looking at, but in just about every important metric, we continue to be essentially comatose.
Central bankers Debating the Limits of Power in Jackson Hole are wondering what’s holding back the economy.
“What is holding the economy back? Why is it that we’ve had such incredibly accommodative monetary policy for so long (but) we’ve had so little growth? I think it remains a puzzle,” said Donald Kohn, who is now a senior fellow at the Brookings Institution think tank in Washington.
Adam Posen, who finished his final day as a member of the Bank of England’s monetary policy on Friday and is a powerful advocate for more forceful central bank action, asked the same question as Kohn: “Why has all this lower short-term interest rates failed to make the economy go go go?” He argued that policymakers in Europe and the United States should waste no time in extending asset purchase programs to spur growth.
Alan Blinder, another former Fed vice chair who now teaches economics at Princeton, ticked off the two most blatant culprits for why the U.S. economy continued to struggle: government spending cuts and the drag from the depressed housing market.
Adam Posen and Alan Blinder are clearly delusional.