***
The Great Abdication
by PAUL KRUGMAN
June 24, 2012
Among economists who know
their history, the mere mention of certain years evokes shivers. For example,
three years ago Christina Romer, then the head of President Obama’s Council of
Economic Advisers, warned politicians not to re-enact 1937 — the year F.D.R.
shifted, far too soon, from fiscal stimulus to austerity, plunging the
recovering economy back into recession. Unfortunately, this advice was ignored.
But now I’m hearing more and
more about an even more fateful year. Suddenly normally
calm economists are talking about 1931, the year everything fell
apart.
It started with a banking
crisis in a small European country (Austria). Austria tried
to step in with a bank rescue — but the spiraling cost of the rescue put the
government’s own solvency in doubt. Austria’s troubles shouldn’t have
been big enough to have large effects on the world economy, but in practice
they created a panic that spread around the world. Sound familiar?
The really crucial lesson of
1931, however, was about the dangers of policy abdication. Stronger European
governments could have helped Austria
manage its problems. Central banks, notably the Bank of France and the Federal Reserve, could have done much more to
limit the damage. But nobody with the power to contain the crisis stepped up to
the plate; everyone who could and should have acted declared that it was
someone else’s responsibility.
And it’s happening again,
both in Europe and in America.
Consider first how European
leaders have been handling the banking crisis in Spain. (Forget about Greece, which is pretty much a lost cause; Spain is where the fate of Europe
will be decided.) Like Austria
in 1931, Spain has troubled
banks that desperately need more capital, but the Spanish government now, like Austria’s
government then, faces questions about its own solvency.
So what should European
leaders — who have an overwhelming interest in containing the Spanish crisis —
do? It seems obvious that European creditor nations need, one way or another,
to assume some of the financial risks facing Spanish banks. No, Germany won’t
like it — but with the very survival of the
euro at stake, a bit of financial
risk should be a small consideration.
But no. Europe’s
“solution” was to lend money to the Spanish government, and tell that
government to bail out its own banks. It took financial markets no time at all
to figure out that this solved nothing, that it just put Spain’s
government more deeply in debt. And the European crisis is now deeper than
ever.
Yet let’s not ridicule the
Europeans, since many of our own policy makers are acting just as
irresponsibly. And I’m not just talking about Congressional Republicans, who often
seem as if they are deliberately trying to sabotage the economy.
Let’s talk instead about the
Federal Reserve. The Fed has a so-called dual mandate: it’s supposed to seek
both price stability and full employment. And last week the Fed released its latest
set of economic projections, showing that it expects to fail on both parts of
its mandate, with inflation below target and unemployment far above target for
years to come.
This is a terrible prospect,
and the Fed knows it. Ben Bernanke, the Fed’s chairman, has warned in
particular about the damage being done to America by the unprecedented level
of long-term unemployment.
So what does the Fed propose
doing about the situation? Almost nothing. True, last week the Fed announced
some actions that would supposedly boost the economy. But I think it’s fair to
say that everyone at all familiar with the situation regards these actions as
pathetically inadequate — the bare minimum the Fed could do to deflect
accusations that it is doing nothing at all.
Why won’t the Fed act? My
guess is that it’s intimidated by those Congressional Republicans, that it’s
afraid to do anything that might be seen as providing political aid to
President Obama, that is, anything that might help the economy. Maybe there’s
some other explanation, but the fact is that the Fed, like the European Central
Bank, like the U.S. Congress, like the government of Germany, has decided that
avoiding economic disaster is somebody else’s responsibility.
None of this should be
happening. As in 1931, Western nations have the resources they need to avoid
catastrophe, and indeed to restore prosperity — and we have the added advantage
of knowing much more than our great-grandparents did about how depressions
happen and how to end them. But knowledge and resources do no good if those who
possess them refuse to use them.
And that’s what seems to be
happening. The fundamentals of the world economy aren’t, in themselves, all
that scary; it’s the almost universal abdication of responsibility that fills me,
and many other economists, with a growing sense of dread.
***
