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Due governatori a Jackson Hole


There has been considerable coverage of Ben Bernanke’s speech to the annual central bankers’ bash at Jackson Hole on Friday. A number of US commentators have criticised his reticence to commit to more decisive stimulus (Paul Krugman, Dean Baker); the Financial Times called it ‘vapid’.

There was much less coverage of ECB President Trichet’s address to the same event. Thankfully. For whatever Bernanke’s blemishes, I’d gladly take him in Trichet’s stead (and a fortiori as his successor, given the likely alternative). If you have the time, read both speeches, compare and contrast, and decide for yourself who you would rather have managing your economy. If not, the bottom line is: Bernanke is a man in a hole who recognises that he is in a hole. He is hoping that the hole is gradually getting shallower with time, but he is not sure and so he is preparing the use of various mechanisms to get out in case the hole gets deeper. Trichet is a man in a hole but one who thinks that he is already out of it, ladders and pulleys are dangerous contraptions and, worse, that if he and others just keep on digging in the same way as in the past Europe will come up smelling of roses.


In fact the speeches would be worthy of a full Lit Crit essay – why does Trichet quote Max Weber and claim, incredibly, that nothing he says should be taken as a guide to ECB policy, whereas Bernanke is relentlessly technocratic and clearly believes that every word he says is a guide to Fed policy? – but I’ll leave it at some examples in support of the view that, unlike Trichet, Bernanke at least recognises that the first law of holes is: ‘Stop digging’.


Bernanke frankly acknowledges that growth prospects are weaker than the Fed expected and that inflation is currently lower than the central bank would like; he lists the measures taken by the Fed to address the crisis and notes that, thanks to its communication policy, markets are confident that policy rates will stay low ‘for an extended period’; he emphasizes that quantitative easing – buying USD 2 trillion worth of assets – was explicitly designed to reduce long-term interest rates. He explicitly weighs the pros and cons of four types of additional expansionary measure. And, last but not least, he gave an explicit commitment to bolster recovery.


The Fed, he said, ‘will do all that it can to ensure continuation of the economic recovery. Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally. Because a further significant weakening in the economic outlook would likely be associated with further disinflation, in the current environment there is little or no potential conflict between the goals of supporting growth and employment and of maintaining price stability’.


In fact, I think the Fed Chairman is too sanguine about the US recovery (although a not implausible defence is that he may be being deliberately upbeat in the sense of a self-fulfilling prophecy) and that he pays too much attention to the possible downsides of the envisaged expansionary measures. Yet in tone and content he is a million miles from the ECB President.


In M. Trichet’s speech references to the crisis are in the past tense. What is now needed is to ‘deal with the legacy of the excesses and imbalances accumulated over previous decades’. Most of the address is devoted to the need for fiscal consolidation, which is the responsibility of (elected) governments and not of the (unelected) central bank. Oh, and governments should also ensure ‘a continuation along the path of structural reforms in product markets, labour markets and financial markets’, because ‘one should never underestimate the room for higher growth potential through resolute structural reforms, particularly in Europe, which is still marked by numerous rigidities’. (This at a time when actual output is so far below potential that years of decent growth would be needed just to make up lost ground, even if potential output were to remain constant.)


And what about the monetary authorities, for which Mr. Trichet is responsible? In fact the lecture contains virtually nothing on what the ECB intends to do to ensure recovery except, in case you hadn’t guessed already, maintain its unwavering commitment to price stability: ‘A credible, medium-term orientation on price stability is the best contribution that central banks can make toward sustainable, stable growth. A credible commitment to price stability anchors inflation expectations, depresses inflation risk premia and contributes to keeping longer-term interest rates low…’. Output gaps? Unemployment? Possible policy trade-offs? Not on the central bank agenda or at least not as important as lecturing governments on fiscal rectitude.


There are numerous other points relating to non-standard policy and other issues, but I won’t labour them. To sum up, it seems that the lesson drawn by the ECB from the second-largest crisis in the history of capitalism is that central banks and governments should resolutely, errr, do exactly what they were doing before the crisis. In other words: keep digging!


So to my American colleagues: I understand your critiques of your central bank chief. But just imagine the mess you would be in if you had the ECB instead of the Fed and the man digging holes instead of the one at least tinkering with ladders and pulleys.