Last Saturday, reported The Financial Times, some of the world’s most powerful financial executives were going to hold a private meeting with finance ministers in Davos, the site of the World Economic Forum. The principal demand of the executives, the newspaper suggested, would be that governments “stop banker-bashing.” Apparently bailing bankers out after they precipitated the worst slump since the Great Depression isn’t enough — politicians have to stop hurting their feelings, too.I'm betting that Bernanke caves. The modern world lives in a "democracy" but while you and I get "one vote", the rich get what the cartoonist Scott Adams called for: let the rich have many votes. Adams limited his call to 2 votes. But as far as I can tell the millionaires figure they should get a million votes and the billionaires are holding out for a billion votes. In short, they are corrupting civilization as it always has been. The rich and powerful want rules that make the happy and to heck with everybody else.
But the bankers also had a more substantive demand: they want higher interest rates, despite the persistence of very high unemployment in the United States and Europe, because they say that low rates are feeding inflation. And what worries me is the possibility that policy makers might actually take their advice.
What about inflation? High unemployment has kept a lid on the measures of inflation that usually guide policy. The Federal Reserve’s preferred measure, which excludes volatile energy and food prices, is now running below half a percent at an annual rate, far below the informal target of 2 percent.
But food and energy prices — and commodity prices in general — have, of course, been rising lately. Corn and wheat prices rose around 50 percent last year; copper, cotton and rubber prices have been setting new records. What’s that about?
The answer, mainly, is growth in emerging markets. While recovery in advanced nations has been sluggish, developing countries — China in particular — have come roaring back from the 2008 slump. This has created inflation pressures within many of these countries; it has also led to sharply rising global demand for raw materials.
What about commodity prices? The Fed normally focuses on “core” inflation, which excludes food and energy, rather than “headline” inflation, because experience shows that while some prices fluctuate widely from month to month, others have a lot of inertia — and it’s the ones with inertia you want to worry about, because once either inflation or deflation gets built into these prices, it’s hard to get rid of.
And this focus has served the Fed well in the past. In particular, the Fed was right not to raise rates in 2007-8, when commodity prices soared — briefly pushing headline inflation above 5 percent — only to plunge right back to earth. It’s hard to see why the Fed should behave differently this time, with inflation nowhere near as high as it was during the last commodity boom.
So why the demand for higher rates? Well, bankers have a long history of getting fixated on commodity prices. Traditionally, that meant insisting that any rise in the price of gold would mean the end of Western civilization. These days it means demanding that interest rates be raised because the prices of copper, rubber, cotton and tin have gone up, even though underlying inflation is on the decline.
Ben Bernanke clearly understands that raising rates now would be a huge mistake. But Jean-Claude Trichet, his European counterpart, is making hawkish noises — and both the Fed and the European Central Bank are under a lot of external pressure to do the wrong thing.
They need to resist this pressure. Yes, commodity prices are up — but that’s no reason to perpetuate mass unemployment. To paraphrase William Jennings Bryan, we must not crucify our economies upon a cross of rubber.
Judging Obama from his previous performances, I'm pretty sure he will soon be leaning on the Federal Reserve to make the banks happy. Why? Because Obama has sold himself to the highest bid, Wall Street has bought and paid for him.
And here is Obama with his newest shiny toy -- competitiveness -- to distract people from the real issue. This is from a January 24th NY Times op-ed by Paul Krugman:
Meet the new buzzword, same as the old buzzword. In advance of the State of the Union, President Obama has telegraphed his main theme: competitiveness. The President's Economic Recovery Advisory Board has been renamed the President's Council on Jobs and Competitiveness. And in his Saturday radio address, the president declared that ''We can out-compete any other nation on Earth.''A leader is so named because he leads. Not because he tricks people or dazzles them. Obama doesn't understand leadership. I'm amazed that the US, a country of 300+ million can't find a worthy leader. But since 1968 the US has been led by an unbroken line of incompetents and madmen. The absolute worst was George Bush. Obama looks good by comparison. But in absolute terms, Obama is at best a middling level president and falling as he gets more and more involved in selling the presidency for campaign contributions.
This may be smart politics. Arguably, Mr. Obama has enlisted an old cliche on behalf of a good cause, as a way to sell a much-needed increase in public investment to a public thoroughly indoctrinated in the view that government spending is a bad thing.
But let's not kid ourselves: talking about ''competitiveness'' as a goal is fundamentally misleading. At best, it's a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what's good for corporations is good for America.
So what does the administration's embrace of the rhetoric of competitiveness mean for economic policy?
The favorable interpretation, as I said, is that it's just packaging for an economic strategy centered on public investment, investment that's actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they've been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation.
My guess is that we're mainly talking about packaging here. And if the president does propose a serious increase in spending on infrastructure and education, I'll be pleased.
But even if he proposes good policies, the fact that Mr. Obama feels the need to wrap these policies in bad metaphors is a sad commentary on the state of our discourse.
Mr. Obama himself may do all right: his approval rating is up, the economy is showing signs of life, and his chances of re-election look pretty good. But the ideology that brought economic disaster in 2008 is back on top -- and seems likely to stay there until it brings disaster again.
The fact that Obama did not slay the dragon on the Wall Street banks and how they orchestrated the biggest crash since the Great Depression will haunt him. A true leader would have seized the moment, like FDR did, to restructure the economy to ensure that greed and corruption were put back in a box and wouldn't threaten ordinary citizens for a generation or two. With Obama, the threat was cajoled and bribed and will be out of the box in 3 or 5 or 7 years to take everybody down again.