November 11, 2013
The NYT had an article on a conference at the International Monetary Fund with the headline, “Candid Criticism of the Fed That Wasn’t On the Agenda.” The piece promises blunt criticism of the Fed from former Treasury Secretary and top Obama adviser Larry Summers:
“Now that he is no longer a candidate to head the Federal Reserve, Mr. Summers — who withdrew from consideration this fall in the face of stiff resistance in Congress, with the White House ultimately nominating Janet L. Yellen — was perhaps freer to speak in his trademark blunt style. And he didn’t disappoint, arguing that by many important metrics, policy has failed.
“Mr. Summers underscored how weak the economy remains, despite the extensive stimulus and the Fed’s continuing campaign of asset purchases, with the labor market slack and inflation subdued.
“‘My lesson from this crisis is, my overarching lesson is that it’s not over until it is over, and that is surely not right now,’ he said.
“He noted that short-term interest rates had remained close to zero for years, with no end in sight: ‘We may well need in the years ahead to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity.’
“‘There’s no evidence of growth that is restoring equilibrium,’ Mr. Summers added. ‘One has to be concerned about a policy agenda that is doing less with monetary policy than has been done before, doing less with fiscal policy than has been done before,’ and is ‘taking steps whose basic purpose is to cause there to be less lending, borrowing and inflated asset prices than there was before.'”
This appears to be more a criticism of the Obama administration and Congress for failing to run more aggressive fiscal policy than a criticism of the Fed. The Fed is clearly in uncharted territory in using monetary policy to try to boost the economy out of a severe slump. If Summers suggested a way in which the Fed could be more effective in boosting demand this NYT article neglected to mention it.
That would seem to imply that Summers directed the criticism at himself and his former colleagues for failing to push for more aggressive fiscal policy. Presumably he also regrets allowing bubbles to develop in his reign as Treasury Secretary, the eventual collapse of which led to the downturn. Summers likely also now would recognize that the high dollar policy that he and his predecessor pushed in the Clinton years was a serious mistake since the over-valued dollar led to a huge trade deficit. That in turn created a shortfall in demand that could only be filled by bubble generated demand.
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