Monthly Archives: August 2012

Ben Bernanke

Ben Bernanke. Image by Getty.

Ben Bernanke, Fed chairman, will speak about “Monetary Policy Since the Crisis” at the Jackson Hole Symposium at 10 am (EDT) on Friday. The markets have learned to focus intently on such occasions, since there is something in the clean air of Wyoming which seems to inspire Mr Bernanke. On several occasions in recent years, the tone he has adopted at Jackson Hole has set the trend in financial markets for many months to come.

This year, there are doubts about what the chairman might say. The markets have already assumed that a further monetary easing by the Fed is just around the corner, almost certainly to be announced at the next FOMC meeting on September 12-13. At the very least, this will probably involve an extension of the Fed’s guidance on “exceptionally low” levels for the federal funds rate from the end of 2014 at least to mid 2015.

However, there is uncertainty in the markets about whether the FOMC is minded to do anything more aggressive than that in September. That possibility was raised by the dovish set of minutes for the 31 July/1 August FOMC meeting which were published last week. The key question is whether Mr Bernanke will choose to clarify the ambiguities in these minutes in either direction. Read more

The macroeconomics of John Maynard Keynes continue to dominate the global economic policy debate to this very day. But many have forgotten that the great intellectual was also one of the most active investors of his era.


Keynes – image by Getty

The exact nature and effects of economic uncertainty are subjects which have played a central role in macroeconomic theory for several decades, especially in the work of Keynes and his followers. Uncertainty, as defined by Keynes, is thought by many to be capable of explaining all of the key events of the past five years, including the intractability of the recession in the developed economies. More unexpectedly, the concept has started to play a starring role in the US presidential campaign, though in a very different context from anything contemplated by Keynes.

When I first studied Keynesian macroeconomics in the early 1970s, Keynes’ thoughts on the nature of uncertainty, which appear most famously in Chapter 12 of the General Theory, were not thought central to his analysis of the Great Depression, or for his policy prescriptions. The writings of Paul Davidson changed that perspective in the 1980s, but the subject was still mostly viewed as a special topic for rather obscure debates among post-Keynesian theorists. None of this had mass appeal until the crash of 2008, and the work of Robert Skidelsky in 2009. Read more

This is a longer version of an article which appeared in the print edition of the Financial Times on Friday, 12 July 2012.

The British economy, unlike its inspirational Olympic team, has been unable to match even the tepid performance which other developed economies have mustered since the Great Recession hit bottom in 2009. In the past two years, after allowing for the under-recording of growth in the official data, real GDP has been little better than flat, at a time when a strong recovery from recession would normally have been expected. So what has gone wrong, and what should be done about it?

The first issue is whether the growth shortfall has been due mainly to demand side or supply side factors. Sir Mervyn King has consistently pointed to the demand side, arguing that the crisis in the Eurozone, and the rise in commodity prices, has depressed private sector demand, while the reduction in public spending has actually occurred slightly faster than the Coalition originally planned in 2010.

Aggregate demand has certainly been far weaker than I expected this year, and that has been primarily responsible for the absence of growth. Essentially, an aggressively easy monetary stance has not been sufficient to offset the impact of the fiscal tightening, and the twin external shocks from oil and the euro crisis. Read more

When Mario Draghi said on 26 July that a “convertibility risk” was preventing the smooth functioning of the ECB’s monetary policy across national borders inside the eurozone, he was breaking a taboo which has been stubbornly followed by all of his predecessors in the project to create a durable single currency. (See Alphaville here.) That taboo is that no-one in the ECB should ever admit that the euro might break apart. The objective of the taboo (which admittedly has previously been broken in the “special case” of Greece) has always been to ensure that markets should not feel the need to reflect any concerns about possible foreign exchange risk among the member states which comprise the euro.

By admitting that this “convertibility risk” now exists, the ECB president has implicitly acknowledged that the permanence of the single currency is not fully credible in the financial markets. The recognition of redenomination risk after a potential devaluation is one reason, he implies, why sovereign bond yields are now so high in Spain and Italy. He has said that this prevents the ECB from transmitting its intended monetary stance into those economies, which gives the ECB the right to take direct action to reduce these bond yields.

After last Thursday’s ECB meeting, it appears that this direct action will be to purchase short dated government bonds in Spain and Italy, provided that these governments have previously applied for support from the EFSF/ESM mechanism, and have accepted any conditions attached. The question is whether this action will be enough to put the convertibility genie back into the bottle. Read more