The Crash Years

David Leonhardt has a nice piece* about Bernanke and When Caution Carries Risk:

The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.

Look around at the American economy today. Unemployment is 9.7 percent. Inflation in recent months has been zero. States are cutting their budgets. Congress is balking at spending the money to prevent state layoffs. The Fed is standing pat, too. Bond investors, fickle as they may be, show no signs of panicking.

The reason the states' budgets are bad is the recession and high unemployment, not that they spent too much in the good years. The recession and high unemployment is a result of the bursting of the housing bubble. The markets should know this.

And as Krugman points out:

I hold no brief for weak financial regulation in America. But it’s a bad sign that Germans still think of this as a made-in-America crisis. The truth is that the European housing bubble was as big or bigger than the US bubble; not in Germany, true, but it was German capital exports that fed the bubbles in Spain and Ireland. This was a North Atlantic crisis, roughly equally severe on both sides of the ocean.

True, Europe has better automatic stabilizers whereas our Senate won't do anything more about high unemployment. Ezra Klein reports the "tax extenders" bill failed to pass:

A quick list of presidents who wouldn't have been inaugurated if 57 percent of the vote was insufficient: Barack Obama, George W. Bush, Bill Clinton, George H.W. Bush, Ronald Reagan, Jimmy Carter, Richard Nixon, Lyndon Johnson, John F. Kennedy, Dwight D. Eisenhower, Harry Truman ... I could go on.

But the tax extender bill failed in the Senate today. It only got 57 percent of the vote. If there's anything encouraging here, it's that Olympia Snowe is making noises about a standalone vote for unemployment benefits. But there's really not much that's encouraging here, and that's particularly true if you're a small business that can't find a loan, or an unemployed person who can't find work. As far as the Senate is concerned, the recession is over. The election has begun.

At least Bernanke has performed better than the European Central Bank has, but he could be doing much better and as Leonhardt writes, is risking an awful lot over mythical concerns that the "market" will lose confidence. But as people keep pointing out, the market should recognize that the deficits are a result of the bursting of the housing bubble; the recession - less tax revenue, more outlays - and emergency measures, not a recklessly wasteful and out-of-control government. It was not "fiscal excess" as Alan Greenspan and David Brooks baselessly assert.

Former deputy secretary at the Treasury Brad DeLong says, "Confidence in the safety and soundness of U.S. Treasury bonds is greater than--well, greater than it has ever been in my lifetime."

The blowers of the housing bubble are ultimately responsible for the deficits and debt - along with those who refuse to reform health care and/or voted for Bush's budget-busting tax cuts for the rich. (Bill Clinton showed us how to get to budget surpluses during his Presidency, which wasn't that long ago. You need a growing economy. It's not that hard.)

Martin Wolf writes:

Festina lente - hurry slowly - is advice we have inherited from the ancient Romans. Western policymakers should now take it to heart. Confronted with huge fiscal deficits, many have concluded that they should hurry fiscal tightening on as fast as possible, in the hope that it will prove expansionary. What are the chances that they will be right? Small, I believe. Moreover, rather better alternatives are on offer. But their drawback is that they are unorthodox: alas, many "sound" people prefer orthodox recessions to unorthodox recoveries.

Krugman approvingly quotes Adam Posen (pdf) of the Bank of England’s Monetary Policy Committe. "On those claiming that the ECB [European Central Bank] has lost its purity by buying bonds to help avert economic catastrophe:

Cultures which make a public fixation of virginal maturity, of a stylized maiden’s reputation, tend to be backward superstitious cultures that impede people exercising autonomy and making responsible choices.

At least the Chinese are making noises about allowing their currency to rise, which means they're gaining confidence in the global economy. It's not a sure thing, like Obama's July 2011 pullout date for Afghanistan, but they're talking about it. It's possible.
--------
* Dean Baker has a quibble with it.