Sunday, February 13, 2011

Goodbye Axel Weber and Kevin Warsh - we will miss you

Yesterday, Paul Krugman took another step on his journey from esteemed academic to banal journalist. In the New York Times, he produced a short and nasty piece on the departure of two highly respected central bankers, Axel Weber of the Bundesbank and Kevin Warsh, of the Federal Reserve.

Here is what Krugman had to say:

I have to say that Axel Weber has bowed out of the race for ECB head gracefully; but this isn’t really about the person, it’s about the views. And I am therefore glad to hear both that he won’t be taking the job, and that the reason he bowed out was that euro-area leaders didn’t share his hard-money views. Tightening in Europe in the face of continuing very high unemployment and low core inflation is a very bad idea.

In a somewhat similar vein, I wish Kevin Warsh all the best in his future career — and I’m glad to see someone who believes that both monetary and fiscal policy should tighten to head off fears the market doesn’t even have off the Fed board.

Not a bad few days for future policy prospects.

The departure of Weber is real loss. If he had been appointed as head of the ECB, there was a strong chance he would have remodelled the bank on the lines of the old Bundesbank. The focus would have been on price stability and not on the current ECB fiscal obsession of bailing out weak peripheral members of the Eurozone. When Trichet leaves the ECB later this year, eurozone members will have a hard time finding a replacement that could have matched Weber.

Likewise, Warsh didn't buy into Bernanke's policy of quantitative easing and purchasing crappy mortgage assets from US banks. He believed that these actions would do little to resolve the growing economic difficulties of the US economy.

Still, Krugman seems happy. There are now fewer cautious voices within monetary policy circles, both in Europe and the States.


  1. Krugman was simply glad that two people who believe in tightening in the face of recession are not in a position of influence any more. That's good for Europe and the US.

    The question is, why does Alice believe that tightening is the cure for recession? It is as if she only cares about inflation and nothing else.

  2. Barry,

    Thank you for your comment. You ask a fair question.

    I believe that inflation is profoundly evil. It always involves an arbitrary redistribution of wealth from savers to borrowers. It is an undemocratic tax.

    My hatred of inflation is partly driven by fear. If unchecked, inflation threatens to destroy the middle class, which I regard as a necessary bulwark of civilisation.

    I also believe that fiscal tightening is inevitable. The sooner, the better.

    I recognise them up front tightening may have output costs. However, I believe that any delay would only raise those costs.

    A delay also increases the probability of a disorderly fiscal adjustment. We have already seen this in Ireland and Greece.

    Ultimately, I fear disorder and chaos. I crave policy rules and stability.


  3. 2 points.

    Inflation does not need to transfer wealth from creditors to debtors. Consider:

    An economy with 2% inflation and 4% interest rates

    is the same as

    an economy with 4% inflation and 6% interest rates.

    Higher inflation just means that creditors have to charge more interest.

    The economy with higher inflation and interest rates is a safer one because it has more room for monetary policy when a recession hits. And more room for monetary stimulus means less need for fiscal stimulus - now there's an idea you should like.