Bernanke’s Perry Problem
The larger answer, however, is outside political pressure. Last year, the Fed actually did institute a policy of buying long-term debt, generally known as “quantitative easing” (don’t ask). But it faced a political backlash out of all proportion to its modest effect on the economy, culminating in Mr. Perry’s declaration that any further monetary easing before the 2012 election would be “almost treasonous,” and that if Mr. Bernanke went ahead and did it, “we would treat him pretty ugly down in Texas.”
Now just imagine the reaction if the Fed were to act on the other and arguably more important parts of that Bernanke 2000 agenda, targeting a higher rate of inflation and welcoming a weaker dollar. With prominent Republicans like Representative Paul Ryan already denouncing policies that allegedly “debase the dollar,” a political firestorm would be guaranteed.
So now you see why I don’t expect any substantive policy announcements at Jackson Hole. Back in 2000, Mr. Bernanke accused the Bank of Japan of suffering from “self-induced paralysis”; well, now the Fed is suffering from externally induced paralysis. In effect, it has been politically intimidated into standing by while the economy stagnates. And that’s a very, very bad thing.