Ben Bernanke risks being remembered for the same monetary folly that was perpetrated by John Law, the banker who fled 18th century France after creating an asset bubble, the deputy governor of Norway’s central bank said.
“If printing money is not followed up by action -- in euro area countries, in the U.K. and in the U.S. -- Mario Draghi, Mervyn King and Ben Bernanke run the risk of being recorded in history in the same chapter as the Scotsman John Law,” Norges Bank Deputy Governor Jan F. Qvigstad said in the text of a speech delivered yesterday in Oslo.
European Central Bank President Draghi, Federal Reserve Chairman Bernanke and Bank of England Governor King are pursuing unprecedented stimulus programs in an effort to drag their economies out of the worst crisis since the Great Depression. The ECB’s main interest rate is 0.75 percent, the Fed’s rate hovers near zero and the Bank of England’s is 0.5 percent. Draghi in September pledged unlimited debt purchases to support euro markets. Bernanke a week later vowed to buy bonds until the U.S. labor market recovers.
John Law, born in 1671, was a Scottish economist who moved to France. Under the Duke of Orleans, he set up Banque Generale -- a lender that was able to issue bank notes -- to help revive the French economy. He’s best known for the Mississippi Scheme, a venture that ballooned into a bubble. When it burst, the French economy was plunged into a crisis, forcing Law to flee. He died a pauper in Italy in 1729, according to the Encyclopedia Britannica.
“Unrestrained printing of money has led to problems on many occasions through history,” Qvigstad said.
In an interview after the speech, Qvigstad said his comments had been “a bit rhetorical.” The intention “was to underline the point that central banks cannot solve the problem,” he said. “The politicians and real actions, like pension reforms, labor market reforms budget balance, budget reforms, those are the things that are needed to solve the problems.”
The Fed’s third round of quantitative easing may extend through next year and climb past $1 trillion, according to economists at JPMorgan Chase & Co. and Pierpont Securities LLC. Bernanke has kept interest rates near zero since December 2008, and the Fed in September extended the horizon for record-low rates through at least the middle of 2015.
The Fed bought $2.3 trillion in securities in its previous two rounds of bond-buying and has swapped its short-term Treasuries with longer-term securities in a program called Operation Twist, due to expire in December.
At the Bank of England, policy makers said on Nov. 8 that they don’t plan to buy more bonds beyond the 375 billion pounds ($595 billion) already purchased, concluding a third round of quantitative easing. The next day, the bank said that it will transfer income from gilts it holds under that program to the Treasury in a move that King equates to an easing of monetary conditions.
Norway’s central bank has signaled its next move will be to raise its main rate from 1.5 percent to counter the effects of overheating. Still, Qvigstad and Governor Oeystein Olsen have said they don’t want Norwegian rates to stray too far from policy rates elsewhere to avoid fanning krone appreciation.
Norway’s economy, which is backed by a $660 billion sovereign wealth fund, has been overheating for the past half year, Qvigstad said yesterday. His bank has managed to build up trust in inflation targeting, giving it more time to achieve its goals, he said.
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