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 can’t 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.
The Fed may be the only source of support for the world’s largest economy as Democrats and Republicans spar over fiscal policy. President Barack Obama needs to negotiate an accord on revenue increases and spending cuts with leaders of a Democratic-controlled Senate and a House of Representatives led by Republicans. The so-called fiscal cliff of more than $600 billion in tax increases and spending cuts is slated to start in January unless Congress acts.
At the Bank of England, King said today that the U.K. economy may shrink in the current quarter and its recovery will be subdued.
“We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while,” King told reporters in London. “There are limits to the ability of domestic policy to stimulate private sector demand as the economy adjusts to a new equilibrium. But the Committee has not lost faith in asset purchases as a policy instrument, nor has it concluded that there will be no more purchases.”
Policy makers at the Bank of England 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.
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. Even so, his bank has managed to build up trust in its inflation targeting, giving it more time to achieve its goals, he said. Underlying inflation has remained below the central bank’s 2.5 percent target since mid-2009.
The economy “is at more than full capacity, so the economy is overheated in that sense,” Qvigstad told reporters. The output gap “will increase further and that will be the main driving force for increased inflation,” he said.