I once read a book where Richard Rorty debated another philosopher on the nature of “truth.” Rorty claimed something to the effect that; “Truth was what your colleagues let you get way with.”
The other philosopher countered with a hypothetical. Suppose someone says: “Most people believe X is true, but I believe that Y is actually true.” Clearly they’d have in mind a different conception of truth. Rorty countered that claiming something not widely believed is “actually true” is implicitly a prediction that it will be accepted as the truth at some point in the future. That doesn’t always work, but it’s an interesting way of thinking about truth.
In any case, it can now be said that Lars Svensson’s critique of Riksbank policy has been proven “true” in the sense that his opponents have now recognized it as true (the following is from the excellent Ambrose Evans-Pritchard):
Sweden’s Riksbank has torn up the rulebook of global central banking, cutting interest rates to zero even though the economy is in the grip of a credit boom.
The extraordinary step is intended to stave off deflation but it comes at a time when the Swedish economy is growing at almost 2pc and property prices are rising briskly. The bank has abandoned earlier efforts to curb asset bubbles by “leaning against the wind”.
The Riksbank cut the deposit rate to -0.75pc in what looks like a preparatory move to drive down the krona. Governor Stefan Ingves said the bank has a toolkit of extreme measures in reserve, including use of the exchange rate.
If the Riksbank was caught off guard, it’s because they weren’t paying attention to the only world class monetary expert on their committee.
The Riksbank has in effect washed its hands of the credit boom, leaving it to government regulators to control household debt with mortgage curbs, liquidity limits for banks and other “macro-prudential” tools as best they can.
You mean regulators should deal with specific problems in a specific sector of the economy with a scalpel? I thought the central bank needed to deal with the housing market with a sledgehammer, smashing the entire economy.
“What the Riksbank is doing is something that a lot of central banks around the world are going to have to do: once interest rates approach zero, they are forced to think about far more radical instruments,” said Lars Christensen, from Danske Bank.
The Riksbank – arguably the world’s oldest central bank, with a tradition of bold monetary experiments – carried out a dramatic volte-face in July when it slashed rates and gave up trying to restrain asset prices. Governor Ingves was outvoted in what amounted to a policy mutiny.
The shift over recent months is a triumph for Mr Svensson, who resigned last year in a stormy dispute. He said the bank made a mistake by tightening before the economy had fully recovered, and then compounding the error by allowing itself to be distracted by the noise of asset bubbles. “Low inflation has actually increased the households’ real debt burden. Riksbank policy has been counterproductive,” he said.
The Riksbank is now fully aligned with the Yellen Fed in Washington, which argues that raising rates to stop asset bubbles merely destroys jobs for little useful purpose. Both are pitted against the Bank for International Settlements. The BIS says radical monetary stimulus may help individual countries but only by displacing the problem onto others, leading to a “Pareto sub-optimal” for the world as a whole. It warns that speculative excess is reaching pre-Lehman levels, and calls on global central banks to take pre-emptive action before the bubbles becomes unmanageable.
What is far from clear is whether the Riksbank can get away with such policies. It may run into harsh criticism from rest of the world if it is seen to engage in “beggar-thy-neighbour” stealth devaluation at a time when the Swedish economy is expected to grow 2.7pc next year, and has a current account surplus above 7pc of GDP.
Does the BIS think the eurozone is a bubble? How much tighter should ECB policy be? As an aside, Sweden’s a good example of why people should never, ever reason from a current account surplus. It tells us nothing interesting about the business cycle.
Sweden was one of the first central banks to adopt price level targeting, in the early 1930s. In an intellectual sense, the ECB is at least 80 years behind Sweden:
The institution enjoys a prestige beyond its size, a legacy of the great Swedish economists of the early 20th century: Knut Wicksell, Gustav Cassel, Bertil Ohlin and Gunnar Myrdal. It is watched closely as a pioneer in central bank theory.
The bank famously began “price targeting” in the early 1930s after breaking free from the Gold Standard. The revolutionary policy was the precursor of today’s inflation targeting. It enabled Sweden to escape deflation early in the Great Depression, suffering far less damage than countries that stuck doggedly to failed orthodoxies.
And speaking of monetary innovators, the intellectual leader of market monetarism was recently interviewed by Erin Ade on Boom/Bust (at about the 3 minute mark.) He is just as good at explaining ideas verbally as in print. But he looks slightly different from what I expected.
HT: TravisV, Saturos