Stefan Elfwing sent me the following email:
The riksbank has finally loosened their policy a little by lowering the repo to 1.25% from 1.5%.
. . .
[A] few months ago there was basically no discussion about monetary policy in Swedish press (aside from noting that L.E.O. [Svensson] and Ekholm were in opposition). This changed over the spring and summer:
* Matt O’Briens Atlantic piece ”How Much Is a Good Central Banker Worth?” got some play in the media, especially this part:“Let’s try a thought experiment. Say that Lars Svensson — one of the world’s top monetary economists and the current deputy governor of Sweden’s central bank, the Riksbank — could get our economy back to trend in half the time Ben Bernanke could. It’s actually plausible-ish. Like Bernanke, Svensson spent his academic career championing unconventional monetary policy as a “foolproof” way to escape a liquidity trap. (Coincidentally, they were colleagues at Princeton). But unlike Bernanke, Svensson’s Riksbank has been much more willing than Bernanke’s Fed to experiment with these kind of heterodox policies. Perhaps unsurprisingly, Sweden’s recovery has been the envy of the developed world. So I ask again: How much is a good central banker worth? Put simply, how much cash should we throw at Svensson to steal him away from Sweden?. . .
* Svensson’s paper about . . . the riksbank policy being too tight for over 15 years (causing 0.8%, 40 000 people, extra unemployment) had a big impact. I have seen it cited in a lot of articles (however, in 99% of the cases the authors have no clue about monetary policy).
* Svensson’s decision to go public has also made a big impact, i.e., basically calling the majority incompetent fools. The clearest example was an interview in Sweden’s biggest national daily (we only have two and the second one is not really national) http://translate.google.com/translate?sl=sv&tl=en&js=n&prev=_t&hl=en&ie=UTF-8&layout=2&eotf=1&u=http%3A%2F%2Fwww.dn.se%2Fekonomi%2Fstriden-som-splittrar-riksbanken.
* So before this meeting there was suddenly pressure from everywhere to lower the rate. Export firms complaining about the strong krona, which rose over the summer. Labor unions and other persons worrying about the unemployment rate quoting the “40 000 extra unemployed” claim. Economists, who almost all have been quiet up to now, voicing their support for the minority view. Op-ed in all the four biggest paper wanting a lowered rate and writing about Ingves and co:s “inflation-paranoia”.
* So, even if the fundamentals were much better than before the last meeting (e.g., they increased their RGDP forecast for 2012 from 0.6% to 1.5%), they lowered the rate. Several bank-economists were surprised, but I think Ingves feared for his reputation and legacy. One example of an op-ed with a hear-see-speak no evil illustration
The next meeting is in the end of October and Svensson had to do some damage control (the incompetence meme was becoming a little too widespread) before the next meeting, and also increase the probability of another rate decrease this year. This was published 1-2 day after the decision (I would bet some money that LEO S would not have written it if the rate stayed the same). http://translate.google.com/translate?hl=en&sl=sv&tl=en&u=http%3A%2F%2Fwww.dn.se%2Fledare%2Fjag-beklagar-djupt-hur-uttalandet-tolkats
Back in 2009 I wrote the following:
Someone either understands that the only reliable speedometer is NGDP (or inflation) or they don’t. Governor Strong got it. So did the author of Lords of Finance (Liaquat Ahamed), and so did Friedman and Schwartz. Strong’s death really was a tragedy.
The elite bankers and financiers of Wall Street were pretty smart people. So were the central bankers of the US, Britain, and France. But they weren’t smart enough. After Strong died the best central banker was probably Montegu Norman, but the central bank he led (in England) lacked the gold reserves to decisively influence world conditions. Today the world’s best central banker might be Lars Svensson, but he can’t even muster a majority in Sweden.
So the wealthy conservatives of the interwar period who dominated central banking dug their own graves, and the graves of millions of others. Not through greed but through ignorance. The few people who were able to see the big picture; Keynes, Fisher, Hawtrey, etc, did not have a voice in policy.
I don’t care how much is costs, even if we have to pay FOMC members a billion dollars a year, we will save much more money in the long run if we can get “strong” central bankers (pun intended) who have the vision to see what needs to be done, and who understand that effective policies require explicit target paths for macro aggregates.
Recall that a “gaffe” is when a policymaker accidently tells the truth. Svensson had to apologize for his gaffe. But he’s right, most central bankers in Sweden (and the US in my view) are in way over their heads, they simply don’t have the necessary expertise in monetary economics. I’m not a policymaker, so I don’t have to apologize for saying that.
PS. Matt O’Brien has written a number of pieces that are sympathetic to market monetarism. Good to see that his views were heard in Sweden, and may have helped trigger a healthy debate in that country.
Update: Johnleemk reminds me that Michael Kinsley came up with that definition of ‘gaffe.’