2020年3月3日 星期二

Can the Fed and friends save the economy?

On putting too much faith in central bankers.
Traders work on the floor of The New York Stock Exchange on Monday.John Taggart for The New York Times
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By Paul Krugman

Opinion Columnist

Markets were in a state of near panic, deeply worried about the economic outlook. But then the Federal Reserve stepped up: its chairman issued a statement strongly suggesting that he would cut interest rates. And the market experienced a huge relief rally.

No, I’m not talking about Monday’s big market bump. I’m talking about Dec. 5, 2000, in the middle of what we now remember as the bursting of the dot-com bubble. (Actually, I wonder if some of my readers are too young even to remember that?) The Fed chairman in question was Alan Greenspan; his remarks sent the tech-heavy Nasdaq soaring 10.5 percent in a day, while broader stock indexes also rose by several points.

The relief was, however, short-lived. Stocks quickly began falling again. The Nasdaq wouldn’t regain the level it reached on Greenspan Day until, wait for it, 2012.

I’m not making a stock market prediction here; that’s a mug’s game (and sometimes I’ve been the mug). I’m just trying to put Monday’s rally into perspective.

The thing is, markets actually had more reason to place faith in Alan Greenspan 2000 than they do to have faith in Jerome Powell 2020, because Greenspan had a lot more ammunition. The short-term interest rates the Fed effectively controls were above 6 percent in late 2000, and the Fed ended up cutting rates by about 5 percentage points — which was, it turned out, still not enough to prevent a big stock slump and a recession.

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Before today’s rate cut, the Fed only had around 1.5 percent, leaving far less room to cut. And the Fed’s counterparts abroad are in even worse shape: short-term interest rates in Europe are actually negative, so the European Central Bank has basically no room at all to cut further.

So why did markets get all giddy over the prospect of central bank stimulus? Bear in mind, also, that it was always a given that the Fed would cut rates if the coronavirus looked likely to do serious economic damage. So there wasn’t even much news on that front.

What probably happened, instead, was that talk of Fed easing provided a convenient peg on which to hang a story that was mostly about herd behavior.

My view of markets was shaped long ago by a classic analysis Robert Shiller — who later won a richly deserved Nobel Prize — did of the huge October 1987 stock crash, which came out of the blue. After the fact people tried to come up with various explanations of the crash, but Shiller managed to interview a large number of traders in real time, as the crash was happening. He found, basically, that traders were selling because other traders were selling; it was essentially a self-reinforcing selling panic.

What happened Monday was basically a self-reinforcing buying panic.

But were last week’s big sell-offs equally irrational? Probably. There was some real news about the coronavirus, but probably not enough to justify the sheer scale of the decline.

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So what happens next? When it comes to the markets, I have no idea. But when it comes to the underlying economics, we know two things. First, the coronavirus is looking more and more like a serious blow to the economy. Second, as I’ve already pointed out, the Fed and its counterparts don’t have much room to respond.

I’ve been saying for a while that I didn’t know when the economy would next face a serious bump in the road, but I did know that our shock absorbers were pretty much shot. Well, here comes the bump. Brace yourself.

Quick Hits

Shiller looked back at Black Monday 30 years later.

Sick people should stay home. But what if, like many Americans, they don’t have sick leave?

Trump demands immunity from criticism over his coronavirus response.

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