This is an Op Ed by Paul Krugman published in the NY Times in April 2014, thought i would repost it here for everyone to read:
Three
years ago Sweden was widely regarded as a role model in how to deal
with a global crisis. The nation’s exports were hit hard by slumping
world trade but snapped back; its well-regulated banks rode out the
financial storm; its strong social insurance programs supported consumer
demand; and unlike much of Europe, it still had its own currency,
giving it much-needed flexibility. By mid-2010 output was surging, and
unemployment was falling fast. Sweden, declared The Washington Post, was “the rock star of the recovery.”
Then the sadomonetarists moved in.
The story so far: In 2010 Sweden’s economy was doing much better than those of most other advanced countries. But unemployment was still high, and inflation was low. Nonetheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates.
There
was some dissent within the Riksbank over this decision. Lars Svensson,
a deputy governor at the time — and a former Princeton colleague of
mine — vociferously opposed the rate hikes.
Mr. Svensson, one of the world’s leading experts on Japanese-style
deflationary traps, warned that raising interest rates in a
still-depressed economy put Sweden at risk of a similar outcome. But he
found himself isolated, and left the Riksbank in 2013.
Sure
enough, Swedish unemployment stopped falling soon after the rate hikes
began. Deflation took a little longer, but it eventually arrived. The
rock star of the recovery has turned itself into Japan.
So
why did the Riksbank make such a terrible mistake? That’s a hard
question to answer, because officials changed their story over time. At
first the bank’s governor declared that it was all about heading off
inflation: “If the interest rate isn’t raised now, we’ll run the risk of
too much inflation further ahead ... Our most important task is to
ensure that we meet our inflation target
of 2 percent.” But as inflation slid toward zero, falling ever further
below that supposedly crucial target, the Riksbank offered a new
rationale: tight money was about curbing a housing bubble, to avert financial instability. That is, as the situation changed, officials invented new rationales for an unchanging policy.
In short, this was a classic case of sadomonetarism in action.
I’m
using that term (coined by William Keegan of The Observer) advisedly,
not just to be colorful. At least as I define it, sadomonetarism is an
attitude, common among monetary officials and commentators, that
involves a visceral dislike for low interest rates and easy money, even
when unemployment is high and inflation is low. You find many
sadomonetarists at international organizations; in the United States
they tend to dwell on Wall Street or in right-leaning economics
departments. They don’t, I’m happy to say, exert much influence at the
Federal Reserve — but they do constantly harass the Fed, demanding that
it stop its efforts to boost employment.
And
when I say that the dislike for low rates is visceral, I mean just
that. While sadomonetarists may offer what sound like coherent
analytical rationales for their policy views, they don’t change their
policy views in response to changing conditions — they just invent new
rationales. This strongly suggests that what we’re looking at here is a
gut feeling rather than a thought-out position.
Indeed,
the Riksbank’s evolving justifications for rate hikes were mirrored at
international organizations like the Switzerland-based Bank for International Settlements,
an influential bankers’ bank that is a sadomonetarist stronghold. Just
like the Riksbank, the bank changed its rationale for rate hikes — It’s
about inflation! It’s about financial stability! — but never its policy
demands.
Where
does this gut dislike for low rates come from? At some level it has to
reflect an instinctive identification with the interests of wealthy
creditors as opposed to usually poorer debtors. But it’s also driven, I
believe, by the desire of many monetary officials to pose as serious,
tough-minded people — and to demonstrate how tough they are by
inflicting pain.
Whatever
their motives, sadomonetarists have already done a lot of damage. In
Sweden they have extracted defeat from the jaws of victory, turning an
economic success story into a tale of stagnation and deflation as far as
the eye can see.
And
they could do much more damage in the future. Financial markets have
been fairly calm lately — no big banking crises, no imminent threats of
euro breakup. But it would be wrong and dangerous to assume that
recovery is assured: bad policies could all too easily undermine our
still-sluggish economic progress. So when serious-sounding men in dark
suits tell you that it’s time to stop all this easy money and raise
rates, beware: Look at what such people have done to Sweden.
