Paul Krugman and Central Banks’ Coordinated Action
The prices of bread, milk, televisions, cars, tractors and factories are all set by the interaction of the supply and demand schedules of millions of individual actors. The price of credit however is set by a few men in suits in a large marble building.
As such, we have no way of knowing whether the price of credit, also known as the interest rate is equal to the price that reflects the market’s requirements.
The Central Banks of Canada, China, Sweden, Switzerland, the European Union and the United States all lowered interest rates in their respective regions today.
Central Banks are between a rock and a hard place and must decide between “injecting liquidity” into sagging financial markets and reeling in the inflation that they themselves have manufactured.
Keynesian economist and perennial Nobel Prize candidate Paul Krugman has praised the rate cuts, however claims that
We’re way past the point at which conventional monetary policy has much traction.
With the Fed’s benchmark rate now at 1.5%, the United States may be in liquidity trap territory.
Krugman may be correct in saying that coordinated rate cuts will make little difference, however he fails to present an alternative course of action. It won’t be long before Krugman and his ilk will be advocating massive public works and widescale labour market interventions to “stave off crisis”, rather than waiting for time to heal the wounds.
Another war perhaps, Mr. Krugman?