You are a centrist New Keynesian Technocrat who is set to become Treasury Secretary during what looks like a replay of the Great Depression and the Japanese Depression.
However, Ben Bernanke is the Chairmen of your Central Bank. You are used to an environment where the Chairman exercises his full moral authority and moves the entire Federal Reserve. Ben Bernanke is personally an expert on the Great Depression and was highly critical of the Bank of Japan’s failure to act during its crisis.
You also see your Chairman swiftly moving to create innovative facilities to prevent contagion from spreading in financial markets.
What are you likely to conclude?
- Your primary role is to enable the Fed. You have to create an environment where the Fed can enact the type of policy your Chairman advised Japan to enact two decades ago. This means in large part bringing down risk spreads in the financial markets. You don’t believe you can do this if banks are afraid of overly aggressive action by the Central Government. Your role is then to stonewall such action.
- You are aware that the Fed may need to engage in Quantitative Easing. The Fed will likely receive criticism that it is “Monetizing the Debt” and that the US is becoming a Banana Republic. You need to remove such criticism by staking out a serious position on the US’s long term fiscal situation.
- You believe that populist anger is likely to rise up from the Left. This is your sense of the history of these types of situations. The danger of this could take many forms but the most obvious is the empowerment of activists and Congressmen who want to rapidly increase regulation. You need to stand in the way of this.
In short, your mission seems simple. Hold together the centrist neoliberal vision of the relationship between the State and the Economy while the Federal Reserve hits the gas and revives the economy.
You know its only a matter of time before Bernanke makes a credible commitment to be irresponsible, the dollar falls, US manufacturing revives and middle America experiences a mini-boom.
You just have to hold back the lions until that time arrives.
Unfortunately it never arrives and you are left having cut the legs out from underneath fiscal policy that could have revived the economy. You put deficit reduction on the table at exactly the wrong time and you hobbled the only effective counterweight to a massive populist uprising on the Right.
Hindsight is 20/20.