Hurricane Trichet Hits Jackson Hole

  x You have successfully emailed the post. Erin Weir is the Senior Economist at the International Trade Union Confederation.

The European Central Bank president does not seem to get it. Far from acknowledging that last month’s interest-rate hike was premature, he touts “price stability.”

His main theme is that the economic divergence between Eurozone countries is comparable to that between American states. From there, he jumps to the non sequitur that what both Europe and the US need is more “structural reform,” specifically deregulation of labour and service markets.

What he misses (or deliberately overlooks) is that the US is a fiscal union, in which transfers help to support hard-hit regions. The lion’s share of public borrowing is done by the central government at low interest rates underpinned by a sovereign currency (regardless of missives from S&P).

The Eurozone’s problem is being a monetary union without any semblance of a fiscal union. Member economies cannot adjust through different monetary policies or fiscal transfers. National governments must borrow at their own interest rates, which reflect a lack of currency sovereignty.

The solution to the Eurozone crisis is for European institutions such as the central bank, which has sovereignty over the Euro, to stand behind the (Euro-denominated) public debts of member states. However, Trichet wants to diagnose the problem as being “over-regulated” labour markets.

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ROUNDUP: Here's What Everyone Expects From Bernanke At Jackson Hole

As Ben Bernanke's big speech at Jackson Hole Wyoming approaches, everyone has weighed in on whether he will hint at a third round of quantitative easing or other forms accommodation.

On one hand the U.S. recovery is slowing and global economic sentiment has worsened, but on the other inflation is higher than it was in 2010 when Bernanke launched QE2, and recent economic data hasn't been entirely terrible. Bernanke is also in a tough spot, since three regional Fed bank presidents voted against his decision to keep interest rates ultra low.

Back in June, Bill Gross co-CIO of PIMCO had said on twitter, "next Jackson Hole in August will likely hint at QE3 / interest rate caps."

But there has been a sea change since then, and now the predominant opinion is "don't get your hopes up."

In an editorial to the Financial Times, PIMCO's other chief Mohamed El-Erian argues that Bernanke should stave off another round of easing:

"...Rather than embark on another policy initiative (“QE3”) with questionable net benefits, it would be better for Mr Bernanke to use his Jackson Hole speech to reframe the national policy debate and, in the process, set the stage for President Barack Obama’s key economic announcements on September 5.

He should do so in three steps. First, acknowledge that the considerable headwinds undermining economic growth and jobs have important and growing structural elements. Second, explain why a sustainable solution must go well beyond Fed financial engineering and, specifically, incorporate co-ordinated structural reforms on the part of agencies responsible for housing, the labour market, public finances, infrastructure and directed credit. Third, and most delicate, caution that another round of unconventional Fed policies would only be effective if accompanied by these other policy initiatives.

Jim Paulsen of Wells Capital Management also argued against QE3:

"We have created a very bad precedent… The financial markets whine and policy officials jump. The Fed has become the Pavlov’s dog of the stock market, and this is a horrible precedent for policy makers."

Meanwhile John Silva chief economist at Wells Fargo said the economy needs structural changes (via Marketwatch):

“The Fed has shot the big cannons. They are now playing the game with smaller ammunition

Mick Levy chief economist at Bank of America followed in the same thread saying he hoped Bernanke would discuss that mere changes to monetary policy would be inadequate to boost the economy (via Marketwatch):

All the targeted counter-cyclical stimulus is not going to address the huge pocket of distressed properties… The slowdown is not the fault of not enough liquidity."

Earlier this month Nouriel Roubini said the Fed would announce QE3 (via WSJ):

He will announce at Jackson Hole even more quantitative easing… Some variant of additional monetary easing. Keeping the fed fund rate at zero is one step. Buying more treasuries is another one. Trying to target directly the long-rates is another one, price-level targeting, lengthening the maturity of treasuries there is a combination of policies. We'll have QE3, maybe QE4, maybe QE5 if we're in the long haul of near depression.

He also took to twitter to say QE3 had begun in Japan and Switzerland with their currency interventions. He added, "The Fed will eventually get to QE3 but it will be too little too late."

European Central Bank president Jean-Claude Trichet, MIT professor Esther Dufflo and Harvard University professor Dani Rodrik will also speak at Jackson Hole this weekend.

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