Failing to learn from our economic history – Leonhardt on the Fed’s timidity

Several people already flagged this piece, but it bears repeating – and Leonhardt sums it up brilliantly.

Clipped from

Mr. Bernanke also believes that the economy is growing “not fast enough,” as he recently put it. He has predicted that unemployment will remain high for years and that “a lot of people are going to be under financial stress.”

Yet he has been unwilling to use his power to lift growth and reduce joblessness from near a 27-year high. Instead, Fed officials are expected to announce on Wednesday that they have left their policy unchanged, even if they acknowledge that the economy has recently weakened.

In effect, Mr. Bernanke and his colleagues have decided to accept an all-but-certain downside — high unemployment, for years to come — rather than risk an even worse situation — a market panic, a spike in long-term interest rates and yet higher unemployment. As the last few years have shown, market sentiment can change unexpectedly and sharply.

The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.

Which seems to be the greater risk: too much action or too little?