Brad DeLong introduces the concept of “zombie” elites with underwater reputations who thereby refuse to adapt to changing circumstances. Thus his theory of Jean-Claude Tricket and the European Central Bank, though the application is clearly wider:

The most likely scenario is this: they bet on mean-reversion in unemployment, on the magic full-employment equilibrium-restoring properties of the market, on their role as prudent stewards of financial rectitude, and on a take-no-prisoners commitment to price stability in all circumstances as the driving force behind the great moderation.

They were wrong. They now have a choice. They can admit that they were wrong. Then they will probably have to resign, and then be snubbed worldwide. Nobody likes a loser.

Alternatively, they can double down. Their reputations right now are underwater. What do they have to lose reputationwise by saying more absurd nonsense? And there is a chance that tomorrow the confidence fairy will appear, wave her magic wand, and the V-shaped recovery will start.

This is, I think, the right way to think about the “success” of Bush administration Iraq policy in its second term. In the case of Europe, I would add that the underwater elites extend well beyond the narrow confines of the European Central Bank. The current crisis is revealing the fact that the Euro wasn’t a very good idea and realistic approaches to resolving it require admitting that. Either the project is a failure and countries need to leave the Eurozone, or else the project can only be made workable by asking German taxpayers to do something they were promised they’d never been asked to do. Talking about fiscal austerity is a good way of casting the problems here as caused by greedily unaustere voters and obscuring the extent that what we’re watching is the fundamental failure of a deeply elite-driven project.

The conventions of central bank independence dictate that the bizarre behavior of the European Central Bank not be discussed at the G-20 meeting, but with the ECB cutting rates by less-than-expect, bank chief Jean-Claude Trichet seems to be continuing his campaign to drag the world into years of depression.

This whole issue continues to be generally under-discussed. It’s widely understood in the United States context that Ben Bernanke is one of the very most important economic policymakers in the country. He’s probably the number two guy after Barack Obama. But the Eurozone’s economic output is about the same as that of the United States—it varies according to the exchange rate of the day. This means that Trichet is about as important as Bernanke, and probably more important than any of Europe’s elected officials. He’s a top-five guy in terms of determining the economic fate of the globe. And he’s a rare dissenter from the general view that the current downturn is a true crisis that requires emergency measures. This is a big deal and, if he’s wrong, a very big problem.

Brad DeLong wrote an excellent article several months ago titled “The Republic of the Central Banker” about the vast and often underappreciated power wielded by central bankers. His focus, naturally, is on the U.S. Federal Reserve system and its chairman. But the central banker who holds sway over the largest economic unit is no longer the Fed Chair. Rather, it’s the head of the European Central Bank, Jean Claude Trichet. His decisions have vast influence over the fate of the entire global economy. And he seems to not be doing a very difficult job, arguing confidently that there’s no risk of deflation and maintaining the ECB’s lifelong obsession with inflation.

This is a problem for Europe. But it’s a problem for us, too. American households are increasing their savings rates which is macroeconomically counterproductive in a downturn. Counterproductive but probably unavoidable considering the past years of dissavings. But the world needs someone to be reducing savings and generating demand. And many of the people in a position to do that live in Germany. But absent a central bank that appreciates the gravity of the situation and is interested in stimulating demand, it won’t happen. And all of us around the world will suffer for it. I think confidence had developed over the past few decades that whatever might come to pass, policymakers wouldn’t just repeat the blunders of the Great Depression era. But that confidence seems to some extent misplaced.