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Why Are Major Central Banks Getting Schooled By Peripheral Players?

David Beckworth puzzles over the fact that the Swiss and Swedish national banks both seem to know how to reflate a depressed economy — it involves a stated determination to achieve reflations — but the bigger banks are lost at sea:

First the Fed gets schooled on central banking by the Swedish central bank and now by the Swiss National Bank. This is getting embarrassing. It is like watching a talented basketball player getting dunked on by Kobe Bryant and then by Lebron James. Normally, such a talented basketball player would go study these other players and learn from them. But the Fed seems determined to get repeatedly dunked on. Fortunately, it has a teammate, the ECB, that is willing to get dunked on too and thus share the embarrassment. It is time for the Fed and the ECB to go back to basketball camp. I recommend the ones put on by the Swedes and Swiss.

I would also add Australia and Israel to the list of small developed countries that seem to have this right. That said, the trouble here can’t really be an intellectual one. I don’t have any opinions about monetary policy that can’t be found in the published writings of Ben Bernanke. In the case of the ECB, it’s pretty clearly an ideological/moral failing. In Frankfurt they sincerely believe that it would be inappropriate to take the consequences of their actions for human welfare into consideration when setting monetary policy. Their goal is to make the inflation rate as low as politically feasible, and the job of elected governments is to learn to live within that framework.

The case of the Fed is more puzzling. But I note that across a whole range of non-military policies the United States is extremely small-c conservative in its policymaking compared to other countries. We don’t do much in the way of policy innovation here, in part for institutional reasons but in part I think as a simple consequence of national size. In macroeconomic management it may be the same. Actual responsibility and power makes people risk-averse in a way that commentators aren’t, and running a very large and very important economy can make a person risk-averse to the point of paralysis. This was, ironically, precisely Bernanke’s critique of Japan in the nineties.

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