Paul Krugman has a long piece on the NYT Magazine. In contrast to his usual clamor for more fiscal stimulus, this time he is focused on monetary policy and on Bernanke´s “let-down”:

Bernanke was and is a fine economist. More than that, before joining the Fed, he wrote extensively, in academic studies of both the Great Depression and modern Japan, about the exact problems he would confront at the end of 2008. He argued forcefully for an aggressive response, castigating the Bank of Japan, the Fed’s counterpart, for its passivity. Presumably, the Fed under his leadership would be different. Instead, while the Fed went to great lengths to rescue the financial system, it has done far less to rescue workers. The U.S. economy remains deeply depressed, with long-term unemployment in particular still disastrously high, a point Bernanke himself has recently emphasized. Yet the Fed isn’t taking strong action to rectify the situation.

The article is well worth reading. Krugman even relaxes his “liquidity trap constraint”. Unfortunately, Krugman is still too tied with monetary policy as interest rates and with the need to increase the inflation target. I think these two “principles” form the greatest barrier for innovative thinking about monetary policy, in particular given the dire economic situation.

When Krugman says: “Instead, while the Fed went to great lengths to rescue the financial system…” he misses the point that that´s Bernanke´s “fetish” (just like for Krugman it´s the “liquidity trap”). Bernanke made clear the overwhelming need to rescue the financial system in his famous 1983 article “Nonmonetary effects of the financial crisis in the propagation of the great depression”. The opening paragraphs of that article read:

And what Bernanke gets wrong, and the fact that has most influenced his behavior, is that it wasn´t the New Deal´s rehabilitation of the financial system in 1933-35 that got the economy going, but, and in spite of New Deal legislation, it was the monetary policy loosening induced by FDR´s March 1933 decision to delink from gold, devalue the dollar and indicate a price level target that triggered the economic rebound. New Deal legislation was only enacted in July 1933, and as the industrial production chart shows it stopped the largest ever rebound in production on it´s track. The figures below illustrate what has been dubbed “Rooseveltian Resolve”.

Bernanke should heed the words he said in reference to Japan in 1999:

Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn’t absolutely guaranteed to work. Perhaps it’s time for some Rooseveltian resolve in Japan.

Update: Just saw that David Beckworth also discusses the Krugman article.