Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘The Wall Street Journal’ Category

From Zombie Banks to Zombie Mortgages?

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Op-Ed in The Wall Street Journal
  • SEPTEMBER 10, 2010

Japan misallocated capital during its lost decade. How the U.S. can avoid its mistakes.

By Greg Ip

Japan’s recent demotion to world’s third-largest economy, behind China, triggered two distinctly different feelings in the United States.

One was Schadenfreude. At the end of the 1980s Japan was a contender for the No. 1 spot. It was the rich world’s fastest growing big country. Its companies dominated electronics, steel, automobiles and even banking. Its political and business leaders were paragons of long-term strategic thinking, while budget and trade surpluses left it rich with cash. Meanwhile, the U.S. was on the brink of recession, its corporate managers obsessed with short-term profits and its politicians incapable of mustering a coherent industrial strategy. “Japan has created a kind of automatic wealth machine, perhaps the first since King Midas,” Clyde Prestowitz wrote in 1988. The U.S. was “a colony-in-the-making.”

What happened next, of course, is history. Japanese property and stock prices cratered, its banking system seized up, and a decade (actually, two now) of economic stagnation followed.

The second feeling Japan’s misfortunes evoked is dread. The U.S. has gone through its own spectacular property crash and banking crisis and is now mired in a painfully weak recovery. Does it face a long period of stagnation as Japan did? Read the rest of this entry »


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September 11, 2010 at 5:26 pm

Fed Weighs Pause After Next Rate Cut

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Inflation Worries Loom as Economy Continues to Stall


The original article is linked here.

WASHINGTON — The Federal Reserve is likely to cut its short-term interest rate by a quarter of a percentage point next week — but then may be ready for a breather.

The Fed, meeting Tuesday and Wednesday, is likely to make what would be its seventh cut in eight months. The reason: Some officials see a case for more insurance against a deeper recession.

But others are concerned a cut could contribute to inflationary pressure with little benefit for growth. That means the option of standing pat will likely also be on the table. If it does cut rates, the Fed could signal in the statement accompanying the decision an inclination to pause and assess the impact of its cuts, which have lowered the federal-funds rate to 2.25% from 5.25% since last year. Read the rest of this entry »

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April 24, 2008 at 11:27 pm

Fed Weighs Its Options in Easing Crunch

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  • APRIL 9, 2008
  • The original article is linked here.

    WASHINGTON — The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

    Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011. Read the rest of this entry »

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    April 9, 2008 at 11:32 pm

    For the Fed, a Recession — Not Inflation — Poses Greater Threat

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    By Greg Ip

    1030 words

    3 March 2008

    The Wall Street Journal



    (Copyright (c) 2008, Dow Jones & Company, Inc.)

    Two fears hang over the U.S. economy: wrenching recession and spiraling inflation.

    Yet history suggests the two almost never happen at the same time. And that explains why the U.S. Federal Reserve, for now, has chosen to focus on the first threat rather than the second.

    Fed officials believe that those who say it is courting a return of 1970s-style “stagflation” — stagnant growth and inflation — misinterpret the lessons of that decade. Read the rest of this entry »

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    March 3, 2008 at 10:43 pm

    Bernanke Breaks Greenspan Mold

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  • AUGUST 30, 2007
  • Managing Crisis, Fed Chief Dulls Notion That Turmoil In Market Leads to Rate Cut

    WASHINGTON — When Ben Bernanke was nominated to head the Federal Reserve in 2005, he promised to “maintain continuity with the policies and policy strategies established during the Greenspan years.” But in handling his first financial crisis, Mr. Bernanke shows signs of a break with Alan Greenspan, the Fed’s chairman from 1987 to 2006.

    That shift is important in understanding why Mr. Bernanke hasn’t cut the Fed’s main interest rate yet, and it could alter investors’ expectations of how the Bernanke Fed will function. Read the rest of this entry »

    Written by gregip

    August 30, 2007 at 11:41 pm

    Amid Financial Excess, a Revival of Austrian Economics

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    JUNE 25, 2007, 8:00 AM ET

    This ran as a blog post in Real Time Economics on  The original is linked here.

    Does the U.S. risk repeating the mistakes that led to the Great Depression? The Bank for International Settlements‘ annual report, released Sunday, suggests that it does, and offers a remedy steeped in the doctrine of Austrian economics.

    In the 1930s adherents of the “Austrian school,” named for its Austrian-born proponents Ludwig von MisesJoseph Schumpeter and Friedrich Hayek, argued the Great Depression represented the unavoidable remediation of misallocated credit and overinvestment in the 1920s. The Austrian school largely failed to become orthodoxy as first Keynesian demand management appeared to end the Depression and later monetarism blamed the Depression on inadequate attention to the money supply.

    Austrian economics, however, has enjoyed a minor revival in the last decade, most prominently at the Basel, Switzerland-based BIS, which has few formal banking duties but is an important talking shop (it is sometimes called the “central bankers’ central bank.”) The BIS’s leading “Austrian” is a Canadian, William White, the head of the bank’s monetary and economic department and sometimes-rumored successor to retiring Bank of Canada governor David Dodge. In a 2006 paper Mr. White wrote that under Austrian theory, “credit creation need not lead to overt inflation. Rather…. the financial system … create[s] credit which encourages investments that, in the end, fail to prove profitable.” This leads to an “an eventual crisis whose magnitude would reflect the size of the real imbalances that preceded it [because] the capital goods produced in the upswing are not fungible, but they are durable. Mistakes then take a long time to work off.” He argued that in recent decades, “financial liberalisation has increased the likelihood of boom-bust cycles of the Austrian sort.”

    Although the concluding chapter of the BIS’s latest annual report, released Sunday, never mentions the Austrian school, it is suffused with its influence. “Virtually no one foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s, respectively,” it begins. “In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived.”

    It notes that “the prices of virtually all assets have been trending upwards, almost without interruption, since the middle of 2003.” While fundamental economic improvements are at the root, “the market reaction to good news might have become irrationally exuberant. There seems to be a natural tendency in markets for past successes to lead to more risk-taking, more leverage, more funding, higher prices, more collateral and, in turn, more risk-taking… [S]uch endogenous market processes … can, indeed must, eventually go into reverse if the fundamentals have been overpriced.”

    Apart from financial imbalances, the report argues the world economy also displays dangerous misallocations of capital. In its “recent rates of credit expansion, asset price increases and massive investments in heavy industry, the Chinese economy also seems to be demonstrating very similar, disquieting symptoms” to Japan in the 1980s. “In the United States, it is the recent massive investment in housing that has been unwelcome from an external adjustment perspective. Housing is the ultimate non-tradable, non-fungible and long-lived good.” In other words, the U.S. could be stuck with a lot of houses that are hard to sell to each other and impossible to sell to foreigners, and won’t need replacement for a long time.

    What does the BIS say central bankers should do? Essentially, relax their single-minded focus on price stability, and tighten monetary policy when “a number of indicators — not just asset prices but also credit growth and spending patterns — are simultaneously behaving in a manner that indicates increasing exposures.” In other words, when easy credit is fueling excesses, raise interest rates to end the party, even if inflation is quiescent.

    In practical terms, few central banks are ready yet to heed the Austrian prescription. Federal Reserve Chairman Ben Bernanke spent a lot of his life arguing just those sorts of prescriptions helped bring about, and deepen, the Great Depression. (See, for example, his 2002 speech, “Asset-Price ‘Bubbles’ and Monetary Policy.” Under him, the Fed remains focused on inflation. The European Central Bank has recently reasserted the importance of money and credit growth in its deliberations, but its policy for practical purposes also remains focused on inflation. The Bank of Japan comes closest to sharing the BIS view and has routinely cited the risk overinvestment as a reason to raise rates, but it has recently stopped tightening as inflation remains near zero.

    As Mr. White has acknowledged, the Fed can rightly argue its practice of leaving bubbles alone and cutting rates to mitigate their bursting appears to have worked well. The post-stock bubble rate cuts may have in turn created a housing bubble whose consequences haven’t fully played out. But the strength of economic growth since 2002 appears to have placed the burden of proof on advocates of an alternative policy.

    This isn’t to say Fed officials are unsympathetic to some of the BIS’s diagnoses. Some, in particular New York Fed president Tim Geithner, regularly warn that risk-taking is at an extreme and a reversal could trigger a self-reinforcing spiral of price declines and asset sales. Yet, having thought it over, they’ve concluded anything the Fed does with interest rates to address this risk would likely make matters worse. –Greg Ip


    Written by gregip

    June 25, 2007 at 11:33 pm

    Did Greenspan Add to Subprime Woes?

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  • JUNE 9, 2007
  • Gramlich Says Ex-Colleague Blocked Crackdown On Predatory Lenders Despite Growing Concerns

    The original article is linked here.

    Alan Greenspan was arguably the country’s most powerful financial cop in his 18 years as chairman of the Federal Reserve. But Mr. Greenspan’s regulatory record has received far less scrutiny than his management of the economy.

    That may be changing. A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. Democrats in Congress are now turning up the heat on regulators, especially the Fed, for failing to do more to stamp out those practices, and the Fed appears increasingly likely to overhaul its approach.

    [Alan Greenspan]

    Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies. Read the rest of this entry »

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    June 9, 2007 at 11:51 pm