Tuesday, July 08, 2008

Rogoff and the ECB vs. Everyone else?

Last week the ECB raised their policy interest rate 25 basis points to 4.25%. This of course is a stark contrast to the Fed's recent "move" of keeping its rate at 2.00%. The policy histories of these two institutions are interesting:

Is the ECB too bureaucratic and inertial as some have argued? Or is the Fed too much of a fine tuner / over-reacter? Or maybe both? Certainly it's a big advantage for the ECB that it's a multinational organization because it doesn't have to worry about national elections like the Fed does.

One prominent economist has recently sided with the ECB's policy choices:

The spectacular and historic global economic boom of the past six years is
about to hit a wall. Unfortunately, no one, certainly not in Asia or the US, seems willing to bite the bullet and help engineer the necessary co-ordinated retreat to sustained sub-trend growth, which is necessary so that new commodity supplies and alternatives can catch up.

Instead, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policy makers in most regions have to start pressing hard on the brakes, not the accelerator.

Ben Bernanke!! it's Ken Rogoff on line 1!!