water cannon

Dean Baker has an interesting take on Greenspan’s monetary policy:

Actually, the problem is fairly straightforward. Mr. Greenspan’s monetary policy has been completely offset by the monetary policy being pursued by Japan and China’s central banks. While Greenspan was trying to slow the U.S. economy with the standard tool of raising short-term interest rates, the Japanese and Chinese central banks were very directly acting to prevent this slowing by buying long-term bonds, thereby pushing down long-term interest rates. Over the last year, these two central banks together have purchased almost $80 billion in long-term U.S. government bonds.

The basic story is that Greenspan is pursuing monetary policy with the water pistol of short-term interest rates. The Japanese and Chinese central banks are using the equivalent of a water canon by directly entering the long-term bond market. Greenspan wants high rates, Japan and China want low rates.

Round I goes to Japan and China. Will Maestro be able to stage a comeback?