Posen Testifies on Economic and Financial Market Challenges

July 14, 2009

The U.S.-born, Harvard-educated, and well-connected economist Adam Posen, who will join the Bank of England Monetary Policy Committee at end-summer, testified in parliament earlier today on a wide range of issues.  He will replace Tim Besley, one the of Committee’s most hawkish members, but also continues a U.S. connection, as the dovish David Blanchflower, a professor from Dartmouth, also stepped down from the MPC recently.  Posen has a high expertise in multiple areas that are particularly timely for these difficult times: monetary theory, Japan’s deflation and banking crisis, the euro and Germany, and of course the U.S. economy and banking crisis.  He remains a deputy director at Washington’s Peterson Institute for International Economics, whose director, C. Fred Bergsten was the ideologue at the U.S. Treasury who orchestrated a weaker dollar early in the Carter Administration to boost U.S. competitiveness.  Posen has co-authored projects with Fed Chairman Bernanke and has worked at Germany’s Bosch Foundation, the Brookings Institute, and the Federal Reserve Bank of New York.  He has consulted with the U.S. Treasury and State Departments, the Council of Economic Advisors, the IMF, the EU Commission, Japan’s Ministry of Economy, Trade and Industry, the ECB, the German Bundesbank and the U.S. Congressional Budget Office.

Posen brings to the Bank of England a less hawkish bias than the departing Besley.  In today’s testimony, he approved of quantitative easing, suggested that markets had over-interpreted the MPC’s failure to expand planned asset purchases at its July meeting, and predicted QE would not be ending soon.  He does not recommend a mechanistic monetarist strategy, but two revealing remarks asserted that 1) persistent above-trend growth is unlikely in the next couple of years and 2) deflationary risks therefore exceed inflationary risks at the moment.  On sterling, Posen thought the euro is positioned to rise against Britain’s currency in the very near future but that sterling ought to advance on balance against the common European currency over the medium term.  Based on his command of Japanese developments in the 1990’s, he feels deeply that sustained growth in Britain without a policy macroeconomic feeding tube will be possible only after the banking system is restored to health.  The same point could presumably be made about other economies with suspect banking institutions like the United States and Germany.  Posen believes that positive British growth will probably reappear early in 2010, or perhaps even sooner, but that GDP will not trace a smooth trajectory in the period that follows.  He asserted that the United States as of now is better-positioned than either Britain or the euro area.  Deciding when to start tightening British monetary policy and fiscal policy will be enormously challenging but implied that neither should occur soon.  In time, the consolidation of Britain’s budget will become a top priority.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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