Ben Bernanke took his moveable feast of easy money to Paris on Friday — but Mohamed El-Erian is not pleased with what the Fed Chairman had to say.
You can find out why over on FT Tilt — for free and without registration (but you know, if you want to sign up…).
Before you head over, here’s the background:
In his latest QE2 stump speech, this time at the Banque de France Financial Stability Review Launch Event, Bernanke defended US monetary policy against criticisms that it is exporting inflation to emerging tilt markets. (He also presented a new Fed paper citing the importance of growing global demand for US AAA assets to the financial crisis. Sorry, “AAA” assets.)
Here’s the gist of what he said in the city of love:
First, these capital flows have been driven by many factors, including expectations of more-rapid growth and thus higher investment returns in the emerging market economies than in the advanced economies. Indeed, recent data suggest that the aggregate flows to emerging markets are not out of line with longer-term trends.
Second, as I noted earlier, emerging market economies have a strong interest in a continued economic recovery in the advanced economies, which accommodative monetary policies in the advanced economies are intended to promote.
Third, policymakers in the emerging markets have a range of powerful–although admittedly imperfect–tools that they can use to manage their economies and prevent overheating, including exchange rate adjustment, monetary and fiscal policies, and macroprudential measures.
Finally, it should be borne in mind that spillovers can go both ways. For example, resurgent demand in the emerging markets has contributed significantly to the sharp recent run-up in global commodity prices.
Or, more simply:
1) This is not new.
2) Pipe down — we’re in this together.
3) You’ve got policy tools — use ’em.
4) We’re hurting too.
El-Erian does not concur; here’s a taster:
Emerging economies do not share the Chairman’s view that they posses the ability to deal with all this. Rather than internalize these externalities, they are trying to insulate themselves from what they view as excessive policy denial in advanced economies. And the overall result includes, but is not limited to, persistent global imbalances, growing inflationary pressures, and future financial instability.
For what it’s worth, we reckon they’re both criticising each other for the same thing: interfering with the free flow of capital, and the G20 for its lack of teeth. There’s blame to go around here. But certainly, Bernanke’s “nothing to see here” line looks increasingly stretched, even if fundamentals are driving EM inflation.
To read El Erian’s riposte in full, head over the road to FT Tilt.
Bernanke says foreign investors fuelled crisis – FT