Adam Posen Presses Central Banks to Act More Aggressively

GOVERNMENTS are pushing austerity; bankers are hoarding cash; a recession looms in the United States and Europe. But Adam S. Posen has a solution: a shock-and-awe display of coordinated central bank attacks aimed at reviving sluggish economies.

An American economist on the Bank of England’s monetary policy committee, Mr. Posen is no academic scribbler or lonely blogger, but someone inside the central banking establishment.

And, as a leading expert on what is often called Japan’s lost decade, he is particularly worried that the Federal Reserve in the United States and the European Central Bank are making the same monetary policy mistakes that left Japan’s once-robust economy stagnant all through the 1990s and even into the 21st century.

For months now, Mr. Posen — who got his bully pulpit at the Bank of England by answering an ad in The Economist — has been warning that policy makers in Washington and in Europe have been too optimistic about how quickly the global economy would recover from the financial crisis.

The joint action by central banks on Thursday to make it easier for weak European banks to borrow dollars is no doubt a policy nod in Mr. Posen’s direction, but it is still a far cry from the type of unified bond purchasing program, or quantitative easing, that he is advocating.

When Fed officials meet this week, they are widely expected to take further action to reduce long-term interest rates, a significant turnabout after months of suggesting that a recovery was solidly under way. The European Central Bank has not yet gone so far, but officials have recently signaled a new openness to reducing interest rates or at least to stop raising them.

In simplest terms, Mr. Posen wants central banks to print more money. A lot more money.

There is a certain tilting-at-windmills aspect to his crusade. The Fed will probably stop well short of the aggressive bond buying that Mr. Posen has advocated. Already, some Fed officials — and most Republican leaders, including the presidential hopefuls Rick Perry and Mitt Romney — believe that the Fed is at risk of rekindling inflation.

But that hasn’t stopped Mr. Posen from pressing his case. Earlier this month, he had lunch with Kiyohiko Nishimura, a deputy governor at the Bank of Japan, and Charles Evans, the president of the Federal Reserve Bank of Chicago. And, last Tuesday, he traveled to this small hamlet in southeast England to issue his most passionate cry yet ”I am here to warn policy makers in the United States, Europe, everywhere that we cannot take our foot off the pedal,” Mr. Posen said before a roomful of small-business leaders and bankers. “The outlook is grim — the right thing to do now is engage in more monetary stimulus.”

Although a few bubbles of sweat appeared on his forehead, Mr. Posen argued his brief here with aplomb — mixing self-deprecating remarks that touched on the oddity of a 44-year-old American prescribing monetary policy in Britain (“I get paid in pounds and pay rent in pounds,” he assured his audience) with a trenchant analysis of the economy’s various ills (stagnant growth, increasing unemployment and banks that will not lend).

His listeners hailed his proposal that the Bank of England and the British Treasury form a government-backed bank to make small-business loans. But on a day when inflation ticked up to 4.5 percent, among the highest annual rates in Europe, his call to monetary arms received a muted response.

”I am very worried about the consequences of quantitative easing,” said John Thurston, chairman of Watts, a local company that supplies parts and services to commercial vehicles. Watts has felt the effect of the business slump, but the inflationary impact of more government bond buying worried him.

“I just don’t know how you unwind it,” he said.

Mr. Thurston is not alone in his concern.

On the Bank of England’s nine-member monetary policy committee, Mr. Posen was the only one to vote last month for the bank to resume its bond purchasing program, according to minutes of the meeting.

IN addition to the Fed’s reluctance to start another bond-buying effort, the European Central Bank is also not expected to continue its current program of purchasing the bonds of weak euro zone economies for much longer.

Mr. Posen’s central premise is that governments in Japan, Europe and the United States are running the risk of repeating the policy mistakes of the 1930s, when the conventional wisdom called for strict monetary policy and budget cutting, only deepening the Depression.

Not that central bankers have exactly been sitting on their hands.

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