The August 25th issue of The Economist carried two leaders (aka editorials to those of us in the States) that carried completely contradictory policy perspectives.
In one leader, the newspaper (as the magazine likes to call itself) debated who should replace Ben Bernanke as chairman of the Federal Reserve: Larry Summers or Janet Yellen. In the other, the editors argued that China’s banking system has become far too beholden to the state and ought to be liberalized.
On the surface, each editorial appears to be addressing separate issues. However, The Economist severely criticized China for engaging in “financial repression” – the policy of keeping interest rates artificially low – while raising no similar objections to the Fed keeping short-term rates at zero.
I may be dense, but I have one simple question: why is it ok for the Fed to push rates down (or up when appropriate), but it’s not ok for China to do the same thing?
Indeed, when discussing who should succeed Bernanke, The Economist thinks that the next chairman needs to be able to navigate a world in which “weak growth, not inflation” is the biggest challenge, and to persuade financial markets that “the central bank knows what it is doing” while implementing “less tested and more controversial tools, such as bond-buying.” And yet in the very next editorial, China is encouraged to gradually free deposit rates. Among the presumed benefits is that higher rates would encourage depositors, who for the past several years have invested in real estate and other risker investments in light of the meager returns on deposits, to place more of their money in the banks.
So which is it, Economist? Should the government get out of the interest-rate setting business and allow people to make financial decisions without outside interference, or are there circumstances when the right bright people sitting around a conference table can establish policies that will direct the economy to perform in a particular way? While I may hold some strong views, it would be helpful if The Economist could come up with only one answer to this question.