QE2 right after Elections?

[briansd1]

Interesting opinion in WSJ.

Since there might be a gridlock in Congress on the fiscal side, the Fed might act even more in the future, if growth doesn’t return. After all, the Fed is independent.

I’m all for keeping the Fed independent from politics and letting them do their jobs.

In Defense of Ben Bernanke

By ALAN S. BLINDER

Ignorance is not bliss, especially when your economy is faltering and sound policies are badly needed.

For months, we have witnessed the spectacle of people arguing that Keynes was wrong. Somehow, additional government spending actually reduces employment—even when the economy has huge amounts of spare capacity and unused labor desperate for work; even when the central bank will prevent interest rates from rising to “crowd out” private spending. Really?

One current catchphrase is “job-killing spending.” Hmmm. How, exactly, does more spending kill jobs when there is idle capacity and no threat of rising interest rates? Stumped? So am I.

The anti-Keynesian revival has been disheartening enough. But now the economic equivalent of the Flat Earth Society is turning its fury on Ben Bernanke and the Federal Reserve. Critics ranging from German Finance Minister Wolfgang Schauble to tea party favorite Sarah Palin—which is quite a range—have spoken as if Bernanke & Co. have lost their marbles and are embarking on a wild policy misadventure.

All in all, it looks like the nation and the world need an Economics 101 refresher. So let’s start with the basics.

The Fed’s plan is to purchase about $600 billion of additional U.S. government securities over about eight months, creating more bank reserves (“printing money”) to do so. This policy is one version of quantitative easing, or “QE” for short. And since the Fed has done QE before, this episode has been branded “QE2.”

Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, “by lowering short-term interest rates,” you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money.

But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.

That sounds pretty similar to garden-variety monetary policy. Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment.

The next charge is that QE2 will be inflationary. Partly true. The Fed actually wants a bit more inflation because, now and for the foreseeable future, inflation is running below its informal 1.5% to 2% target. In fact, there’s some concern that inflation will dip below zero—into deflation. The Fed, thank goodness, is determined to stop that. We don’t want to be the next Japan now, do we?

But might the Fed err and produce too much inflation? Yes, it might, leaving us with, say, 3% inflation instead of 2%. Or it might err in the opposite direction and produce only 1%. Neither outcome is desirable, but each is quite tolerable. To create the fearsome inflation rates envisioned by the more extreme critics, the Fed would have to be incredibly incompetent, which it is not.

The final major charge, levied especially by a number of foreign officials, is that the Fed’s new policy amounts to currency manipulation: deliberately lowering the international value of the dollar to gain competitive advantage for U.S. exporters. Is there any truth to this? Not if words have any meaning.

Economics 101 teaches us that one standard side effect of a central bank reducing interest rates is a lower exchange rate. Actually, things don’t always work out that way in the real world; sometimes the stronger growth pushes the currency up instead. This contradictory evidence notwithstanding, it is commonly assumed that expansionary monetary policy depreciates the currency. That’s why some foreign governments, especially the more mercantilist ones, are apoplectic. What’s down for us is up for them.

But calling QE2 “currency manipulation” is a grotesque abuse of language. After all, the U.S. dollar is a floating currency. Many factors, including but certainly not limited to monetary policy, influence the exchange rate, which changes every minute. But the Fed will not intervene to push the dollar down. If the dollar should rise instead of falling, c’est la vie.

More important, the U.S. is a sovereign nation with a right to its own monetary policy. So I was stunned when a top aide to the Russian president suggested that the Fed should consult with other countries before making major policy decisions. Come again? An independent central bank doesn’t even consult with its own government.

Finally, there’s that old hobgoblin: consistency. Critics tell us that QE2 won’t give the U.S. economy much of a boost but will lead to rampant inflation. Both? How does that work?

If buying Treasurys is a weak policy tool, a view with which I have some sympathy, then it shouldn’t be very inflationary. There is no magic link between growth of the central bank’s balance sheet and inflation. People, businesses and banks have to take actions—like spending more, investing more, and lending more—to connect the two. If they don’t, we will get neither faster growth nor higher inflation, just more idle bank reserves.

What the Fed proposes to do is neither foolproof nor perfect. Frankly, it’s not the policy I would choose. As I’ve written on this page, I’d like the Fed to purchase private securities and to reduce the interest rate it pays on reserves, even turning it negative. The latter would blast reserves out of banks into some productive uses.

But I don’t run the Fed. Maybe Chairman Bernanke’s ideas are better than mine and, in any case, the planned QE2 is far better than doing nothing. It is not a shot in the dark, not a radical departure from conventional monetary policy, and certainly not a form of currency manipulation.

I know Ben Bernanke. Ben Bernanke is a friend of mine. And critics ranging from Mr. Schauble to Ms. Palin are no Ben Bernankes.

Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve.

http://online.wsj.com/article/SB10001424052748704658204575611052418939656.html

[briansd1]

Now for the Republican perspective.

WASHINGTON—The Federal Reserve’s latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

http://www.foxnews.com/us/2010/11/15/republicans-launch-fresh-attack-fed/

[briansd1]

Now for the Republican perspective.

WASHINGTON—The Federal Reserve’s latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

http://www.foxnews.com/us/2010/11/15/republicans-launch-fresh-attack-fed/

[briansd1]

Now for the Republican perspective.

WASHINGTON—The Federal Reserve’s latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

http://www.foxnews.com/us/2010/11/15/republicans-launch-fresh-attack-fed/

[briansd1]

Now for the Republican perspective.

WASHINGTON—The Federal Reserve’s latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

http://www.foxnews.com/us/2010/11/15/republicans-launch-fresh-attack-fed/

[briansd1]

Now for the Republican perspective.

WASHINGTON—The Federal Reserve’s latest attempt to boost the U.S. economy is coming under fire from Republican economists and politicians, threatening to yank the central bank deeper into partisan politics.

A group of prominent Republican-leaning economists, coordinating with Republican lawmakers and political strategists, is launching a campaign this week calling on Fed Chairman Ben Bernanke to drop his plan to buy $600 billion in additional U.S. Treasury bonds.

“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” they say in an open letter to be published as ads this week in The Wall Street Journal and the New York Times.

http://www.foxnews.com/us/2010/11/15/republicans-launch-fresh-attack-fed/

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