Sign in
Become a MarketWatch member today
Outside the Box
Nov. 19, 2010, 3:40 p.m. EST
View all Outside the Box "?
"? Previous Column
Why Ireland's troubles matter to you
First Take "?
Groupon should just say no to Google
By Stephen Stanley
STAMFORD, Conn. (MarketWatch) "â? After Chairman Ben Bernanke and the Federal Reserve took it on the chin last week for their quantitative-easing decision in public opinion and in the bond market (and on YouTube), the pro-QE2 camp fanned out across the country early this week to make their case once again.
I continue to be struck by the poor quality of the arguments being made in favor of the latest round of quantitative easing, or QE2. I thought it might be helpful to go through Alan Blinder's Wall Street Journal op-ed from Monday because it was the most detailed defense of QE2. Blinder set out to debunk four criticisms of QE2. Read Blinder's op-ed.
Blinder asserts that "critics are branding QE2 a radical departure from past practices and a dangerous experiment."? Bernanke refuted a similar straw man in Georgia 10 days ago. Perhaps some are making that argument, but most of the more astute critics of the policy are not. The problem with QE2 is not that QE is never appropriate, but that it is inappropriate now.
Columnist Mary Anastasia O'Grady explains the Fed chairman's attack on Beijing's currency policy.
First, current conditions are far from severe enough to justify such a stance now. Core inflation is modestly below the Fed's opinion of its "mandate"? and economic growth is close to trend, a far cry from the deflationary emergency scenario for which QE2 was originally prescribed. Moreover, the problems holding back the economy have nothing to do with a shortage of liquidity, but reflect seriously destructive fiscal and regulatory policy.
A big part of the problem here is apparently that those who favor QE2 take a very mechanical Keynesian view of fiscal policy. Because they cannot fit the damage of recent government policy into their macroeconomic models, they ignore it. In fact, it is the uncertainty and fear caused by a breathtaking expansion in government spending and regulatory overreach that has stymied private-sector demand.
Adding even more liquidity to an already overliquefied economy will not effectively address our problems.
Blinder argues that "the next charge is that QE2 will be inflationary."? His answer to that is it won't be and that "to create the fearsome inflation rates envisioned by the more extreme critics, the Fed would have to be incredibly incompetent, which it is not."? I don't think the Fed is "incredibly incompetent,"? either, but policy makers lost the benefit of the doubt with their excessively easy stance in the 2003-2007 period and a stubborn unwillingness to face up to those mistakes.
What has QE2 opponents most worried is that the Fed is pursuing an explicit policy of inflating asset prices only a few years after it contributed to a devastating housing bubble. Furthermore, over the past five years, the Fed ignored sustained core inflation in the 2.5% vicinity (from 2004 through 2008) but hit the panic button over core inflation around 1.25%, when its self-described mandate is somewhere around 1.75% to 2% (up from less than 1% in the 1990s and a target of 1% to 2% in the 2000s).
Given the upward creep in the Fed's inflation target and its asymmetric reaction to similarly sized misses on either side of the target, it is perfectly reasonable to conclude that the Fed is growing increasingly willing to tolerate higher inflation to get the unemployment rate down, notwithstanding their insistence otherwise. This is exactly what led the Fed down a disastrous path in the 1960s and 1970s. Policy makers never made an explicit decision to pursue a 10% inflation strategy.
Then, Blinder turns to the international community's critique that the Fed is manipulating the currency. I actually am sympathetic to Blinder's point on this count. Of course, when the Fed eases, the dollar will, all else equal, weaken. There is nothing especially pernicious about that. G-20 policy makers are simply frustrated because they agree with many of us here that the strategy is misguided.
Finally, Blinder argues that critics can't have it both ways. He says that it is inconsistent to argue that QE2 will not boost growth much and at the same time say that it will cause inflation. It either is potent or it isn't. He argues that it is not very powerful. I agree.
However, Blinder's position about inconsistency is only right if you agree with his Phillips Curve perspective on the world. If one adheres to a more monetarist view, then it is absolutely possible for the Fed to print $600 billion in high-powered money, have little lasting impact on real activity and create a lot of inflation.
Call it the 1970s.
An IPO by Groupon could show it is a sustainable business on its own and fuel more competition with Google
3:51 p.m. Nov. 19, 2010
- Ziepod | 3:03 p.m. Nov. 19, 2010
"U.S. stocks open lower Monday as investors remain wary of euro-zone financial stability http://on.mktw.net/auwZn9" 9:44 a.m. EST, Nov. 22, 2010 from MarketWatch
"Novell agrees to private-equity buyout valued at $2.2 billion http://on.mktw.net/ckyByW" 8:44 a.m. EST, Nov. 22, 2010 from MarketWatch
"Hong Kong stocks trade lower, as property shares weigh; Hang Seng Index down 0.3% http://on.mktw.net/bAKDuw" 9:04 p.m. EST, Nov. 21, 2010 from MarketWatch
"Japanese stocks rise after Ireland aid news; Nikkei Average up 1.1% http://on.mktw.net/bY1o78" 7:04 p.m. EST, Nov. 21, 2010 from MarketWatch
"#MSNBC suspends Scarborough for donations http://bit.ly/dfNAI7" 6:01 p.m. EST, Nov. 19, 2010 from MarketWatch
Marsh on Monday
The coming euro split
Wall Street Irregulars
Gold bug plays with stocks, real estate
Consumer Confidential
FTC takes on debt collectors
This Week in China
Ireland's woes mirror Hong Kong in 1997
Digital Dvorak
Bust up Microsoft, make a fortune
Your Portfolio
Read Full Article »