T he German and Chinese governments, Republican congressmen, the liberal economist Joseph Stiglitz, and Sarah Palin don’t agree on much. But they’re united in their opposition to the Federal Reserve’s second round of quantitative easing—or, as it’s known, QE2. According to various of the Fed’s critics, QE2—which involves the Fed’s buying six hundred billion dollars in government bonds over the next eight months—could start a global currency war, weaken the dollar, spark inflation, and create price bubbles in asset classes around the world. Next thing you know, dogs and cats will be living together.
This huge uproar might make you think that QE2 represents some radical shift in the Fed’s mission. It doesn’t. The Fed’s job is to manage the country’s money supply, and it ordinarily does so by manipulating short-term interest rates, lowering rates when it wants to give the economy a push and raising rates when the economy seems to be overheating and needs to be cooled down. At the moment, though, short-term rates are already near zero and can’t be cut further. So instead the Fed is buying longer-term government bonds. The hope is that this will help keep long-term interest rates low, pump more money into the economy, and make investments other than government bonds (where investors have been parking their money) more appealing. The Fed used this tool during the worst of the financial crisis, and it helped arrest the economy’s precipitous decline. Now the Fed is using it once again because, though the economy has recovered, it’s still weak—unemployment is near ten per cent, and vast amounts of productive capacity are idling. In the circumstances, the Fed’s job is to use monetary policy to try to boost demand. And quantitative easing is how you do that when you can’t cut interest rates any more.
So why the backlash? In part, it’s a political matter. China and Germany don’t like QE2 because they’re worried that it might drive down the value of the dollar, making their products more expensive in the U.S. and American exports cheaper around the world. That would be good for American companies and help create American jobs. But the Germans and the Chinese like the status quo. The Republican opposition seems propelled by a reflexive hostility to anything that might help Barack Obama (as an improving economy would). If, as the Republican Senate minority leader, Mitch McConnell, put it, the Republicans’ top priority is to insure that Obama is a one-term President, the Fed’s actions aren’t exactly welcome. Certainly it’s hard to imagine that Sarah Palin would be Tweeting against Ben Bernanke if a Republican were sitting in the Oval Office.
It isn’t just politics, though. What’s most striking about the attacks on QE2 is how hysterical they are. People aren’t just suggesting that the Fed’s policy—which is quite modest relative to the size of the U.S. economy—might be ineffective or mildly inflationary. Instead, they’re accusing the Fed of “injecting high-grade monetary heroin” into the system, pursuing a policy that “eviscerates” the middle class, and potentially giving birth to an “undead homicidal zombie market.” This response reflects a pervasive sense of anxiety about both the state of the economy and any attempt to fix it. You can see it in the inflation hawks’ conviction that a crashing dollar and higher prices are right around the corner, even though core inflation is lower than it has been in the past fifty years, while the dollar’s value has actually risen in recent weeks. The same kind of anxiety fuels assertions that QE2 is “artificially” elevating stock and commodity prices around the world, as investors take cheap money from the Fed and invest it elsewhere. (The influential Reuters blogger Felix Salmon calls Bernanke a serial “bubble-blower.”) Never mind that stock prices are virtually unchanged since this spring, and commodity prices have actually tumbled in the last couple of weeks. The simple fact that some asset prices have risen since QE2 was first hinted at is treated as prima-facie evidence that markets are disastrously out of whack.
The Fed’s opponents hope that the backlash against QE2 will lead Bernanke to curtail or quash the program. But the backlash really shows why QE2 is necessary. If you listen to the Fed’s critics, you’d think that investors and lenders and borrowers are back to their reckless ways, pouring money into dubious investments. In reality, the economy is still dominated by caution. American banks have a trillion dollars in reserves that they could be lending out. Consumers are continuing to cut their debt loads. Private investors have been pouring money into government bonds, even though their yields are dismally small. Although the stock market is reasonably priced, investors aren’t exactly throwing money at new companies. And, most important, businesses are still hesitant to hire. In these conditions, injecting more money into the economy, and nudging people to take a little more risk, is what the Fed is supposed to do.
Any use of monetary policy entails risks, of course. But in any reasonable accounting the biggest risk we face isn’t inflation or a currency war or a stock-market bubble. It’s the risk that, a year or two from now, fifteen million people will still be unemployed. Opponents of QE2 are effectively saying that the government should do nothing to try to change this. That’s understandable: in times of uncertainty, inaction often seems safer than action—especially if you’re one of the lucky ones who have a job. Right now, though, doing nothing would be doing damage. ♦
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