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Economic Patriots and Not So Much
So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.
Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.
And if Mr. Bernanke gives in to their bullying, they may all get their wish.
—Paul Krugman, today, NYTimes (read his column here, and get the NYT if you appreciate the work)
A few days ago, Krugman called out conservative economists who had not signed the letter attacking the Fed’s quantitative easing. Mankiw was mentioned by name. He gave his opinion on Wednesday: http://gregmankiw.blogspot.com/2010/11/qe2.html
In short, Mankiw agrees with what the Fed is doing, but doesn’t think it’ll do much good, which sounds surprisingly like what Krugman has been saying.
The Americans who are criticizing the Fed don’t seem to know what they’re talking about. Core inflation is below the Fed’s target for healthy growth and there is a real risk of deflation. To oversimplify things a bit, if deflation occurs and you owe money, you’re in big trouble. And the Fed can’t lower interest rates any more, so what you’re left with are the starting conditions of the Great Depression.
As for the international front, Bernanke hit back this morning. The big thing here is that QE isn’t really currency manipulation, whereas China is in fact engaging in currency manipulation by not allowing the Yuan to appreciate. They’re being complete hypocrites. http://www.bbc.co.uk/news/business-11795631
Quantitative easing (money printing) is the last desperate act of a failed economic regime. The US has been engaging in active currency manipulation since the wake of the financial crisis with “extended period” zero interest rate policies and two rounds of QE totaling over $2 trillion. Does China manipulate its currency by not allowing it to float freely on the foreign exchange? Yes. But to blame China for our inability to make our exports more competitive in the global market is to engage in some serious denial about the sad state of American manufacturing.
But I’m not here to defend the Chinese. Rather, it’s more important that we realize that QE is essentially an effort to provide more liquidity to banks with large off-balance sheet (hidden) losses. Look where the Fed is buying the treasuries from. Is the Fed buying these securities directly from the Treasury Department? No. It’s buying them from banks like Goldman Sachs, who are essentially front-running the Treasury and selling them to the Fed at higher costs. QE is essentially a bailout program. No one—not even the inept Bernanke—can think that a second, and smaller round of QE, can “succeed” where the first and larger round failed, especially with unemployment similarly high and consumer confidence similarly low. By implementing QE2 ahead of the holidays, the Fed will be plausibly be able to claim a small victory as retail picks up, but the relief will only be temporary. The plain fact is, the US does not have a supply problem, as QE’s enactment seems to imply, but a demand one. All the QE and ZIRP in the world won’t make for a real economic recovery, so long as the wages of Americans remain stagnant, our home values remain low, and the price of health care, college tuition, and staples of American life continue to rise. This isn’t a sustainable model, and QE is only making it worse.
I doubt anyone, least of all Bernanke, thinks that QE will “succeed,” especially if we’re defining success as a healthy economy. But, as Mankiw said, it’s better than nothing. Bernanke has his hands tied with so many of the regional Fed Presidents being inflation hawks. They act as if they’d rather see deflation.
All of the real solutions you listed would require Congress to spend money, something that wouldn’t happen even if the Democrats had retained the House. It’s politically impossible to move another stimulus bill through Congress, even if it were to be better designed than the first one.
Look at the current political climate though. The Republicans want to repeal healthcare reform, raising healthcare costs for consumers and the government. The Republicans want to undo student loan reforms, effectively making it more expensive for students to attend college. And as for housing prices, we couldn’t even get the Democrats to seriously help out people with underwater mortgages.
So what exactly is the alternative to the Fed pumping money into the economy? Considering the internal politics of the Fed and the extent of the Fed’s power under current law, I’m not sure I see what else they can do. Congress needs to act, but it won’t.
I do have to disagree with your assessment that QE is “the last desperate act of a failed economic regime.” The Bank of Japan, Bank of England, and European Central Bank have all performed variants of what the Fed is currently doing over the past decade. It certainly is a desperate act, but that has more to do with political failure to act in our case.
As an aside, I wasn’t blaming China for anything; I was simply pointing out their hypocrisy. Though, if the Fed can be considered to be performing currency manipulation now, then they’re obligated by law to do so. One of the Fed’s two main goals is to control inflation and US core inflation is much too low.
What would I suggest the Fed do other than print money out of thin air and buy treasuries at inflated rates from secondary dealers?
I would suggest they not do that.
As I said, the key here is the lack of demand thanks to how indebted we are as a nation. Our debt to household income ratio is nearly 125%, a historic high. In addition, we have high unemployment, and many Americans who ARE presently employed aren’t even sure if that will be the case next month. They’re getting nothing on their savings because the Fed wants them to part with their money all in the name of inflating the economy upward with more debt.
Given the circumstances, there is no justification for QE2, other than of course to assist the banks. That’s another farce about QE and easy money from the Fed: there is no guarantee that money will be lent out. Do you know what the financial sector has been doing with the money the Fed lends them? They’re buying treasuries! So that means banks borrow at 0%-0.25%, and then use that money to buy up government bonds, which have higher yields, and the taxpayers pay the arbitrage. They’ve also been using the cash to pay themselves bonuses and lend money overseas. This is completely farcical.
This is not a problem of insufficient liquidity, as the Fed maintains. That rationale is only a cover for the real motivation: another bank bailout. And that shouldn’t be surprising because the financial services sector owns the government.